Session 3 Customers and Values

Question 1

Economics of Loyalty (DRAW PIC)

Answer 1

Why Loyal Customers Are More Profitable
 Lifetime Customer Value
 Loyal customers are much more profitable

Question 2

Lifetime Customer Value

Answer 2

The present value of the profit stream that the company would have realized if the customer had not defected prematurely.

Question 3

2. Base Profit

Answer 3

 The profit margin that a company earns
from an average customer
 Stable over the years

Question 4

3. Revenue Growth

Answer 4

 Retained customers increase purchase
quantities over time
 Increases over the years

Question 5

4. Operating Costs

Answer 5

 Existing customers cost less to serve than new ones

 Existing customers have better knowledge

Question 6

5. Referrals

Answer 6

 Favorable word-of-mouth

 Increases over the years

Question 7

6. Price Premium

Answer 7

 Relatively price insensitive

 Increases over the years

Question 8

1. Acquisition Cost

Answer 8

Think City Bank Example

Cost per Customer= Cost of Contacting All Prospects/No. of Customers Obtained

Question 9

Lifetime Customer Value

Answer 9

Prediction model of net profit attributed to the entire future relationship with customer.

Cash flows in the “future” need to be discounted
so that customers keep coming back because loyal customers are more profitable worth the %5 discount

** When LCV of company is HIGH than Loyalty Programs work!

Question 10

Time Value of Money

Answer 10

Money in the present > than money in the future
 Inflation => reduced buying power in future
 Opportunity Cost => could have invested elsewhere

Question 11

How to calculate TOTAL Lifetime Customer Value:

Answer 11

Total Lifetime 
Customer Value
=
Total Lifetime Value of 
New Customers
\+
Total Lifetime Value of 
Existing Customers
- 
Total Lifetime Value of 
Lost Customers

Question 12

Customer Retention Management: 4 Strategies

How do firms try to retain customers

Answer 12

4 Strategies in Customer Retention Management: CCLM
1. Customer Satisfaction Management

2. Customer Value map
3. Loyalty Programs / Frequency Marketing
4. “Migration” Management

Question 13

1. Customer Satisfaction Management

Answer 13

1. Expectation Confirmation/Disconfirmation Model
   (how well did firm perform in relation to expectation)
2. Customer Satisfaction Surveys
3. Complaints & Suggestion System
   (but more ppl dont complain)
4. Ghost Shopping

Question 14

2. Customer Value Map (DRAW)

Answer 14

Market Share = f (perceived value / price)
Price (y) relative to Quality (x)

Fair Value Line- Price should go right in middle of graph on FVL

Question 15

3. Loyalty Programs / Frequency Marketing
   Problems with it:
   When It Works:

Answer 15

Problems with It:
• Very popular, but too popular to gain unique advantage (similar programs)
• Are you getting truly loyal customers or just repeat purchasers?

When does it work?:
• When the program supports and is consistent with the brand value proposition
• When the program adds to the value of the product/service
• When lifetime customer value is high

Question 16

4. “Migration” Management

Answer 16

Defection is a problem but people who CHANGE their buying patterns in a company could be worse (i.e., they “migrate” from high to low user status)
This messes up their predicted LCV

Question 17

Economic Loyalty: What are the various factors that increase a customerʼs value over time? (DRAW IT)

Answer 17

TOP TO BOTTOM

• Price Premium
• Referrals
• Cost Savings
• Revenue Growth
• Base Profit
• (Acquisition Cost)