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Week 10: Profitability and Pricing 1 - Customer Profitability - Coggle…
Week 10: Profitability and Pricing 1 -
Customer Profitability
Customer level metrics
RFM
2.
Frequency
: how often does a customer visit a store?
Monetary value
: how much does a customer spend in the store?
Recency
: length of time since a customer last purchased
Customer profitability
: the
revenues
earned from and the
costs
associated with the customer relationship during a specified period
example:
page 7
diagram:
page 8
pyramid
(3 levels)
Customer Lifetime Value (CLV)
PV of projected future cashflows
attributed to customer relationship
customer profit
: summarizes the
past financial performance
of a customer relationship
formula:
page 14
Value of a firm = Number of customers x CLV
example:
p.16
CLV over the entire lifetime of a customer =
Initial margin + Margin(retention rate/ (1+ discount rate - retention rate))
Assumptions
Constant retention rate
Constant discount rate
Constant margin
4
. If a customer is not retained, then that customer is lost for good?
CLV (
updated
) = (Margin -
Retention cost
) x (Retention rate/ (1 + discount rate - retention rate))
Retention and Attrition rate
Retention rate
= Number of customers retained/ Number of customers at start
Attrition rate
= 1 - Retention rate
Attrition rate
: probability that a customer will leave the firm
Expected customer lifetime = 1/ Attrition rate
Discount rate (similar to finance)
Prospect Lifetime Value (PLV)
PLV = Profits expected from the prospect - Cost of prospecting
Acquisition rate
: proportion of customers that a firm expected to acquire
Acquisition spending
: expenditure associated with acquiring a prospect
PLV = (Acquisition rate x CLV) - Acquisition spending per prospect
Average acquisition cost
= Acquisition spending/ Number of customers acquired
Average retention cost
= Retention spending/ Number of customers retained
Acquisition vs Retention
Value of firm (under
retention
) = Number of existing customers x
update CLV
Value of firm (under acquisition) = (Number of customers targeted x
PLV
) + (Number of existing customers x
original CLV
)