The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs
|
All the factors in a lifetime value table can be influenced by marketing programs: the average order size, the number of orders per year, and the retention rate. To see the way this works, let’s focus on only one factor, the retention rate, and see what would happen if WardChem could increase that rate by 5 percent—an achievable goal for most companies. Let’s see how WardChem could go about it.
-
It could set up a relationship-building team for its top customers.
-
It could provide a much higher level of customer service.
-
It could set up a super-customized Web page for each customer.
-
It could put thousands of pages of technical information about its chemicals on the Web for its customers (only) to use.
Let’s assume that the cost of all these additional relationship-building activities is about $110 per customer per year, or about $5 million. There could be two results: The retention rate might go up by 5 percent, and the number of orders might go up by one-half order per year. Table 5-8 shows what could happen.
| Year 1 | Year 2 | Year 3 | |
|---|---|---|---|
| Retention rate | 75% | 80% | 85% |
| Retained customers | 45,000 | 33,750 | 27,000 |
| Average order | $2,500 | $2,700 | $2,900 |
| Orders per year | 8.5 | 9.5 | 10.5 |
| Total revenue | $956,250,000 | $865,687,500 | $822,150,000 |
| Cost rate | 75% | 71% | 69% |
| Variable costs | $717,187,500 | $614,638,125 | $567,283,500 |
| Acquisition cost ($1,400) | $ 63,000,000 | 0 | 0 |
| Retention costs ($200/yr) | $ 9,000,000 | $ 6,750,000 | $ 5,400,000 |
| Total costs | $789,187,500 | $621,388,125 | $572,683,500 |
| Gross profit | $167,062,500 | $244,299,375 | $249,466,500 |
| Discount rate | 1.01 | 1.09 | 1.17 |
| Net present value of profit | $164,767,265 | $223,953,322 | $212,564,425 |
| Cumulative NPV of profit | $164,767,265 | $388,720,586 | $601,285,011 |
| Lifetime value | $3,661 | $8,638 | $13,362 |
Lifetime value in the third year has gone up from $11,907 to $13,362. What does that mean for WardChem in terms of profits? As Table 5-9 shows, it means more than $65 million more profits—after taking into account the extra $5 million per year spent on relationship-building activities.
|
| Year 1 | Year 2 | Year 3 |
|---|---|---|---|
| New LTV | $3,661 | $8,638 | $13,362 |
| Old LTV | $3,462 | $7,926 | $11,907 |
| Difference | $200 | $712 | $1,454 |
| Times 45,000 customers | $8,987,305 | $32,046,283 | $65,451,072 |
Lifetime value charts like these are used in calculating the value of a name. They are very powerful predictors of success in database marketing.
|