lifetime value in new format

Database Marketing and Lifetime ValueArthur Middleton HughesVice President / Solutions ArchitectKnowledgeBase Marketing, Inc. DMA Tuesday, October 18, 20052:00 3:00 PMGeorgia World Congress CenterAtlanta, GeorgiaDMA Saturday, October 15, 20052:30 3:40 PMGeorgia World Congress CenterAtlanta, Georgia

What KnowledgeBase Marketing Does

MarketingDatabaseData AccessAnd AnalysisSoftwareCustomer Transactions

Marketing Staff -Access By WebInputs from Retail, Phone, WebHow a modern database system worksAppendedDataWebsiteModel

Marketing Databases and Operational Databases

Daily updating permits greater customer contact and service

Possible direction of things to come

What is a relational database?A method of storing an unlimited amount of data about customers in a way that makes it easy to retrieve it, modify it, add to it, create new fields, etc. A relational database consists of fields, tables, and records. A field is the smallest structure (the atom) of the relational database.: A last name, a date, a dollar amount, a product number. A table is the chief structure in a relational database. It represents a single specific subject which can be either an object or an event. Object: Customers. Event Orders. Records are unique instances of the subject of the table. An example is Bill Jones, one of the records in the Customers table.

Tables are related through keysTables are related to each other by keys. Each has a unique primary key (PK). A foreign key (FK) is the primary key of another table that it is related to.

Users access their databases through the web. They can run queries to get reports from their databases

Compared with newcomers, Long term customers: Buy more per yearBuy higher priced optionsBuy more oftenAre less price sensitiveAre less costly to serveAre more loyalHave a higher lifetime value

Retention is the way to measure loyalty

Retain01

0.5

0.7

0.8

0.85

0.9

Years as a customer

Percentage Retained from Previous Year

Sheet1

50%

70%

80%

85%

90%

Sheet2

Sheet3

Retention pays better than acquisition

Two Kinds of Database PeopleConstructors

People who build databases Merge/Purge, Hardware, SoftwareCreators

People who understand strategy Build loyalty and repeat salesYou need both kinds!

What doesnt work:Treating all customers alikeThis 28% lost 22% of the banks profits!Bank Customers by Profitability

