Analytical CRM PDF

Analytical CRM
Profit and No. of years
Source: Sunil Gupta, Customer

Management, Harvard Publishing
LTV
• LTV = Simple LTV
• With split cost

• LTV=
• LTV = Consideration of retention rate
• LTV = where Margin multiple=
Source: CRM, Kumar and Reinartz

LTV
• LTV with constant retention rate, gross contribution, and acquisition
cost
• LTV with additional consideration of word of mouth

Customer Equity
• Customer equity
• Customer Equity Share

Margin Multiple considering constant
retention rates and discount rates

• A commercial cleaning company spends an average of Rs. 500 per year, per
customer, in supplies, wages, and account maintenance. An average
customer generates Rs. 1000 in revenue per year. Assuming a discount rate
of 12% and an annual retention rate of 80%, which of the following is the
estimate for the lifetime value of an average customer using the simplified
customer lifetime value (CLV) equation?
a Rs. 500
b Rs. 1,000
c Rs. 1,250
d Rs. 1,750
e Rs. 2,225
• Assume that the margin multiple is 2.5 which corresponds to an 80%
retention rate (r) with a 12% discount rate (i). Consider the estimated
average monthly revenue of a customer is Rs. 125, and the estimated
average monthly cost of a customer is Rs. 40. What is the CLV of the
estimated average customer?
• A retailer is considering offering a new customer service across its
regional chain of stores. Although the new service does not have an
upfront cost for the retailer, estimates suggest offering the new
service will increase the average monthly revenue per customer from
Rs. 50 to Rs. 55. It will also increase the average monthly costs per
customer from Rs. 10 to Rs. 15. The retailer expects offering the new
service will increase annual retention rates from 60% to 70%.
Assuming a constant annual profit margin, retention rate, and
discount rate over time, calculate the change in average customer
lifetime value (CLV) with the new service using a 10% discount rate.
Based only on the change in average CLV, should the retailer offer the
new service
• Airtel mobile has an overall 75% retention rate. Each customer costs
the company Rs. 60 in maintenance costs and Rs. 30 in recordkeeping
and billing costs for all types of customers on an annual basis. Airtel
offers its customers three different plans: the premium package,
purchased by 30% of customers for Rs. 300 per month; the super-
premium package, purchased by 20% of customers for Rs. 400 per
month and the basic package, purchased by the remaining customers
for Rs. 100 per month. Assume discount rate as 10%.
• What is CLV for different plan and weighted average CLV

• Shyam Agency, a paint wholesaler from Berger paints located in Kolkatta, is
considering selling paint to professional painters. They conduct a pilot in their
Kolkatta. Based on inputs from summer trainee, it is observed that six hundred
professional painters spend a total of Rs. 2,30,00,000 per year on paint. Average
gross margin from Shyam Agency is 35%, and it currently has Rs. 42,00,000 of
sales in this segment. The current retention rate of each painter is 80%, and the
revenue per painter is stable over time. (Assume a 10% discount rate.)
• Summer Trainee suggest that Shyam Agency spends Rs. 10,00,000 for a one-time
direct marketing campaign to professional painters. How many painters would
Shyam agency need to acquire to make this investment profitable in the long
term (assume an infinite horizon)?
http://bit.ly/hbsp2pI1nam
Calculating CLV for 1 customer
Year Profit per Annual Customer Annual Cumulative Discounted
customer retention account Discount Rate discount cash flow
probability remaining factor
0 100
1 42 82 % 82 0.10
2 66 93 % 76 0.10
3 70 92 % 70 0.10
4 75 94 % 66 0.10
5 86 91 % 60 0.10
6 92 93 % 56 0.10
7 96 84 % 47 0.10
8 99 85 % 40 0.10
9 105 85 % 34 0.10
Traditional Marketing Metrics
• Market Share
• Sales Growth

• Market share can be quickly calculated. There can be a possibility
where volume and value share may differ.
• However, there need to be an understanding regarding category sales

which is consolidation of all industries. However, it does not provide
information regarding how sales are distributed across customers.
• Sales growth can be for a brand, product, or a firm. For example, at

present, there is a cause of concern regarding slowdown in
automobile sales. Managers use it as a proof of performance. It is a
relative measure. It does not tell which customers have grown.
Customer Acquisition Metrics
• Acquisition Rate
• Acquisition Cost

Customer Activity Metrics
• Average interpurchase time
• Retention Rate
• Link between average life time duration and retention rate:

Churn Rates

Impact of reduction in churn rates

Reasons of Defection

• If the average lifetime duration is 5 years, what is retention rate.
Customer Activity MetricsPeriod Reten Surviv Survivors
tion al (Assuming 1000
Rate Rate in Period 0)
1 0.55 0.55 550
• Survival Rate 2 0.62 0.341 341

3 0.68 0.231 231
4 0.73 0.169 169
5 0.90 ? ?
• Average lifetime duration

Customer Based Value Metrics
• Size of Wallet
• Share of category requirement
• Individual Share of Wallet

Segment Customer Based value metrics
• Recency(R): A measure of how long it has been since a customer last
placed an order with the company
• Frequency (F): A measure of how often a customer has ordered in a

certain defined period.
• Monetary Value (M): The amount that a customer spends on an

average transaction

RFM Analysis
• RFM Cell sorting technique
• Relative importance of RFM

Customer selection strategy
• Profiling
• Binary classification using decision trees
• Logistic regression

Technique for evaluating alternative customer
selection strategy
• Misclassification rate
• Lift

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Analytical CRM

Profit and No. of years

Source: Sunil Gupta, Customer

• With split cost

• LTV = Consideration of retention rate

• LTV = where Margin multiple=

Source: CRM, Kumar and Reinartz

• LTV with additional consideration of word of mouth

Source: CRM, Kumar and Reinartz

• Customer Equity Share

Source: CRM, Kumar and Reinartz

Source: Sunil Gupta, Customer

• What is CLV for different plan and weighted average CLV

Source: CRM, Kumar and Reinartz

• However, there need to be an understanding regarding category sales

• Sales growth can be for a brand, product, or a firm. For example, at

Source: CRM, Kumar and Reinartz

• Link between average life time duration and retention rate:

Source: Sunil Gupta, Customer

Source: Sunil Gupta, Customer

Source: Sunil Gupta, Customer

• Survival Rate 2 0.62 0.341 341

• Average lifetime duration

Source: CRM, Kumar and Reinartz

• Share of category requirement

• Individual Share of Wallet

Source: CRM, Kumar and Reinartz

• Frequency (F): A measure of how often a customer has ordered in a

• Monetary Value (M): The amount that a customer spends on an

Source: CRM, Kumar and Reinartz

• Relative importance of RFM

Source: CRM, Kumar and Reinartz

• Binary classification using decision trees

Source: CRM, Kumar and Reinartz

Source: CRM, Kumar and Reinartz

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