This document discusses metrics for measuring customer relationships and profitability. It outlines several key metrics: 1) Customer counts, recency, and retention rates are used to monitor how well a firm attracts and keeps customers over time. Recency looks at the time since a customer's last purchase, while retention rates track the number of customers retained. 2) Customer profitability sums the financial performance of customer relationships. Customer lifetime value projects the future value of existing customers. 3) Prospect and customer values compare the immediate sales from new customers to their future cash flows, helping firms assess acquisition spending versus retention efforts.

1. Customer Profitability Metrics Andrew Manuel

2. Metrics That Measure the Performance of Individual Customer Relationships Customers, Recency, and Retention Count of customers the firm serves People or businesses buying Customer Profit Summarizes the past financial performance of a customer relationship Customer Lifetime Value Forward looking attempt to value existing customer relationships Used to inform prospecting decisions Prospect Value Versus Customer Value Compares immediate sales to future cash flows from newly acquired customer relationships Acquisition Versus Retention Spending Monitors performance of acquisition and retention spending

3. Part 1: Customers, Recency, and Retention Purpose: To monitor firm performance in attracting and retaining customers

4. Definitions A customer is a person or business that buys from the firm. Customer Counts Number of customers of a firm for a specified time period Recency Length of time since a customer’s last purchase Retention Rate Ratio of number of retained customers to number at risk

5. Customer Counts Contractual situations Count how many customers are currently under contract at any point in time Contracts may cover two or more individuals (e.g., mobile phone contract with multiple individuals or phones) Firm must standardize and implement consistently Customers may have multiple contracts with a single firm Non-contractual situations Depends on whether individuals are identifiable Count visits or transactions if individuals are not identifiable (e.g., retail store counts number of transactions that go through the cash registers in a day, week, or year) Even when customers are identifiable, a complication may occur when purchase activity is sporadic (e.g., catalog customers) Count how many customers have bought within a certain period of time

6. Recency The length of time since a customer’s last purchase For example eBay reported 60.5M active users in Q1 2005 Active users were number of users who bid, bought, or listed an item within previous 12-month period Active (12-month) users increased from 45.1M to 60.5M Number of active customers increased due in part due to customer acquisition Get percentage of the 45.1M active customers one year ago who were active the previous 12 months to measure how well the firm maintained existing customer relationships

7. Retention Applies to contractual situations in which customers are either retained or not For example Magazine subscriptions Checking account with a bank Renters pay rent until they move out Retention Rate: Ratio of the number of customers retained to the number at risk For example 40,000 magazine subscriptions are set to expire in July 26,000 renewed retaining 65% of customers Note that new subscribers obtained during July are not included nor customers whose subscriptions were to run out in later months Sometimes better to measure retention in “customer time” rather than “calendar time” (e.g., what percentage of customers surviving for three years retained throughout year four)

8. Source Farris, Paul W., Bendle, Neil T., Pfeifer, Phillip E., and David J. Reibstein (2006). Marketing Metrics: 50+ Metrics Every Executive Should Master , New Jersey: Wharton School Publishing