Fig 13-1

176%

282%

386%

490%

592%

694%

Bank Profitability

5550.7966712675

4440.2482277602

3330.1582554487

2220.0151534356

111-0.2183079119

Households

% Households

Total Profit

% Profits

Bank Profitability2

5%0.7966712675

11%0.2482277602

28%0.1582554487

28%0.0151534356

28%-0.2183079119

Total Profit

% Profits

Fig 13-3

SegmentHouseholds% HouseholdsTotal Profit% Profits

520,1265%$11,180,79179.67%

446,70611%$3,483,72424.82%

3118,27328%$2,221,01815.83%

2119,80428%$212,6691.52%

1118,39428%-$3,063,817-21.83%

Total423,303100%$14,034,385100%

Fig 13-4

579.67%

424.82%

315.83%

21.52%

1-21.83%

Fig 13-6

CHECK &HOMECREDITMUTUALTOTAL

SAVINGSEQUITYCARDFUNDS

Revenue

Net interest$210$248-$280$0$178

Fees$18$18$396$1,500$1,932

Total Revenue$228$266$116$1,500$2,110

Expenses

Amort.Sales Costs$20$120$67$75$282

Acc. Maint.$30$75$40$900$1,045

Transact Cost$193$21$0$30$244

Allocated Overhead$0$0$0$0$0

Total Expenses$243$216$107$1,005$1,571

Loss Provision$0$23$160$0$183

Net Income-$15$27-$151$495$356

Taxes-$6$11-$60$198$143

NI After Taxes-$9$16-$91$297$213

Cost of Capital$1$49$32$68$150

NIACC-$10-$33-$123$229$63

Annual revenue and costs for typical bank customer having these products

Fig 13-9

Cardholders Ranked By Likelihood to Churn

ABCDE

TotalActualPercentCumulative

ScoreBaseAttritionAttritionBase

95.03,3151,61948.843,315

90.015,0143,97426.4718,329

85.026,3784,85818.4244,707

80.039,9237,13917.8884,630

75.032,8745,22615.90117,504

70.033,9266,18218.22151,430

65.053,5366,99213.06204,966

60.071,5949,27412.95276,560

55.034,8702,7097.77311,430

50.018,7339074.84330,163

45.012,8444123.21343,007

40.09,8335135.22352,840

35.07,4002233.02360,240

30.06,4112053.20366,651

25.02,355743.16369,006

20.0464.000.00369,470

15.032.000.00369,502

Totals369,50256,67211.28369,502

Fig 13-10

Year 1Year 2Year 3

Card Members13,4331141810048

Retention Rate85.00%88.00%92.00%

Annual Profitability$241$248$255

Total Revenue$3,237,353$2,831,676$2,562,210

Acquisition Cost $80$1,074,640$0$0

Marketing Costs $8$107,464$91,344$80,383

Total Costs$1,182,104$91,344$80,383

Profit$2,055,249$2,740,332$2,481,827

Discount Rate1.001.201.44

Net Present Value Profit$2,055,249$2,283,610$1,723,491

Cumulative NPV Profit$2,055,249$4,338,859$6,062,350

Lifetime Value$153.00$323.00$451.30

Fig 13-11

Lifetime Value of 276,560 Cardholders Most Likely To Churn

ABCDE

AverageCumulativeTotal

LifetimeNumberCumulativePercentLifetime

ValueMembersMembersMembersValue

$637.2417,72317,7236.41%$11,293,800

$550.0011,33429,05710.51%$5,628,700

$500.0012,83341,89015.15%$6,416,500

$450.0013,43355,32320.00%$6,044,850

$400.0015,53470,85725.62%$6,213,600

$350.0018,55689,41332.33%$6,494,600

$300.0020,356109,76939.69%$6,106,800

$250.0025,543135,31248.93%$6,385,750

$200.0031,456166,76860.30%$6,291,200

$150.0035,993202,76173.32%$5,398,950

$100.0041,789244,55088.43%$4,178,900

$50.0026,578271,12898.04%$1,328,900

$0.005,432276,560100.00%$0

Fig 13-12

Credit Card Retention Budget Calculation Chart

CDEFGHIJK

InducementsMembersDollarsDollarsAttritionEstimatedEstimatedAverageTotal$ Gained

SelectedBudgetedPerReductionAttritionReductionLifetimeLTV GainPer $ Spent

(Max 20,000 / line)(Col C * Col E)MemberPercent(18% of Col C)(Col G * Col F)Value(Col H * Col I)(Col J / Col D)

Increased Credit Line20,000$157,600$7.8814.00%3,600504$531$267,624$1.70

Upgrade to Gold2,000$25,040$12.5221.00%36076$531$40,144$1.60

Cash Advance Checks20,000$70,000$3.506.50%3,600234$531$124,254$1.78

Reduce Interest Rate7,323$204,971$27.9949.00%1,318646$531$342,967$1.67

Reduce Annual Fee2,000$70,000$35.0060.00%360216$531$114,696$1.64

Waive Annual Fee2,000$80,000$40.0069.00%360248$531$131,900$1.65

Provide Air Miles2,000$90,000$45.0072.00%360259$531$137,635$1.53

Total55,323$697,6119,9582,183$531$1,159,220$1.66

Marketing to Customer Segments

Examples of Profitable StrategiesNewslettersSurveys and ResponsesLoyalty ProgramsCustomer and Technical ServicesFriendly, interesting interactive web siteEvent Driven Communications

What proves that relationship building works?Manufacturer of building productsCatalog sent to 45,000 contractorsPrevious policy: wait for the ordersTest: pick 1,200 customers, split into test of 600 and control of 600Two person pilot program build relationship with test customers to see the results

Credit: Hunter Business Direct

What did they offer?Follow up on bids and quotesSchedule product trainingAsk about customer needsNew Product informationThey did not offer discounts

Change in the number of orders

Orders

0.82

1.12

Control vs Test Groups

Change in number of orders

Sheet1

82%

112%

Sheet2

Sheet3

Change in the Average Order Size

OrderSize

0.86

1.14

Control vs Test Group

Change in average order size

Sheet1

86%

114%

Sheet2

Sheet3

Total revenue gain: $2.6 million dollars

Revenue

0.7

1.27


Change in total revenue

Sheet1

70%

127%

Sheet2

Sheet3

This stuff works!Building a relationship with customers can be highly profitableUsing a database to recreate the old family grocer is a winning strategyBusiness to business relationship marketing is the way to go

Lifetime Value

How Lifetime Value is used to direct retention strategyWe need to know the value of our customers, so as to properly target our sales and retention effortsWe need to discriminate among our customers to acquire and retain the best

What is lifetime value?Net present value of the profit to be realized on the average new customer during a given number of years.To compute it, you must be able to track customers from year to year.Main use: To evaluate strategy.

Lets look at a retail operation

Before and after a loyalty programLets begin with a retention building communication

Examples of Profitable StrategiesNewslettersSurveys and ResponsesLoyalty ProgramsCustomer ServicesMembership cards and status levelsEvent Driven Communications

Event driven communication:Dear Mr. Hughes:

I would like to remind you that your wife Helenas birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock.

As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00.

If you like, I can gift wrap the suit at no extra charge and deliver it to you next week, so that you will have it in plenty of time for her birthday. Or, I can put it aside so you can come in to pick it up. Please call me at (703) 754-4470 to let me know which youd prefer.

