CRM adoption and implementation proposal

content/Unit3/Section 2 Metrics - Traditional Metrics Metrics - Traditional Metrics.html

Customer Based Marketing Metrics

Traditional Marketing Metrics

• Market share
• Sales Growth

Primary Customer Based metrics

• Acquisition rate
• Acquisition cost
• Retention rate
• Survival rate
• P (Active)
• Lifetime Duration
• Win-back rate

Popular Customer Based metrics

• Share of Category Requirement
• Size of Wallet
• Share of Wallet
• Expected Share of Wallet

Strategic Customer Based metrics

• Past Customer Value
• RFM value
• Customer Lifetime Value
• Customer Equity

Detail - Traditional marketing metrics (Use and Data required)

1. Market Share

• Definition

• Share of a firm’s sales relative to the sales of all firms – across all customers in the given market

• Measured in percentage
  • Calculated either on a monetary or volumetric basis
  • Market Share (%) of a firm (j) in a category = 100 * (S /Sj)

Where j = firm, S = sales, Sj = sum of sales across all firms in the market

• Information source

  • Numerator: Sales of the local firm available from internal records

  • Denominator: Category sales from market research reports or competitive intelligence
• Evaluation
  • Common measure of marketing performance, readily computed
  • Does not give information about how sales are distributed by customer

2. Sales Growth

• Compares increase or decrease in sales volume or sales value in a given period to sales volume or value in the previous period
• Measured in percentage
• Indicates degree of improvement in sales performance between two or more time periods
• Sales growth in period t (%) = 100 * ( ∆ Sjt / Sjt-1 )

where: j = firm, ∆ Sjt = change in sales in period t from period t-1, Sjt-1 = sales in period t-1

• Information source
  • Numerator and denominator: from internal records
• Evaluation
  • Quick indicator of current health of a firm
  • Does not give information on which customers grew or which ones did not

Detail - Primary Customer Based metrics

(The use and Data required for each)

Acquisition Rate

• Acquisition defined as first purchase or purchasing in the first predefined period
• Acquisition rate (%) = 100*Number of prospects acquired / Number of prospects targeted
• Denotes average probability of acquiring a customer from a population
• Always calculated for a group of customers
• Typically computed on a campaign-by-campaign basis

Information source

• Numerator: From internal records
• Denominator: Prospect database and/or market research data

Evaluation

• Important metric, but cannot be considered in isolation

Acquisition Cost

• Measured in monetary terms

• Acquisition cost ($) = Acquisition spending ($) / Number of prospects acquired

• Precise values for companies targeting prospects through direct mail

• Less precise for broadcasted communication

Information source:

• Numerator: from internal records

• Denominator: from internal records

Evaluation:

• Difficult to monitor on a customer by customer basis

Customer Activity Measurement

Objectives

• Managing marketing interventions
• Align resource allocation with actual customer to demonstrate how knowledge of customer activity adds to shareholder value behavior
• Key input in customer valuation models such as Net-present Value (NPV)

Average Inter-purchase Time (AIT)

• Average Inter-purchase Time of a customer = 1 / Number of purchase incidences from the first purchase till the current time period
• Measured in time periods
• Information from sales records
• Important for industries where customers buy on a frequent basis

Information source

• Sales records

Evaluation:

• Easy to calculate, useful for industries where customers make frequent purchases
• Firm intervention might be warranted anytime customers fall considerably below their AIT

Retention and Defection

• Retention rate (%) = 100* Number of customers in cohort buying in (t)| buying in (t-1) / Number of customers in cohort buying in (t-1)
• Avg. retention rate (%) = [1 – (1/Avg. lifetime duration)]
• Avg. Defection rate (%) = 1 – Avg. Retention rate
• Avg. retention rate (%) = 1 – Avg. defection rate
• Avg. lifetime duration = [1/ (1- Avg. retention rate)
• Assuming constant retention rates, number of retained customers in any arbitrary period (t+n) = Number of acquired customers in cohort * Retention rate (t+n)
• Given a retention rate of 75%, variation in defection rate with respect to customer tenure results in an average lifetime duration of four years

Retention and Defection-Example

• If the average customer lifetime duration of a group of customers is 4 years, the Average retention rate is 1- (1/4) = 0.75 or 75% per year. i.e., on an average, 75% of the customers remain customers in the next period
• The effect for a cohort of customers over time – out of 100 customers who start in year 1, about 32 are left at the end of year 4
• Customers starting at the beginning of year 1: 100
• Customers remaining at the end of year 1: 75 (0.75*100)
• Customers remaining at the end of year 2: 56.25 (0.75*75)
• Customers remaining at the end of year 3: 42.18 (0.75*56.25)
• Customers remaining at the end of year 4: 31.64 (0.75*42.18)
• Assuming constant retention rates, the number of retained customers at the end of year 4 is 100*0.754 = 31.64. (Number of acquired customers in cohort * Retention rate (t+n) )
• The defection rate is 1-0.75 = 0.25 or 25%

Survival Rate

• Measured for cohorts of customers
• Provides a summary measure of how many customers survived between the start of the formation of a cohort and any point in time afterwards
• Survival ratet (%) = 100*Retention ratet * Survival ratet-1
• Number of Survivors for period 1 = Survival Rate for Period 1 * number of customers at the beginning

Customer Lifetime Duration

• Average Lifetime duration = Customers retainedt * Number of periods / N Where: N = cohort size, t= time period
• Differentiate between complete and incomplete information on customer
• Complete information - customer’s first and last purchases are assumed to be known
• Incomplete information- either the time of first purchase, or the time of the last purchase, or both are unknown
• Customer relationships
  • Contractual (“lost-for-good”): Lifetime duration is time from the start of the relationship until the end of the relationship (e.g.: mobile phone contract)
  • Noncontractual (“always-a-share”): Whether customer is active at a given point in time (e.g.: department store purchase)
  • One-off purchases

P (Active) **

• Probability of a customer being active in time t
• P(Active) = Tn

Where, n is the number of purchases in a given period T is the time of the last purchase (expressed as a fraction of the observation period)

• Non-contractual case