7 - Post Decision Pt II

Question 1

Customer lifetime value (CLV) and how it can be measured

Answer 1

Long-term (future) financial value of customer satisfaction/loyalty/repeat purchase
Can be measured based on past sales records (phone, internet, gym, credit cards, loyalty programs)

Question 2

Method for calculating CLV

Answer 2

Churn method - net profit from a repeat customer over time, discounted to the present moment (done through excel)

Question 3

How do managers use CLV?

Answer 3

To market to different customers and segments of customers

Question 4

CLV Equation

Answer 4

CLV = m * L - AC

Question 5

m component (CLV)

Answer 5

Contribution margin of customer. Represents the profit generated by a customer over the lifetime of their relationship with the business (includes both revenue generated and cost to serve them)
eg: customer buys $100 of goods, cost $20 to produce, m = $80

Question 6

L component (CLV)

Answer 6

Customer’s lifetime. Represents the length of time that a customer is expected to remain with the business. Includes the time between customer’s first purchase and their last
eg: customer makes first purchase at age 25, and most recent at age 45. L = 20 years

Question 7

AC component (CLV)

Answer 7

Acquisition cost. Represents the cost associated with acquiring the customer, including marketing and ad expenses
eg: business spends $500 on ads to acquire one customer, AC = $500

Question 8

Churn/defection rate

Answer 8

% of customers that leave each year
The higher the churn rate %, the lower the expected lifetime of customers (L)

Question 9

Retention rate (RR)

Answer 9

1 - churn rate
% of customers that repeat business

Question 10

CLV with retention rate equation

Answer 10

CLV = sum of t=1 (m * RR^(t-1)) - AC
Expected lifetime of a customer recalculated as probability x outcome summed across all possible outcomes

Question 11

How do managers use CLV?

Answer 11

Can be calculated at the individual level as well as the segment level
eg: individual level - aeroplan account, segment level - diamond vs silver rank

Question 12

How can managers use CLV to make decisions about their customers?

Answer 12

Invest in the most valuable customers
Can be done through incentives, personalized service/offers, surprises, etc
Upgrade current unprofitale customers
Fire current unprofitable customers
Acquire new valuable customers

Question 13

Incentives (CLV)

Answer 13

Often results in high acquisition cost, high variable costs, high contribution margin, low churn
eg: Crypto black card (tons of cashback - AC, incentives like free prime - VC, high annual fee - high m, strong brand reputation - low churn rate)

Question 14

Upselling

Answer 14

Firms upsell their products/services due to CLV factors.
eg: starbucks rewards are generous = upsell drinks
tinder has high churn rate = upsell plans

Question 15

Acquiring new valuable customers

Answer 15

Firms have to focus on segments of high CLV customers, advertise towards “lookalike audiences”
Can also use referral programs

Question 16

Measuring satisfaction - surveys

Answer 16

Firms need to know what data should be collected, what drives satisfaction, what they can do to maximize satisfaction, and the benefits the firm can gain from satisfied customers

Question 17

Sample vs Population

Answer 17

Sample = sub-set of customers (eg: measuring 30 patients in 3 months)
Population = all customers (eg: 10,000 patients in 3 months)

Question 18

Ideal sampling

Answer 18

Random sample is more accurate and representative of total population. Sampling frame should list everyone in the population of interest. Should not include others and should not segment to represent population

Question 19

Sample correspondence to population reality (2 factors)

Answer 19

Sample method
Sample size

Question 20

Method to identify drivers of satisfaction (Q research)

Answer 20

Qualitative research, focus groups or interviews
Includes initially identified drivers

Question 21

Regression equation

Answer 21

Overall satisfaction = a + b1driver1 + b2driver 2 + …
b = weighted importance of a specific driver
a = constant value of overall satisfaction

Question 22

Drill down analysis

Answer 22

Detailed survey on supplementary parts of one driver
eg: quality of car repair
supps = clear explanation of price, clear explanation of condition, clear explanation of reparation, thoroughness of repair, all necessary tests performed as needed, time took to repair, correct diagnosis, etc

Question 23

Expectation model

Answer 23

Consumer satisfaction is a function of consumer expectations and perceived product/service performance
Performance < expectations = disappointment
Performance = expectations = satisfaction
Performance > expectations = delight/high satisfaction

Question 24

Importance - performance analysis

Answer 24

Using axis’ to gage the importance and performance of drivers or supplementary components of drivers

Question 25

What drivers of satisfaction should firms focus on?

Answer 25

High importance and low performance drivers

Question 26

5 benefits of satisfaction modeling

Answer 26

Comprehensive insights
Strategic focus
Detailed
Quantifiable
Benchmarking

Question 27

Comprehensive insights benefits (satisfaction modeling)

Answer 27

Allows firms to study many drivers and outcomes of satisfaction

Question 28

Strategic focus benefits (satisfaction modeling)

Answer 28

What the firm should focus on for maximizing satisfaction

Question 29

Detailed benefits (satisfaction modeling)

Answer 29

Can apply to sub-segments, repeat survey over time

Question 30

Quantifiable benefits (satisfaction modeling)

Answer 30

Objective, not subjective decisions about satisfaction

Question 31

Benchmarking benefits (satisfaction modeling)

Answer 31

Compare satisfaction scores across subunits of hospital, segments of patients, competitors