Sincerely yours, Robin Baumgartner Robin Baumgartner, Store ManagerRidgeway Fashions Leesburg, VA 22069

LTV Before New Strategies

Discount Rate Basic FormulaMarket Rate of Interest...5%Assume Risk (Double rate)...10%Years = n Interest = iFormula: D = (1 + i)nCalculation of rate after 2 years: D = (1 + .10)2 = (1.10)2 = 1.21

LTV Before New Strategies

New Retention StrategiesBirthday ClubCommunicate with themGive them premiums if they shop a lotLets see what could happen

LTV With New Strategies

Effect of adoption of new strategiesThis is the effect of a few strategies. Later we will see the cumulative effect of many strategies

How to use lifetime valueCompute a base lifetime valueDream up a new retention building strategy. Estimate the benefits and costsDetermine whether your new lifetime value goes up or goes downDont undertake any new strategy until you can prove it will be successful

Who is going to defect?Besides LTV, you can develop a model that predicts which customers are most likely to leave.Putting that model with LTV you can refocus your entire retention strategyYou create a Risk Revenue Matrix

Focus retention programs on A and B: 44% of your customers.

Sheet1

Probability of Leaving Soon

LTVHighMediumLow

HighPriority APriority BPriority C

MediumPriority BPriority BPriority C

LowPriority CPriority CPriority C

Sheet2

Sheet3

Using Risk Revenue MatrixTelecom company sent special messages to priorities A and B.Ignored customers in priority CResult: Boost in retention and profits

Using lifetime value to get budget approvalDatabase marketing budgets are usually carved from somewhere elseYou have to prove that you will make better use of the funds than the othersLifetime value can supply testable numbers that CFOs can understandBase your budget on solid numbers backed up by valid tests

