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Subscription access is web-based and costs far less than it would take to devote staff to maintaining this sort of data. This article explains the computation of the lifetime value of a customer of a retail store. First, a definition: Lifetime value is the net present value of the profit that you will realize on the average new customer during a given number of years.
For this table, we are going to look at Ridgeway Fashions before and after they adopted the new strategy of writing letters to husbands before their wife’s birthday. In this table we are looking at a group of 200,000 Ridgeway Fashions customers over a three-year period.
You will note that of the 200,000 customers who were acquired in Year 1, only 80,000 of them came back to make purchases in the second year.
Year X Customers represent those previous year customers who are still buying in the later year.
What do we do with new customers who wander in to the store and begin shopping in the second year?
What you will notice, and will be true of your situation as well, is that the costs of servicing a customer tend to decrease with the number of years that the customer has been buying from you. The reason why we need a discount rate is simple: the profits you receive from your customers come in over several years. If I owe you $1,000 right now, but pay you the $1,000 a year from now, I have gypped you out of the interest you could have earned on that $1,000 if I had paid you right away.
For these reasons, in this example, I have doubled the interest rate to get the discount rate. Where D = Discount rate, i = interest rate , rf = the risk factor, and n = number of years that you have to wait.
Once you have the discount rate, each of your expected profits must be discounted so as to arrive at the Net Present Value of these future profits.
The Net Present Value of the $3,002,000 profits expected in Year 3 is $2,223,704 which is the result of dividing $3,002,000 by the discount rate of 1.35. We must now add together the net present value of all the profits in the present year, and each previous year. The lifetime value is simply the Cumulative NPV Profit in each year, divided by the original group of customers (in this case 200,000).
The NPV lifetime value represents the average profits which you can expect to receive, after a given number of years, from the average new customer that you can sign up. Developing your customer lifetime value table is the first step in the development of strategy. For Ridgeway Fashions, let’s imagine a creative Director of Database Marketing whom we will call Robin Baumgartner. Macroeconomic events like recessions, booms or changes in interest rates which affect the overall demand for most products.
In planning her variable costs, Robin assumes the same cost structure that applied for her customers in general. Just adding these 3% referrals in the second two years has made a major change in the overall success of the Birthday Club. Lifetime value is a practical, hardheaded technique for determining the effectiveness of various marketing strategies.
The basic idea is to come up with strategies that increase lifetime value by as much as possible. About ArthurArthur Middleton Hughes has published over 200 articles on Database and E-mail Marketing. Successful E-mail Marketing Strategies: from Hunting to Farming (RACOM 2009) by Arthur Middleton Hughes and Arthur Sweetser.
This new book takes readers through a step by step approach to implementing database marketing essentials to improve e-mails marketing returns intelligently. The two Arthurs make it easy to see the difference between primitive “Hunting” and customer-centric “Farming”. Arthur Middleton Hughes has just published a new book of Marketing Strategy for Telecoms including Landline and Wireless Telcos, Cable TV, Satellite TV, BPL, IPTV, VoIP and WiMAX. We’re all very familiar with Amazon’s, ‘Customers who bought this like you, also bought this’ recommendations.
Even the smallest retailer knows that to survive in our increasingly digital world, it needs to offer highly personalised product and service recommendations to delight and engage our increasingly demanding global customer.
However, the good news is that you, too, can start doing Amazon-style super-personalised customer interactions.
In addition, graph databases are able to do a number of things better than the familiar relational database management systems that most organisations use for database tasks. Meanwhile, global sports and athletics giant adidas Group has also adopted the technology to offer enhanced features such as product recommendations to its audience. The attractions of a technology that can provide a 360-degree view of a customer in real time are clear. 5 Top Tips to Consider When Building Your Marketing Database You are using an outdated browser. A good way to look at this is to consider the design and fitting of a new kitchen, where an approach could be to ensure each element (kitchen drawers, cupboards, oven, fridge, etc) is provided. Our extensive portfolio is testament to the wide array of services offered to meet varying needs of our client base comprised of large, medium and small companies.
