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Shivangi-CH:5 CUSTOMER PROFITABILITY-Marketing Metrics (CUSTOMER PROFIT …
Shivangi-CH:5 CUSTOMER PROFITABILITY-Marketing Metrics
CUSTOMER ACTIVITY
CONSTRUCTION
CUSTOMER COUNTS
In contractual situation, count the number of customers that are currently under contract.
In non-contractual situation, if the customer are non-identifiable only transactions are counted.
RECENCY
For countable non-contractual customer, count of number of customer bought within a certain period of time is ascertained. This is the concept of recency.
RETENTION RATE
The ratio of the number of customers retained to the number at risk.
The customer must be at risk of leaving in order to be counted as a customer successfully retained.
OBJECTIVE
Monitor firm's performance in attracting and retaining customers.
COMPLICATIONS
In contractual situation, the firm needs to select a standard definition of a customer (policy holder, member).
Treatment of customer counting in case of multiple contracts with a single firm.
To calculate retention rate, the number of customer at risk at the end of the period must be ascertained.
CUSTOMER PROFIT
Customer Profit is the profit the firm makes from serving a customer or customer group over a specified period of time.
FIELDS
Customer decile by profitability
Band profitability
% of total profits
COMPLICATIONS
Assigning indirect cost to the company's cost to customer may require the use of activity-based costing.
Customer's profitability changes over time and must be considered.
Decisions regarding keeping or getting rid off the unprofitable customer.
CONSTRUCTION
Identify the customer-group.
Calculate and sort the list of customer-group profit.
Plot cumulative percentage of total profits versus cumulative percentage of total customer.
OBJECTIVE
Identify the profitability of individual customers.
Rewarding the top tier customer by providing enhanced value.
Identifying the growth potential of the second tier customer.
Recognizing the customer on which the company losses money
PROSPECT LIFETIME VALUE
It is the value expected from the prospect minus the cost of prospecting
FIELDS
Acquisition Rate (%)
Initial Margin
CLV
Acquisition Spending
OBJECTIVE
To account for the lifetime value of a newly acquired customer while making prospecting decisions.
COMPLICATIONS
Assumption that acquisition rate are depended directly on acquisition spending.
Evaluating accurate retention rate is complex and uncertain.
Model does not apply for changing discount rate.
CONSTRUCTION
CUSTOMER LIFETIME VALUE
Customer lifetime value is the dollar value of a customer relationship based on the present value of the projected future cash flows from the customer relationship.
CONSTRUCTION
OR
FIELDS
Retention Rate
Discount Rate
Constant Margin
OBJECTIVE
Evaluate the value of individual customer.
Prioritizing the customers based on the value added.
Compare the company's offering from that of the past.
COMPLICATIONS
Evaluating accurate retention rate is complex and uncertain.
Model does not apply for changing discount rate.
AVERAGE ACQUISITION AND RETAINING COST
CONSTRUCTION
FIELDS
Acquisition Spending
Number of Customers Acquired
Retention Spending
Number of Customer Retained
COMPLICATIONS
Some customers are retained irrespective of the retention spending, which must be accounted.
Some spending work to improve both acquisition and retention efforts of the firm and are difficult to allocate.
Retention rates depends on the period of time under consideration.
OBJECTIVE
Analyse the cost of retaining the existing customer.
Analyzing the cost of acquiring a new customer.
Compare and evaluate the priority of retaining or acquiring the customer.