What your new budget will buy

11.01

NumberResponseSalesAverage

OffersRateResponsesConversionSalesSaleSales

Currently100,000,0002.00%2,000,00030%600,000$260$156,000,000

Warehouse100,000,0002.10%2,100,00030%630,000$260$163,800,000

Increase100,00030,000$7,800,000

11.02

IncreasedProfitIncreased

SalesRateProfits

Annual Warehouse Benefits$7,800,00030%$2,340,000

Annual Warehouse Costs$3,500,000

Loss from warehouse$1,160,000

11.03

80%


SalesRateProfits

Data Mart Benefits$6,240,00030%$1,872,000

Data Mart Costs$800,000

Gain from Data Mart$1,072,000

11.04

StepsCost

Warehouse Build$6,000,000

Over Three Years$2,000,000

Annual Maintenance$500,000

Customer Communications$1,000,000

Total$3,500,000

11.05

LifetimeLikelihood of Defection

ValueHighMediumLow




11.06

LeadsConv.One TimeConv.Two TimeAnnualTotal

RateBuyersRateBuyersRevenueRevenue

Present500,00030%150,00050%75,000$200$15,000,000

With Customer Management500,00036%180,00060%108,000$240$25,920,000

Cost of Customer Management$4,000,000

Net Increased Return$6,920,000

11.07, 08, 09

Year 1Year 2Year 3

Retention Rate40%45%50%

Customers200,00080,00036,000

Visits Per Year1.41.61.8

Spending Per Visit$50$60$70

Revenue$14,000,000$7,680,000$4,536,000

Cost Percentage50%49%48%

Costs$7,000,000$3,763,200$2,177,280

Acquisition Cost $32$6,400,000

Total Costs$13,400,000$3,763,200$2,177,280

Profit$600,000$3,916,800$2,358,720

Discount Rate11.121.32

NPV Profit$600,000$3,497,143$1,786,909

Cum NPV Profie$600,000$4,097,143$5,884,052

Lifetime Value$3.00$20.49$29.42

Fig 11.07

Year 1Year 2Year 3


Customers200,000100,00060,000

Visits Per Year1.622.4


Revenue$17,600,000$14,000,000$11,520,000


Costs$8,800,000$6,860,000$5,529,600


Database Costs$500,000$250,000$150,000

Loyalty Program$5.00$8.00$10.00

Loyalty Costs$1,600,000$1,600,000$1,440,000

Total Costs$17,300,000$8,710,000$7,119,600

Profit$300,000$5,290,000$4,400,400


NPV Profit$300,000$4,723,214$3,333,636

Cum NPV Profie$300,000$5,023,214$8,356,851


Fig 11.08

Year 1Year 2Year 3

Old LTV$3.00$20.49$29.42

New LTV$1.50$25.12$41.78

Change-$1.50$4.63$12.36

With 200,000 members-$300,000$926,071$2,472,799

Fig 11.09

10.11

ConversationsMessagesResponses

TotalActiveSentOpenedQuestions

Zap Registrant Surveys55167921553

Zap Registrant Non Buyers3002072095010

Buyers Invited to Training43017012300

CSR Survey2195142772368149

Corporate Billing Contract Usage1371414700

10.12

Likelihood of Playing in these events

SaturdayWednesdayTuesdayThursday

Gold LottoGold LottoOz LottoPowerball

Jane Smith95.00%2.00%2.00%1.00%

John Brown23.00%25.00%27.00%25.00%

Pat Johnson65.00%31.00%3.00%1.00%

10.13

Second Year Performance

ConversionOrders PerProfit Per

PercentCustomerCustomer

Team78.60%4.1$282.24

Non Team46.60%1.14$30.15

GC84.50%3.86$212.72

Non GC39.10%0.73$12.13

10.14

10.15

4.100

1.143

-

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Team

Non Team

Team vs Non Team

Orders per customer

In the Second Year

3.857

0.727

-

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Goal ClubNon Club

Goal Club vs

Non Club

Orders Per

MBD004223EC.xls

Basic Data

Eurosport buyers January 1999 - June 2001

Life Time Value Study

MultiConv.OrdersSalesGrossGMPromoCost PerPromoPromosTotalContrib.% 2 YrAd

CustomersBuyersPercentOrdersPer. Cust.DollarsPer Cust$AOSMarginPercentCostMailingCountPer CustContrib.Per Cust.ContribRatio

First 3 month Performance

Team30,09312,34341.0%22,2740.740$3,852,825$128.03$172.97$1,584,87941.0%$40,520$0.4983,0472.76$1,544,357$51.3218.2%0.014

Non Team180,45838,34621.0%51,3800.285$3,505,384$19.42$68.22$1,657,12047.0%$225,718$0.47476,9532.64$1,431,404$7.9326.3%0.083

GC50,13222,12744.0%37,6250.751$4,973,628$99.21$132.19$2,110,58542.0%$69,454$0.47146,5172.90$2,041,135$40.7219.1%0.018

Non GC160,41928,56218.0%36,0290.225$2,384,582$14.86$66.19$1,131,41547.0%$196,788$0.47416,4902.60$934,629$5.8348.1%0.106

Avg Cust210,55150,68924.0%73,6540.350$7,358,208$34.95$99.90$3,242,00444.0%$266,240$0.47563,0072.70$2,975,765$14.1321.8%0.046


Team26,48713,56351.2%29,7081.122$4,938,634$186.46$166.24$2,049,66941.5%$71,696$0.47153,8405.81$1,977,972$74.6826.5%0.019

Non Team159,38443,04727.0%64,4750.405$4,550,331$28.55$70.58$2,144,03247.1%$398,174$0.47845,6365.31$1,745,860$10.9536.3%0.112

GC45,21925,35756.1%51,9421.149$6,788,515$150.13$130.69$2,898,16442.7%$125,751$0.47267,3615.91$2,772,416$61.3128.8%0.024

Non GC140,65231,25322.2%42,2410.300$2,700,455$19.20$63.93$1,295,54048.0%$344,119$0.47732,1155.21$951,420$6.7655.8%0.163

Avg Cust185,87156,61030.5%94,1830.507$9,488,969$51.05$100.75$4,193,70244.2%$469,871$0.47999,4765.38$3,723,833$20.0330.9%0.063

First Year Performance

Team19,49613,26368.0%42,6262.186$7,303,357$374.61$171.34$3,030,34841.5%$124,705$0.46274,03014.06$2,905,643$149.0452.8%0.022

Non Team118,83245,05037.9%84,4050.710$6,400,160$53.86$75.83$2,980,69246.6%$709,566$0.461,538,11412.94$2,271,128$19.1163.4%0.142

GC35,33026,14274.0%76,9982.179$10,418,291$294.89$135.31$4,425,29442.5%$229,540$0.46501,68514.20$4,195,757$118.7655.8%0.028

Non GC102,99832,17131.2%50,0330.486$3,285,226$31.90$65.66$1,585,74648.3%$604,732$0.461,310,45912.72$981,014$9.5278.5%0.236

Avg Cust138,32858,31342.2%127,0310.918$13,703,520$99.07$107.88$6,011,04243.9%$834,271$0.461,812,14413.10$5,176,772$37.4257.7%0.078


Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders Per Customer

4.0998169616

1.1429491433

Team vs Non TeamOrders per customerIn the Second Year

Gold Club

3.8572890026

0.7269219353

Gold Club vs Non Club Orders Per Customer in the Second Year

Two year

Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders

Per Cust

Team4.100

Non Team1.143

- 0

Gold Club3.857

Non Club0.727

Sheet3

MBD00421B31.xls

Basic Data






Team30,09312,34341.0%22,2740.740$3,852,825$128.03$172.97$1,584,87941.0%$40,520$0.4983,0472.76$1,544,357$51.3218.2%0.014

Non Team180,45838,34621.0%51,3800.285$3,505,384$19.42$68.22$1,657,12047.0%$225,718$0.47476,9532.64$1,431,404$7.9326.3%0.083

GC50,13222,12744.0%37,6250.751$4,973,628$99.21$132.19$2,110,58542.0%$69,454$0.47146,5172.90$2,041,135$40.7219.1%0.018

Non GC160,41928,56218.0%36,0290.225$2,384,582$14.86$66.19$1,131,41547.0%$196,788$0.47416,4902.60$934,629$5.8348.1%0.106

