Customer Management
Dr. Pankaj Jain
Assistant Professor
NIIT University
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Initial Questions
1. How much customer satisfaction is enough? Higher, the better?
2. Should we aim to satisfy every customer?
3. Should we allocate our resources equally for various kind of
customers?
4. Should we provide same level of excellent service to all customers?
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The Case of Hoover
▰ Hoover UK, famous for vacuum cleaner, announced a promotion
1. Summer, 1992 Buy worth £100 products – Get two free
tickets for UK to Europe
2. Winter, 1992 Buy worth £250 products – Get two free tickets
from UK to USA
▰ Promotion costs = £50 million
▰ Top executives were fired.
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Sunil Gupta, Donald Lehman (2005) 4
Question to Discuss
1. Should we avoid “lost causes” customers?
2. Is getting MORE CUSTOMERS always good?
3. How can organization improve the profitability of “free riders”
4. How to retain “vulnerable customers”?
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Sunil Gupta, Donald Lehman (2005) 6
Customer Life-Time Value
1. CLV is the present value (PV) of all future streams of profit that an
individual customer generates over the life of his or her business
with the firm
Profit, Not Revenue. Contribution (Sales – Variable Costs) Profit
A measure of profitability over a long term
What is long term …is subjective.
In practice, it is around 3 to 5 years
2. CLV is an individual customer level concept. In practice, companies
use it for “group of customers” too
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Application of CLV
1. Helps in deciding customer acquisition cost
2. Often used as segmenting “customer base”
3. Helps in framing marketing objective.
▻ CLV is not static. It is dynamic. It can be improved by marketing
efforts.
4. CLV helps mangers making marketing investment decisions
5. Provides an estimate of Firm’s Value
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Calculating CLV
1. To Calculate CLV, A Firm needs to track to piece of information
▻ Annual Profit Per Customer
▻ Customer Retention Pattern
2. What is your lifetime value for your telecom service provider…
▻ Make a Guess!!
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Calculating CLV
▰ Equation 1
CLV =
▰ = Profit or Contribution margin during year t
= Retention Probability During Year t
= Constant Discount Rate
t = Year
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Calculating CLV
Profit
Per Annual Customer Annual Cumulative Discounted
Customer Retention Account Discount Discount Cash
Year (‘000) Prob Remaining Rate Factor Flow (‘000)
0 100 0.10
1 42 0.82 82 0.10 0.91 31
2 66 0.93 76 0.10 0.83 51
3 70 0.92 70 0.10 0.75 48
4 75 0.94 66 0.10 0.68 48
5 86 0.91 60 0.10 0.62 49
CLV 227
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Simplifying Calculation
▰ Making following assumptions
▻ Customer has a constant profit margin ( m ) over time
▻ Customer has a constant retention rate ( r ) over time
▻ Discount rate ( d ) is constant over time
▻ Value is estimated over an infinite horizon
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Calculating CLV
CLV
▰
*Sum of Infinite Geometric Series
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Calculating CLV
CLV =
▰
*Sum of Infinite Geometric Series
Let’s call the term or as The Margin Multiplier
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The Margin Multiplier
▰ The Margin Multiplier depends on
▻ Discount Rate (i)
▻ Retention Probability ( r )
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CLV & The Margin Multiplier
▰ Example 1
▻ Average Monthly Revenue = 150
▻ Monthly V. Cost to Serve the Customer = 50
▻ Retention Rate = 0.90
▻ Discount Rate = 0.07
Calculate the Margin Multiplier & CLV
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CLV & The Margin Multiplier
▰ Example 1
▻ The Margin Multiplier = 5.29
▻ CLV = 1200 X 5.29 = 6348
https://s3.amazonaws.com/he-assets-prod/interactives/063_margin_multi
ple/Launch.html
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The Margin Multiplier
▰ Discount Rate is 12%
▰ Retention Rate is 80%
▰ Customer Base = 10 million
▰ Annual Contribution Margin = 1000 INR
▰ A “customer satisfaction program” can enhance retention rate from
80% to 90% in ta year. How much the manager can invest in that
program?
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CLV Calculator
▰ https://s3.amazonaws.com/he-assets-prod/interactives/061_customer_lifet
ime_value/Launch.html
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Challenges, Extensions and Limitations of CLV
▰ The information to calculate CLV is not always available
▰ CLV can be extended to segment level customer data
▰ The formula can be extended to accommodate revenue growth.
Margin multiplier would be
▰
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Three Drivers of
Customer Life-Time
Value
1. Customer Acquisition
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“ If you are not focused how you are
going to acquire your customer – and
more importantly at what costs – then it
is going to be very hard to build a
business and even harder for us to
assess whether you even have a
business…
Charlie O’Donnell – Venture Capitalist
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Which Customer Should An Organisation Acquire?
▰ All animals are equal, but some animals are more
equal than others (Orwell, 1948)
▰ Pareto Principle – 80/20
▰ Not all customers are profitable
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How Organisation Acquire Customers
▰ Increase market size
▰ Increasing marketing investment
▰ Increase effectiveness of acquisition
program
▰ Offer discounts and incentives
▰ Generate positive words of mouth
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Three Drivers of
Customer Life-Time
Value
2. Customer Retention
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Terminology
▰ Customer Retention Rate
▰ Customer Defection Rate
▰ Customer Churn Rate
▰ Customer Attrition Rate
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Customer Life-Time
▰ Expected Customer Life-Time =
▰ r = Retention Rate
▰
https://s3.amazonaws.com/he-assets-prod/interactives/060_e
xpected_customer_lifetime/Launch.html
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Reasons for Defections
▰ Dissatisfied Switchers – Poor experience with the
company
▰ Deliberate Switchers – Better options elsewhere
▰ Lifestyle Switchers – External Reasons
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Thanks!
I am Dr. Pankaj Jain
Assistant Professor – NIIT University
You can reach me at
pankaj.jain@niituniversity.in
8769073411
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