Customer Relationship Management: A Database Approach

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MARK 7397 Spring 2007. Customer Relationship Management: A Database Approach. Class 7. James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall jhess@uh.edu 713 743-4175. Review of CLV approximation before calculating customer assets. m r(1+g).

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MARK 7397

Spring 2007

### Customer Relationship Management:A Database Approach

Class 7

James D. Hess

C.T. Bauer Professor of Marketing Science

375H Melcher Hall

jhess@uh.edu

713 743-4175

Review of CLV approximation

before calculating customer assets

m r(1+g)

CLV= St=1 m(1+g)t rt/(1+i)t =

1+i-r(1+g)

where

m is contribution margin

g is growth rate of margin

r is retention rate

i is interest rate

Note: if the world stopped after T=5 periods then this might

exaggerate the total by about 20%.

CDNow Customer Acquisition

Customer acquisition costs ~ \$30-55

Gross margin m ~ \$10-20

Growth in margins g ~ 0

Retention rate r ~ .51-.68

Interest rate i ~.12

20 .68(1+0)

= \$30.90

Best case CLV ~

1+.12-.68(1+0)

10 .51(1+0)

= \$8.36

Worst case CLV ~

1+.12-.51(1+0)

It does not pay to acquire new customers!

Bertelsmann purchase of CDNow

Gross margin m ~ \$15

Growth in margins g ~ 0

Retention rate r ~ .70

Interest rate i ~.12

15 .70(1+0)

= \$25

Typical CLV ~

1+.12-.70(1+0)

Size of CDNow house file ~ 3,290,000 customers

Value of house file = 253,290,000 = \$82 million

In July 2000 Bertelsmann bought CDNow for \$117 million!

Capital One Customer Retention

Gross margin m ~ \$14*4

Growth in margins g ~ 0.02

Retention rate r ~ .85 or .90

Interest rate i ~.12

14*4 .85(1.02)

= \$192

Low retention CLV ~

1+.12-.85(1.02)

14*4 .90(1.02)

= \$255

High retention CLV ~

1+.12-.90(1.02)

Capital One could afford to pay \$63 to increase retention rate by 5%.

AT&T’s Acquisition of TCI and Media One

Customer acquisition costs per customer ~ \$4,200

Gross margin m ?

Growth in margins g ~ 0

Retention rate r ~ .90

Interest rate i ~.12

m .90(1+0)

= \$4,200

Breakeven CLV ~

1+.12-.90(1+0)

m = \$1,027

Profit margin ~ 0.45

Breakeven Sales = \$1,027/.45 = \$2,280

or \$190/month

To justify the acquisition, AT&T needs ALL customers to sign up for cable,

high speed internet, and cable telephone. This is unrealistic.

history

now

future

Can we predict CLV using the past?

Prediction is very difficult, especially about the future.

Neils Bohr

Malthouse and Blattberg took data and pretended to move back to the future:

They ran a regression to explain the future CLV using historic variables on the calibration sample.

They then used the regression to predict CLV for the validation sample.

Actual

False negative

Bottom 80

Top 20

85%

55%

Bottom 80

Predicted

15%

45%

Top 20

False positive