Avg Cust210,55150,68924.0%73,6540.350$7,358,208$34.95$99.90$3,242,00444.0%$266,240$0.47563,0072.70$2,975,765$14.1321.8%0.046


Team26,48713,56351.2%29,7081.122$4,938,634$186.46$166.24$2,049,66941.5%$71,696$0.47153,8405.81$1,977,972$74.6826.5%0.019

Non Team159,38443,04727.0%64,4750.405$4,550,331$28.55$70.58$2,144,03247.1%$398,174$0.47845,6365.31$1,745,860$10.9536.3%0.112

GC45,21925,35756.1%51,9421.149$6,788,515$150.13$130.69$2,898,16442.7%$125,751$0.47267,3615.91$2,772,416$61.3128.8%0.024

Non GC140,65231,25322.2%42,2410.300$2,700,455$19.20$63.93$1,295,54048.0%$344,119$0.47732,1155.21$951,420$6.7655.8%0.163

Avg Cust185,87156,61030.5%94,1830.507$9,488,969$51.05$100.75$4,193,70244.2%$469,871$0.47999,4765.38$3,723,833$20.0330.9%0.063


Team19,49613,26368.0%42,6262.186$7,303,357$374.61$171.34$3,030,34841.5%$124,705$0.46274,03014.06$2,905,643$149.0452.8%0.022

Non Team118,83245,05037.9%84,4050.710$6,400,160$53.86$75.83$2,980,69246.6%$709,566$0.461,538,11412.94$2,271,128$19.1163.4%0.142

GC35,33026,14274.0%76,9982.179$10,418,291$294.89$135.31$4,425,29442.5%$229,540$0.46501,68514.20$4,195,757$118.7655.8%0.028

Non GC102,99832,17131.2%50,0330.486$3,285,226$31.90$65.66$1,585,74648.3%$604,732$0.461,310,45912.72$981,014$9.5278.5%0.236

Avg Cust138,32858,31342.2%127,0310.918$13,703,520$99.07$107.88$6,011,04243.9%$834,271$0.461,812,14413.10$5,176,772$37.4257.7%0.078


Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders Per Customer

4.0998169616

1.1429491433


Goal Club

3.8572890026

0.7269219353

Goal Club vs Non Club Orders Per Customer in the Second Year

Two year

Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders

Per Cust

Team4.100

Non Team1.143

- 0

Goal Club3.857

Non Club0.727

Sheet3

How you got there

11.01

NumberResponseSalesAverage

OffersRateResponsesConversionSalesSaleSales

Currently100,000,0002.00%2,000,00030%600,000$260$156,000,000

Warehouse100,000,0002.10%2,100,00030%630,000$260$163,800,000

Increase100,00030,000$7,800,000

11.02


SalesRateProfits

Annual Warehouse Benefits$7,800,00030%$2,340,000

Annual Warehouse Costs$3,500,000

Loss from warehouse$1,160,000

11.03

80%


SalesRateProfits

Data Mart Benefits$6,240,00030%$1,872,000

Data Mart Costs$800,000

Gain from Data Mart$1,072,000

11.04

StepsCost

Warehouse Build$6,000,000

Over Three Years$2,000,000

Annual Maintenance$500,000

Customer Communications$1,000,000

Total$3,500,000

11.05

LifetimeLikelihood of Defection

ValueHighMediumLow




11.06

LeadsConv.One TimeConv.Two TimeAnnualTotal

RateBuyersRateBuyersRevenueRevenue

Present500,00030%150,00050%75,000$200$15,000,000

With Customer Management500,00036%180,00060%108,000$240$25,920,000

Cost of Customer Management$4,000,000

Net Increased Return$6,920,000

11.07, 08, 09

Year 1Year 2Year 3


Customers200,00080,00036,000

Visits Per Year1.41.61.8


Revenue$14,000,000$7,680,000$4,536,000


Costs$7,000,000$3,763,200$2,177,280


Total Costs$13,400,000$3,763,200$2,177,280

Profit$600,000$3,916,800$2,358,720


NPV Profit$600,000$3,497,143$1,786,909

Cum NPV Profie$600,000$4,097,143$5,884,052


Fig 11.07

Year 1Year 2Year 3


Customers200,000100,00060,000



Revenue$17,600,000$14,000,000$11,520,000


Costs$8,800,000$6,860,000$5,529,600


Database Costs$500,000$250,000$150,000


Loyalty Costs$1,600,000$1,600,000$1,440,000

Total Costs$17,300,000$8,710,000$7,119,600

Profit$300,000$5,290,000$4,400,400


NPV Profit$300,000$4,723,214$3,333,636

Cum NPV Profie$300,000$5,023,214$8,356,851


Fig 11.08

Year 1Year 2Year 3

Old LTV$3.00$20.49$29.42

New LTV$1.50$25.12$41.78

Change-$1.50$4.63$12.36

With 200,000 members-$300,000$926,071$2,472,799

Fig 11.09

10.11

ConversationsMessagesResponses

TotalActiveSentOpenedQuestions

Zap Registrant Surveys55167921553

Zap Registrant Non Buyers3002072095010

Buyers Invited to Training43017012300

CSR Survey2195142772368149

Corporate Billing Contract Usage1371414700

10.12

Likelihood of Playing in these events

SaturdayWednesdayTuesdayThursday

Gold LottoGold LottoOz LottoPowerball

Jane Smith95.00%2.00%2.00%1.00%

John Brown23.00%25.00%27.00%25.00%

Pat Johnson65.00%31.00%3.00%1.00%

10.13


ConversionOrders PerProfit Per

PercentCustomerCustomer

Team78.60%4.1$282.24

Non Team46.60%1.14$30.15

GC84.50%3.86$212.72

Non GC39.10%0.73$12.13

10.14

10.15

4.100

1.143

-

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Team

Non Team

Team vs Non Team

Orders per customer

In the Second Year

3.857

0.727

-

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Goal ClubNon Club

Goal Club vs

Non Club

Orders Per

MBD004223EC.xls

Basic Data






Team30,09312,34341.0%22,2740.740$3,852,825$128.03$172.97$1,584,87941.0%$40,520$0.4983,0472.76$1,544,357$51.3218.2%0.014

Non Team180,45838,34621.0%51,3800.285$3,505,384$19.42$68.22$1,657,12047.0%$225,718$0.47476,9532.64$1,431,404$7.9326.3%0.083

GC50,13222,12744.0%37,6250.751$4,973,628$99.21$132.19$2,110,58542.0%$69,454$0.47146,5172.90$2,041,135$40.7219.1%0.018

Non GC160,41928,56218.0%36,0290.225$2,384,582$14.86$66.19$1,131,41547.0%$196,788$0.47416,4902.60$934,629$5.8348.1%0.106

Avg Cust210,55150,68924.0%73,6540.350$7,358,208$34.95$99.90$3,242,00444.0%$266,240$0.47563,0072.70$2,975,765$14.1321.8%0.046


Team26,48713,56351.2%29,7081.122$4,938,634$186.46$166.24$2,049,66941.5%$71,696$0.47153,8405.81$1,977,972$74.6826.5%0.019

Non Team159,38443,04727.0%64,4750.405$4,550,331$28.55$70.58$2,144,03247.1%$398,174$0.47845,6365.31$1,745,860$10.9536.3%0.112

GC45,21925,35756.1%51,9421.149$6,788,515$150.13$130.69$2,898,16442.7%$125,751$0.47267,3615.91$2,772,416$61.3128.8%0.024

Non GC140,65231,25322.2%42,2410.300$2,700,455$19.20$63.93$1,295,54048.0%$344,119$0.47732,1155.21$951,420$6.7655.8%0.163

Avg Cust185,87156,61030.5%94,1830.507$9,488,969$51.05$100.75$4,193,70244.2%$469,871$0.47999,4765.38$3,723,833$20.0330.9%0.063


Team19,49613,26368.0%42,6262.186$7,303,357$374.61$171.34$3,030,34841.5%$124,705$0.46274,03014.06$2,905,643$149.0452.8%0.022

Non Team118,83245,05037.9%84,4050.710$6,400,160$53.86$75.83$2,980,69246.6%$709,566$0.461,538,11412.94$2,271,128$19.1163.4%0.142

GC35,33026,14274.0%76,9982.179$10,418,291$294.89$135.31$4,425,29442.5%$229,540$0.46501,68514.20$4,195,757$118.7655.8%0.028

Non GC102,99832,17131.2%50,0330.486$3,285,226$31.90$65.66$1,585,74648.3%$604,732$0.461,310,45912.72$981,014$9.5278.5%0.236

Avg Cust138,32858,31342.2%127,0310.918$13,703,520$99.07$107.88$6,011,04243.9%$834,271$0.461,812,14413.10$5,176,772$37.4257.7%0.078


Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders Per Customer

4.0998169616

1.1429491433


Gold Club

3.8572890026

0.7269219353

Gold Club vs Non Club Orders Per Customer in the Second Year

Two year

Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders

Per Cust

Team4.100

Non Team1.143

- 0

Gold Club3.857

Non Club0.727

Sheet3

MBD00421B31.xls

Basic Data






Team30,09312,34341.0%22,2740.740$3,852,825$128.03$172.97$1,584,87941.0%$40,520$0.4983,0472.76$1,544,357$51.3218.2%0.014

Non Team180,45838,34621.0%51,3800.285$3,505,384$19.42$68.22$1,657,12047.0%$225,718$0.47476,9532.64$1,431,404$7.9326.3%0.083

GC50,13222,12744.0%37,6250.751$4,973,628$99.21$132.19$2,110,58542.0%$69,454$0.47146,5172.90$2,041,135$40.7219.1%0.018

Non GC160,41928,56218.0%36,0290.225$2,384,582$14.86$66.19$1,131,41547.0%$196,788$0.47416,4902.60$934,629$5.8348.1%0.106

