Page 292 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 11: CRM Measurements

That doesn’t mean you can’t use the same customer number, or combine the old behaviour Notes
record with the new behaviour record in the customer service shop. In fact, knowing how
long on average a customer defects before they come back can be a useful promotional
tool.
But there has been a significant break in behaviour, and this customer is more likely to
behave as a new customer than a customer who has been with you the whole time. That’s
just the way it works. They’re likely to be interested in different products, for example.

You decide if it’s a new lifetime or not based on your business. In most cases, from a
marketing perspective, and for the purposes of Lifetime Value, they should be treated as
a new customer. Otherwise, all your customers will have “infinite” lifetimes, and you lose
the relevance of the metric.
3. Another challenge to calculating Lifetime Value: Usually much of the data you need to
complete the simple calculation are not available, or can’t be agreed upon by all the
players, especially if you are in a big company. If you don’t know what the average unit
returned costs you in terms of overhead, you can’t do the calculation. If you don’t know
what the average number of customer service calls per unit shipped is and what the calls
cost, you can’t do the calculation. This is a particularly difficult problem for offline retailers,
who don’t have a database that captures nearly enough relevant data.

Here’s one way approach it if the operational data you need is unclear. Try to focus on the
average unit sold, and break up all the revenue and cost components that comprise the unit.
Once you get to a profit/unit, just multiply by units sold to a customer over the “lifetime,”
minus overhead and promotional costs, and you get LTV.
Average price, cost of goods sold, gross margin... should be easy to find. To get customer service
costs, look at how many units you move annually, and divide by annual customer service cost.
Do the same thing for returns, and so on, until you know the costs/unit sold of all the elements
going into a sale. Don’t forget credit processing, after sale support, etc.

Example: Net Profit per Unit Analysis:

Average Sale Price $40.00 100%
Cost of Goods Sold (36.00) (90%)
Gross Margin 4.00 10%
Credit Clearing (.80) (2%)
Revenue Ship & Handle 6.00 15%
Cost of Ship & Handle (4.00) (10%)
Call Centre (1 call every 5 sales) (.80) (2%)
Returns and Processing (5% of Sales) (2.00) (5%)
Fraud/Merchandise Loss (1% of Sales) (.40) (1%)
Promotional Costs/Discounts/Ads (.80) (2%)
Net Profit per Unit $1.20 3%

LTV Calculation and Customer Acquisition Cost Calculations

Say the average customer buys for 2 years, and then stops for at least 1 year. Therefore, we define
the LifeTime of a customer as 2 years.

Over 2 years, the average customer makes 16 purchases.
16 x $1.20 Profit per Unit = $19.20 LTV of the average customer

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