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To make the story interesting, it explores the effect on lifetime value of the introduction of a Birthday club, in which the store writes to husbands suggesting gifts for their wives on the wives birthdays.
We will see how they costed out the Birthday Club, and determined whether the strategy would work, using a lifetime value table.
Let us assume that prior to this time, Ridgeway Fashions issued a plastic membership card to many of their customers, or with customer permission, recorded customer’s credit card numbers so that they could find out who was buying what, and could store that data in a simple database. We keep this database going for the three years, even though more than half of the customers have left us forever. To determine costs in your industry, you should consult the finance department in your company.
This is true in business-to-business as well as in most forms of consumer marketing situations. Your product could become obsolete in the next few years, and wipe out your expectation of further sales. You can worry about whether you have to wait several weeks or months, on the average, to be paid.
The net present value of profits realized by the third year, for example, is equal to sum of the net present value of the profits in the Acquisition year + Year 2 + Year 3.

The second step is to get a great idea, and test it out — in theory –using your lifetime value table as the measuring stick. Robin decides to test out the idea of a Birthday Club: to ask women customers to provide information about their sizes and preferences, their birthday, and their husband’s business address. In drawing up this new table for the Birthday Club, Robin makes the assumption that her programs can increase that to 50% — with further increases as the remaining customer base becomes composed of more and more loyalists. It will result in some husbands, who have never bought women’s clothing before, ordering a birthday gift for their wives, based on the information which she has provided to the store. She estimates that Birthday Club members will buy an average of $130 dollars worth of clothing in the acquisition year instead of $120. In old-fashioned direct marketing programs, one might use this initial loss as a reason to abandon the club as being a loser.
It is possible that the Birthday Club will be so successful that she can persuade (or incentivize) 3% of her customers to recommend Ridgeway to their friends or relatives. It can, and should, be applied to any marketing program to test it before any significant amount of money is spent.
It’s a brilliant tool; Amazon has shown us the value of winning customer business by providing the most personalised product and service recommendations possible. We also all know that firms that don’t meet these demands and which fail to offer this super-personalised experience will pay a penalty on Twitter – and may even go under.
The reason: techniques pioneered by Amazon and the other first wave of e-tailers and social web giants like LinkedIn were powered by a technology developed in-house called the graph database. To do personalisation well, you need to look up the customer’s past purchases, query that history then match the customer to the product or promotion that’s the closest match to their interests, ideally based on their social network footprint as much as previous buying patterns. For example, they are able to rapidly match historical data with live session data and secure a millisecond real-time response, as well as identify relationships between very large numbers of data points, so help you work with all manner of product and customer and social data. A recommendation engine in a graph database can offer a staggering thousand times performance improvement, despite a thousand times increase in data size – invaluable when working with the multi-channel sources of data that are exponentially large.
The largest of them all, Walmart, is deploying graph database technology to combine information from customer purchases at its physical and online stores in order to make real-time personalised recommendations. Unlike other online retailers that offer static content on their website, the retailer wanted to personalise content based on user interests, local languages, regional sporting news and market-specific product offerings. But the good news is you needn’t be a big global brand to introduce graph technology, which means it’s giving all sorts of brands – even the smallest operator – an invaluable leg-up in terms of making sense of all this customer data.
By contrast, ease of returns and exchanges is ranked among the factors scoring high in importance but low in satisfaction.The quadrant analysis (below) illustrates the ranked importance of various customer satisfaction factors. Prior to the club, the wives have signed up for the club giving their preferences in clothing styles, colors and sizes. While this is a retail example, the principles apply to any type of industry: financial services, telecommunications, business-to-business situations, as well as consumer marketing. These costs include the cost of the products or services provided, plus the variable administrative costs such as customer service, debt collection, deliveries, returns, credits, etc. If you are selling software, for example, the customers are likely to tie up your customer service lines during the first sixty days until they learn how your software works. To compute the acquisition cost, simply add up all the money you spend on your advertising and marketing efforts during the year (exclusive of retention programs, which we will discuss later).