Avg Cust210,55150,68924.0%73,6540.350$7,358,208$34.95$99.90$3,242,00444.0%$266,240$0.47563,0072.70$2,975,765$14.1321.8%0.046


Team26,48713,56351.2%29,7081.122$4,938,634$186.46$166.24$2,049,66941.5%$71,696$0.47153,8405.81$1,977,972$74.6826.5%0.019

Non Team159,38443,04727.0%64,4750.405$4,550,331$28.55$70.58$2,144,03247.1%$398,174$0.47845,6365.31$1,745,860$10.9536.3%0.112

GC45,21925,35756.1%51,9421.149$6,788,515$150.13$130.69$2,898,16442.7%$125,751$0.47267,3615.91$2,772,416$61.3128.8%0.024

Non GC140,65231,25322.2%42,2410.300$2,700,455$19.20$63.93$1,295,54048.0%$344,119$0.47732,1155.21$951,420$6.7655.8%0.163

Avg Cust185,87156,61030.5%94,1830.507$9,488,969$51.05$100.75$4,193,70244.2%$469,871$0.47999,4765.38$3,723,833$20.0330.9%0.063


Team19,49613,26368.0%42,6262.186$7,303,357$374.61$171.34$3,030,34841.5%$124,705$0.46274,03014.06$2,905,643$149.0452.8%0.022

Non Team118,83245,05037.9%84,4050.710$6,400,160$53.86$75.83$2,980,69246.6%$709,566$0.461,538,11412.94$2,271,128$19.1163.4%0.142

GC35,33026,14274.0%76,9982.179$10,418,291$294.89$135.31$4,425,29442.5%$229,540$0.46501,68514.20$4,195,757$118.7655.8%0.028

Non GC102,99832,17131.2%50,0330.486$3,285,226$31.90$65.66$1,585,74648.3%$604,732$0.461,310,45912.72$981,014$9.5278.5%0.236

Avg Cust138,32858,31342.2%127,0310.918$13,703,520$99.07$107.88$6,011,04243.9%$834,271$0.461,812,14413.10$5,176,772$37.4257.7%0.078


Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders Per Customer

4.0998169616

1.1429491433


Goal Club

3.8572890026

0.7269219353

Goal Club vs Non Club Orders Per Customer in the Second Year

Two year

Team8,1956,43878.6%33,5984.100$5,883,979$718.00$175.13$2,420,04841.1%$107,120$0.46233,79328.53$2,312,926$282.24100.0%0.023

Non Team51,24223,90046.6%58,5671.143$4,644,979$90.65$79.31$2,150,69846.3%$605,678$0.471,299,44525.36$1,545,021$30.15100.0%0.167

GC15,64013,21784.5%60,3283.857$8,374,103$535.43$138.81$3,536,30642.2%$209,430$0.46455,76329.14$3,326,876$212.72100.0%0.032

Non GC43,79717,12139.1%31,8370.727$2,154,855$49.20$67.68$1,034,44148.0%$503,371$0.471,077,47524.60$531,070$12.13100.0%0.299

Avg Cust59,43730,33851.0%92,1651.551$10,528,958$177.14$114.24$4,570,74543.4%$712,797$0.461,533,23825.80$3,857,945$64.91100.0%0.087

Orders

Per Cust

Team4.100

Non Team1.143

- 0

Goal Club3.857

Non Club0.727

Sheet3

Using lifetime value to get budget approvalDatabase marketing budgets are usually carved from somewhere elseYou have to prove that you will make better use of the funds than the othersLifetime value can supply testable numbers that CFOs can understandBase your budget on solid numbers backed up by valid tests

Conclusion: you can do thisCreate a lifetime value table for your customers.Put LTV into each customer recordUse LTV to determine your marketing strategyUse it to get your budget approved

Books by Arthur HughesFrom McGraw Hill. Order at www.dbmarketing.com Contact Arthur: [email protected]

33

33

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33

33

33

33

33

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33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

33

330%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Percentage

Retained

from

Previous

Year

12345

Years as a customer

79.67%

24.82%

15.83%

1.52%

-21.83%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

5%

11%

28%

28%

28%

Probability of Leaving Soon

LTV

High

Medium

Low

High

Priority A

Priority B

Priority C

Medium

Priority B

Priority B

Priority C

Low

Priority C

Priority C

Priority C

Where are Weldon's Prime Acquisition Targets?

