Lifetime Duration…

• Differences between complete and incomplete Customer Information– Complete information when customers’ first

and last purchases are assumed to be known– Incomplete information when either the time of

first purchase, or the time of last purchase, or both are unknown.

Types of Relationships• Contractual (Lost for Good)

– Buyers engage in a specific commitment on duration and/or level of usage

– Lifetime duration easy to calculate as both first and last purchase known

– Company practically looses entire relationship once contract is over

• Non-Contractual (always-a-share)– No customer commitment on duration and/or level of

usage– Customers may use several sources– Calculation of Lifetime duration not straightforward– The likelihood of a customer being active is measured

CLD when information is incomplete

t0 t1

Buyer 1

Buyer 2

Buyer 3

Buyer 4

Complete Info

Left Censored

Right Censored

Left & Right Censored

P(Active)• Probability of a customer being active in

time t in non-contractual cases

• Example– 2 customers are observed for their activities

during a period of 12 months– Customer 1 purchases in 1st, 3rd, 5th and 8th

month and makes no purchase thereafter– Customer 2 purchases only in 1st and 8th month

and no purchases thereafter– Which customer has a higher probability of

making a purchase in the 12th month?

P(Active)

• P(Active) = Tn

– n = number of purchases in a given period– T = time of last purchase as a fraction of

observation period

P(Active)

Customer 1

Customer 2

Month 1 Month 8 Month 12

X

XX

X X X

P(Active)• For Customer 1

– T = 8/12 = 0.6667– n = 4

– P(Active) = Tn = (0.6667)4 = 0.197• For Customer 2

– T = 8/12 = 0.6667– n = 2

– P(Active) = Tn = (0.6667)2 = 0.444

Win Back Rate• Both contractual and non contractual

settings

• Proportion of acquired customers in a period who were lost in an earlier period

• Indicated a successful communication of an important change in the product offering or a change in customer needs

Customer Value Metrics

Overview• Popular Customer-Based Value Metrics

– Size of Wallet– Share of Category Requirement (SCR)– Share of Wallet (SW)

• Individual• Aggregate

– Transition Matrix

• Strategic Customer-Based Value Metrics– RFM– Past Customer Value– Ltv Metrics– Customer Equity

• Popular Customer Selection Strategies– Decision Trees– Logistic Regression

• Lift Charts

Popular Customer-Based Value Metrics

• Help firms prioritize their customers so that a higher proportion of resources can be allocated to right customers

• To be used only if a correlations give substantial results

• For eg. If the company finds a high correlation between customer’s worth and purchasing actions

Size of Wallet

• Amount of a buyer’s total spending in a category• Category sales of all the firms to that customer• Measured in monetary terms

• Size of Wallet = Sj

– Sj = sales to the customer by firm j

• Source of Information– Primary Market Research for existing customers

– Segment level information for prospects

• Based on assumption that large wallet size indicates more revenue and profits

J

j 1

Share of Category Requirement

• j = firm• V = Purchase Volume• i = Customer who buy the brand

• = summation of volume purchased by all i customers from firm j

• = summation of volume purchased by all i customers from all j firms

I

i 1

I

i 1

J

j 1

Share of Category Requirement• Sources of Information

– Numerator – internal records– Denominator – Market and distribution panels,

primary market research but costly to gather

• The most commonly accepted measure of customer loyalty for some categories with frequent purchases

• Used in conjunction with Size of Wallet• Higher SCR indicates that once a customer

buys a brand, he/she tends to prefer it more as compared to competitors

SCR Calculation Example 1

  Brand A Brand B Brand C Brand D

C1 10 9 2 1

C2 6 0 5 3

C3 0 3 7 0

C4 0 0 0 9

C5 5 5 3 4

C6 1 7 0 3

SCR Calculation Example 2

  Brand A Brand B Brand C Brand D

C1 1 2 0 1

C2 3 0 4 1

C3 0 2 3 5

C4 0 1 5 0

C5 1 6 7 0

C6 3 4 0 4

J

j 1

Share of Wallet (SW)Individual• Proportion of category value accounted for by the firm for a

buyer from all the brands purchased by the buyer in the category

• Indicates the degree to which a customer satisfies his needs in the category with the firm.

• ISW(%) of firm to customer = Sj / Sj

• S = Sales to the customer under study• If a customer buys spends Rs. 5000 on monthly groceries,

and 3000 from Spencer, Spencer’s SW for the customer is 60% for the month

ISW

• Information Sources– Numerator – From Internal Records– Denominator – Primary MR for a representative

sample and extrapolated

• Used as a measure of Loyalty, but does not provide any future indications

Aggregate SW (Brand/Firm Level)

• ASW is the proportion of category value accounted for by the brand within its base of buyers

• ASW(%) = Sum of Sales to the observed customers / Total expenditure of these customers in

the category

SW Example

  Brand A Brand B Brand C Brand D

C1 1000 2000 0 1000

C2 3000 0 4000 1000

C3 0 2000 3000 5000

C4 0 1000 5000 0

C5 1000 6000 7000 0

C6 3000 4000 0 4000

SCR versus SW• Inputs on SW more difficult to obtain

• SCR preferred for categories with less variance of expenditures (FMCG) as frequency is easier to remember

• SW used when this variance is high. (Furniture, durables) as amount is also easy to remember

• Both used simultaneously with Size of Wallet

Customer Segments along SW and Size of Wallet

High

Share-of-wallet

Low

Size-of-wallet

Hold on

Do nothingTarget for

additional selling

Maintain and guard

Small Large

SW versus MS

• MS calculated across buyers and non buyers, SW calculated only across buyers

• MS = sum(SW * Size of Wallet) / total sales in the category