CRM_Note4_Economics

CRM_Note4_Economics - Understanding and Valuing the...

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Customer Economics Understanding and Valuing the Components of the Customer Portfolio
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Example: Customer Economics at Netflix Spring 2003 2 million subscribers (Dec 31, 2003) 1.7% of US Households Expects 5% of US households to be members by 2006 Customer Economics Acquisition cost = $35 Lifetime Revenue = $100 (margin =70%) Stock price about $35 November 2004 2.2 million subscribers Competitive threats Blockbuster, Amazon.com, Wal-Mart Prices cut from $21.99 to $17.99 Blockbuster cut prices from $19.99 to $17.49 Rumors of Amazon entry – stock price drops to $11 September 2005 About 3.5 million subscribers 2
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Agenda: Customer Economics Basics: Customer Lifetime Value Basic Equation Some examples Customer Acquisition / Lifetime Value Exercise Carnival Cruise Case Advanced: Extending the Equation Marketing and Customer State Effects Issues and Extensions Asset Valuation and Marketing Policy Customer Management as a Real Option Competition 3
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Customer Lifetime Value Formula 4 CLVT = T period Customer Lifetime Value Rt = Revenue in Period t Ct = Cost in Period t 0 ( ) T T t t t CLV R C = = -
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Similac Example Baby Formula Lifetime Length? Requirements? Initial Choice? Switching? Add-on Selling? 5
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Targeted Promotions 6
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Similac Example Price = $15.00 for a 1 week supply Retail Margin = 30% Wholesale Price = $10.50 = (1-.3)*$15.00 Manufacturer Margin = 50% Contribution = $5.25 Manufacturer Cost = $5.25 7
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Similac Example Week Revenue Cost Marketing Net 1 $ 10.50 $ 5.25 $ 10.00 $ (4.75) 2 $ 10.50 $ 5.25 $ 1.00 $ 4.25 3 $ 10.50 $ 5.25 $ - $ 5.25 4 $ 10.50 $ 5.25 $ - $ 5.25 50 $ 10.50 $ 5.25 $ - $ 5.25 51 $ 10.50 $ 5.25 $ - $ 5.25 52 $ 10.50 $ 5.25 $ - $ 5.25 52 Week CLV $ 262.00 8
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Basic Structural Model of CLV d is a single period discount rate alpha is a retention rate 9 ( 29 ( 29 0 1 t T t t t t R C CLV d α = - = +
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Newspaper Subscribers Assumptions 26 week subscriptions $3 per week ($3 * 26) 50% margin No Discounting 100% Retention 10
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Newspaper Subscribers Years Price Cost Margin 0.5 $78 $39 $39 1 $78 $39 $39 1.5 $78 $39 $39 2 $78 $39 $39 2.5 $78 $39 $39 3 $78 $39 $39 3.5 $78 $39 $39 4 $78 $39 $39 4.5 $78 $39 $39 5 $78 $39 $39 5 Year Value $390 11
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Add Attrition “Small changes in retention may result in big changes in profit” 12
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Newspaper Example Years Price Cost Margin Retention Expected Margin 0.5 $78 $39 $39 100% $39 1 $78 $39 $39 80.0% $31 1.5 $78 $39 $39 64.0% $25 2 $78 $39 $39 51.2% $20 2.5 $78 $39 $39 41.0% $16 3 $78 $39 $39 32.8% $13 3.5 $78 $39 $39 26.2% $10 4 $78 $39 $39 21.0% $8 4.5 $78 $39 $39 16.8% $7 5 $78 $39 $39 13.4% $5 5 Year Value $174 13
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85% Retention Years Price Cost Margin Retention Expected Margin 0.5 $78 $39 $39 100% $39 1 $78 $39 $39 85.0% $33 1.5 $78 $39 $39 72.3% $28 2 $78 $39 $39 61.4% $24 2.5 $78 $39 $39 52.2% $20 3 $78 $39 $39 44.4% $17 3.5 $78 $39 $39 37.7% $15 4 $78 $39 $39 32.1% $13 4.5 $78 $39 $39 27.2% $11 5 $78 $39 $39 23.2% $9 5 Year Value $209 14
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95% Retention Years Price Cost Margin Retention Expected Margin 0.5 $78 $39 $39 100% $39 1 $78 $39 $39 95.0% $37 1.5 $78 $39 $39 90.3% $35 2 $78 $39 $39 85.7% $33 2.5
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This note was uploaded on 11/21/2011 for the course BUS 443 taught by Professor Michaellewis during the Spring '11 term at Emory.

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CRM_Note4_Economics - Understanding and Valuing the...

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