You will find that money spent on acquisition does not pay as well as money spent on retention. We need to spend some time on the discount rate, however, since that is the most complicated part of the entire lifetime value analysis.
To estimate the value of future money, we must discount it by a certain amount, so we can equate it to present money, and add the two totals together. You may be able to develop more sophisticated risk factors than (rf = 2), based on your business history. Relationship building activities can turn your customers into advocates and lead them to suggest your company to their friends, co-workers, or relatives. Database activities can lead to increased visits, larger average purchases, cross-selling, or upgrades. Database activities can reduce costs, in some cases, by changing the channel of distribution. This information will be put into the database, and supplied to the merchandise buyers who have to buy what the customers want.
As a result of these additional sales, we can assume more visits (or orders) and a higher average order size. But with database marketing we can look at the impact of a new strategy several years ahead. Why don’t we just tuck them into the numbers in the Acquisition year the way we do with other new acquisitions. Before we act on our hunches and prejudices, we can do our homework and prove to ourselves, at least theoretically, whether any proposed program has the possibility of success. The results of each possible action can be calculated to determine whether the effect on lifetime value is worth the effort and resources that went into it. If you want your e-mail marketing to succeed, learn how to farm.—Stephanie Miller, VP Return Path Click here to download free the exhibits from this new book.
To make the recommendations as sharp and relevant as possible also requires the ability to instantly capture any new interests shown in the current visit. As a result, its internal business users can categorise and search for user trend content across every platform and division of the enterprise – from sources ranging from marketing campaigns, product specifications, contracted athletes and associated teams to sports categories, gender information and more. For example, Gartner predicts that for data-driven operations and decisions, graph databases are now “possibly the single most effective competitive differentiator”.
After all, given its move into retail, you need to be competing with, and indeed outcompeting, Amazon these days – and offering highly sophisticated and personalised recommendations that will keep your customers coming back for more. How many phases will be required to validate the delivery and on-going supply of data?UAT Users – Who will be involved in the UAT activity? There are many different things that cause lifetime value to change, some of which are under your control, many of which are not.
It does not include other Ridgeway Fashions customers who pay cash, or otherwise cannot be tracked. It is a measure of customer loyalty, and is something that you, as a marketer, can modify by your marketing strategy and tactics. The fact that some of the lapsed customers may be reactivated, leads companies to keep these customers on their books for a couple of years. In any long-term business transaction, like lifetime customer value, there is always a serious risk. Increases in the retention rate will reduce the costs of servicing customers, and increase the revenue per customer.
Once you have customers on your database, you can learn more about them, and can increase your channels to reach them.

Once you have your customers on a database, you will develop innovative ways to market to them.
Then, each month, Robin will send letters to husbands about their wives birthdays providing hints on what to get. This includes the cost of training the clerks to ask people to join the club, giving the clerks a commission of $5 per customer signed up, getting the survey data, keypunching the data, putting it into the database, creating the Birthday Club software, and writing one letter to each member’s husband at birthday time.
What this shows is that by the third year, the Birthday Club will increase Ridgeway profits by more that $2.4 million. That depends on many things, including the success of Ridgeway as a store, the execution of the marketing plan, etc. And all this needs to be processed in milliseconds – as the next online temptation is only ever one click away. Whether it’s helping direct a fan to a great piece of their favourite team’s football kit, or making connections within a growing digital consumer data set, graphs are enabling adidas Group to deliver the super-personalised features to consumers we’ve been talking about.
This book contains more than a dozen different lifetime value tables for a variety of industries.
This is true in a wide variety of industries, and helps to reduce costs and increase lifetime value. If both tables use the same cost percentages, what that percentage is may not be of crucial importance.
Then divide this total by the number of new customers who actually make purchases from you each year.