WeldonUSPenetrationLifetimeTargetRank

CustomersUniverseRatioValuePotential

Metal Production254 2,433 10.44%$145,067$15,144.68

3

Light Manufacturing15,442 162,009 9.53%$5,914$563.70

4

Heavy Manufacturing44 1,288 3.42%$988,145$33,756.51

2

High Technology612 1,453 42.12%$127,675$53,776.39

1

Total29,198 167,183 17.46%

Weldon Instruments Corporation Customer Segments

AverageTotalSalesLifetimeLTV

CustomersSaleSalesRankingValueRanking

Metal Production254$339,736$86,293,0004$145,067.372

Light Manufacturing15442$13,851$213,892,0001$5,914.514

Heavy Manufacturing44$2,314,159$101,823,0003$988,145.931

High Technology612$299,007$182,992,0002$127,675.793

Total29,198 $20,036$585,000,000$8,555.74

Year 1Year 2Year 3

Old LTV$3.00$20.49$29.42

New LTV$1.50$25.12$41.78

Change-$1.50$4.63$12.36

With 200,000 members-$300,000$926,071$2,472,799

Year 1Year 2Year 3


Customers200,000 100,000 60,000



Revenue$17,600,000$14,000,000$11,520,000


Costs$8,800,000$6,860,000$5,529,600


Database Costs$500,000$250,000$150,000


Loyalty Costs$1,600,000$1,600,000$1,440,000

Total Costs$17,300,000$8,710,000$7,119,600

Profit$300,000$5,290,000$4,400,400


NPV Profit$300,000$4,723,214$3,333,636

Cum NPV Profie$300,000$5,023,214$8,356,851


Year 1Year 2Year 3

Retention Rate 40%45%50%

Customers 200,000 80,000 36,000

Visits Per Year 1.41.61.8

Spending Per Visit $50$60$70

Revenue$14,000,000$7,680,000$4,536,000

Cost Percentage 50%49%48%

Costs$7,000,000$3,763,200$2,177,280


Total Costs$13,400,000$3,763,200$2,177,280

Profit$600,000$3,916,800$2,358,720

Discount Rate 11.121.32

NPV Profit$600,000$3,497,143$1,786,909

Cum NPV Profie$600,000$4,097,143$5,884,052

Lifetime Value $3.00$20.49$29.42

($62)

$48

($80)

($60)

($40)

($20)

$0

$20

$40

$60

New Customer

3rd Year

Customer

Annual Profit

82%

112%

0%

20%

40%

60%

80%

100%

120%

Change in

number of

orders

12

Control vs Test Groups

86%

114%

0%

20%

40%

60%

80%

100%

120%

Change in

average

order size

12


70%

127%

0%

20%

40%

60%

80%

100%

120%

140%

Change in

total

revenue

12


Acquisition

Second

Third

Year

Year

Year

Retention Rate

40%

45%

50%

Customers

200,000

80,000

36,000

Visits Per Year

1.4

1.6

1.8

Spending Per Visit

$50

$60

$70

Revenue

$14,000,000

$7,680,000

$4,536,000

Cost Percentage

50%

49%

48%

Costs

$7,000,000

$3,763,200

$2,177,280

Acquisition Cost $32

$6,400,000

Total Costs

$13,400,000

$3,763,200

$2,177,280

Profit

$600,000

$3,916,800

$2,358,720

Discount Rate

1

1.12

1.32

NPV Profit

$600,000

$3,497,143

$1,786,909

Cum NPV Profie

$600,000

$4,097,143

$5,884,052

Lifetime Value

$3.00

$20.49

$29.42

Acquisition

Second

Third

Year

Year

Year

Retention Rate

40%

45%

50%

Customers

200,000

80,000

36,000

Visits Per Year

1.4

1.6

1.8

Spending Per Visit

$50

$60

$70

Revenue

$14,000,000

$7,680,000

$4,536,000

Cost Percentage

50%

49%

48%

Costs

$7,000,000

$3,763,200

$2,177,280


$6,400,000

Total Costs

$13,400,000

$3,763,200

$2,177,280

Profit

$600,000

$3,916,800

$2,358,720

Discount Rate

1

1.12

1.32

NPV Profit

$600,000

$3,497,143

$1,786,909

Cum NPV Profie

$600,000

$4,097,143

$5,884,052

Lifetime Value

$3.00

$20.49

$29.42

Acquisition

Second

Third

Year

Year

Year

Retention Rate

50%

60%

65%

Customers

200,000

100,000

60,000

Visits Per Year

1.6

2

2.4

Spending Per Visit

$55

$70

$80

Revenue

$17,600,000

$14,000,000

$11,520,000

Cost Percentage

50%

49%

48%

Costs

$8,800,000

$6,860,000

$5,529,600


$6,400,000

Database Costs

$500,000

$250,000

$150,000

Loyalty Program

$5.00

$8.00

$10.00

Loyalty Costs

$1,600,000

$1,600,000

$1,440,000

Total Costs

$17,300,000

$8,710,000

$7,119,600

Profit

$300,000

$5,290,000

$4,400,400

Discount Rate

1

1.12

1.32

NPV Profit

$300,000

$4,723,214

$3,333,636

Cum NPV Profie

$300,000

$5,023,214

$8,356,851

Lifetime Value

$1.50

$25.12

$41.78

Acquisition

Second

Third

Year

Year

Year

Old LTV

$3.00

$20.49

$29.42

New LTV

$1.50

$25.12

$41.78

Change

-$1.50

$4.63

$12.36

With 200,000 members

-$300,000

$926,071

$2,472,799

lifetime value in new format

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