We will use this type system in calculating lifetime value for a business-to-business situation. Built into this number are all of the other numbers in the LTV table: the retention rate, spending rate, the acquisition cost, marketing costs, product costs, and discount rate. Referrals typically have higher retention rates and spending rates than other newly acquired customers. One objective of any new strategy will be to make customers happier, and thus to increase their retention rate.
Database marketing offers a tremendous opportunity to conduct mini-experiments prior to your major rollouts. If you keep track of customer spending in your database, you can prove, easily, to yourself that loyal customers tend to make more purchases per year, that they buy more on each visit, and that they tend to buy higher priced items.
Bear in mind that this $2.4 million is not sales, it is net profits, after all costs have been subtracted including the loss of $1 million in the acquisition year. This holds true for the delivery of a Marketing solution, where having clear business goals and objectives will aid in delivering a solution that is fit for purpose and provides ROI.
Are there enough individuals or enough time to complete the defined tests?Data Availability – To ensure a UAT can be completed in a controlled environment, with any inconsistences easily identified, the delivery and availability of the data for use in the UAT will need to be considered.Sign off Criteria – Before starting a UAT, understanding how success will be measured is critical and will help focus the mind on must haves and nice to haves during the UAT phase. The only requirement is that we are taking snap shots of the performance of a specific group of consumers or companies over their first several years as a customer. Of course, since they are on the database, we will have to keep track of them and send them occasional messages. Research shows, and your database records will prove it, that referred people are more loyal, have a higher retention and spending rate, than the average new acquisition. So before delving into the design and delivery ensure you consider the following:A clear link to the business goals should be the starting point of any marketing objectives.
For now, however, study this particular table, because you will learn the basic principles of lifetime value from it. Later, we will be developing the lifetime value of customer segments, not of all customers, as we are doing here. The disloyal customers have left, and the loyal ones who remain visit more often and spend more per visit.
You will note that she is sending out birthday letters to all club members, even though many have already stopped buying in the store.
For example, ‘To grow UK sales by 10% and European sales by 20% in the next financial year’.Consider operational, social and management goals as these will impact objectives of the Marketing Solution. So when creating the UAT Tests ensure they cover the requirements and not how the solution has been put together, for example in an earlier posting on Analysis (What analysis will I require?) a specific analysis metric requirement was identified for the “Number of quotes by individual in first 6 months”. For now, however, let’s stick with looking at all the customers in the database who were acquired together, to see what we can learn about them. For example, ‘To enable the performance of marketing activities to be measured, evaluated and refined’.Ensure your objectives are business led and not solution led. To test this, a UAT Test should be devised to cover this piece of analysis and not to test how the actual item was implemented in the design phase as the definition could be the incorrect element.If you have any further questions or would like support in ensuring ROI and maximising the potential value of your customer data, please contact me through the BlackerRoberts Ltd “Contact Us” page and I will be happy to discuss your needs. Typically, the longer customers are with you, the more they will spend per year, per visit, per order.
The club communications, alone, may serve to reactivate some lapsed customers, and are well worth the investment.
But the fact that they are linked to an existing customer results in their being more valuable than many other customers.
An objective is the benefit the business should receive as part of the solution, not something delivered as part of the solution. The second year represents the activity from the customers who are still active out of the original group acquired in the Acquisition Year. The MCI Friends and Family program was one of the most successful referral programs in the history of marketing. You list them separately because you want to track them, you want to measure their purchasing habits, and devise special programs to increase their number.
About the data: Findings are based on a comScore survey of more than 3,100 US online shoppers conducted in February 2012.
To help understand this look at the customer journey, to understand the interactions and each unique touch point a customer has with you.
All shoppers surveyed had to meet the criteria of making at least two online purchases in a typical 3-month period.
In your database, you put the ID number of the referred person in the referrer’s record, and vice versa. These scenarios should be defined to ensure the capability to provide and expand is built into the solution and not the delivery of specific elements. Findings related to big-box retailers are based on a survey of 6,500 US consumers by the Empathica Consumer Insights Panel, Wave 1 2012. That way you can track referred people and those who refer them, to determine their lifetime value.

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