RFM Complete

CLV – Customer Lifetime Value

Market Research Basics:

Qualitative Research

Quantitative Research:

 Sampling
 Types of data

CLV

Retention Rate: This is metric which shows the percentage of customers are willing to use your product /
service over a particular time frame.

Formula:

Contribution Margin (CM): (Margin – Avg variable cost)

For a time period T,

Summation a=1 to T, [CM / ((1+d)^a)] * [r ^ (a-1)] - ACQUISITION COST

CM = Contribution Margin

R = Retention Rate

D = Discount Rate (Risk-free Interest Rate)

Question:

Margin per period = 120

Retention Rate = 30%

Discount Rate / Interest Rate = 10%

Number of periods = 8

CLV???

Year 0 = Current Year

M =120

Retention = 100%

Discounted Margin = CM/([(1+d)^a]) = 120

CLV = CM/([(1+d)^a]) = 120

Year 1:
M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 1]

= 120/1.1 => 109.09

Retention = 30%

[109.09] * [30% ^ (1-1)] => 109.9

Year 2:

M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 2]

= 120/1.12 => 99.1

[99.1] * [30% ^ (2-1)] = 99.1*0.3 => 29.73

Year 3:

M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 3]

= 120/1.13 => 90.15

[99.1] * [30% ^ (3-1)] = 99.1*0.09 => 8.91

Year 4:

M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 4]

= 120/1.14 => 81.96

Year 5:

M = 120
Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 5]

= 120/1.15 => 74.51

Year 6:

M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 6]

= 120/1.16 => 67.73

Year 7:

M = 120

Discounted Margin: CM/([(1+d)^a])

120 / [(1 + 10%) ^ 7]

= 120/1.17 => 61.57

Subscription based model:

4 Cases:

Case 1:

When customer leaves after next payment and pays at the beginning of the period (prepaid)

CLV = M (1+d / 1+d-r)

Case 2:

When customer leaves after next payment and pays at the end of the period (postpaid)

CLV = M (1 / 1+d-r)

Case 3:

When customer leaves before next payment and pays at the beginning of the period (prepaid)

CLV = M ((1+d)r / 1+d-r)

Case 4:

When customer leaves before next payment and pays at the end of the period (postpaid)

CLV = M (r / 1+d-r)
Example:

Margin: 120

Retention: 30%

Interest: 10%

Customer pays at the beginning of the period and leaves after next payment

CLV = 120 (1+10% / 1+10%-30%)

120 (1.1 / 1.1-0.3) => 120 (1.1/0.8) => 165

IF ANYWHERE IN THE QUESTION ACQ COST IS GIVEN, THEN WE HAVE TO SUBTRACT IT FROM CLV

IF RETENTION RATE IS NOT GIVEN

Ex:

Year: 2015

Relation: 3

Acquisition Cost: 750

Average Revenue: 24000

Profit: 15%

Interest Rate: 10%

On an average, generally customers in this firm stay for 5 years.

CLV????

Summation a=1 to T, [CM / ((1+d)^a)] * [r ^ (a-1)] - ACQUISITION COST

2019

CM = 15% of 24000 => (15/100 * 24000) => 0.15*24000 => 3600

a=1

d=10%

CLV = 3600 / 1.1 => 3960

2020

CLV = 3600 / 1.12 => 2975

Total CLV = 6935 – 750 => 6185

MARKET RESEARCH

Qualitative: What and how?

Sample

Methods:

 FGD (Focus Group Discussions) (homogeneity within groups and heterogeneity across groups)
 DI (Depth Interview)
 Laddering (Why analysis?)
 Observation / Ethnography
 Netnography

Factors to be considered while making a choice:

 Criticality/sensitivity of the topic

 Respondent time valuable or not?
 Difficulty to guesstimate

QUANTITATIVE RESEARCH

Sampling: method of choosing a sample

 Non-probability
 Probability

Non-probability:

 Convenience: There is a lot of homogeneity within the population

 Judgemental: Opinionated
 Quota: Breaking down samples into quotas
 Snowball: Starts with a very small number and uses references to gain data and increase sample
size

Probability Sampling:

 Simple Random: every element has equal chance of getting chosen

 Systematic Random: select one element randomly and then select every kth element where k =
population size / sample size => 10,000,000 / 1000 => 10,000
 Stratified Random: observed heterogeneity
 Cluster: unobserved heterogeneity

Logistical and administrative constraints -> Cluster Sampling

Else:

Observed heterogeneity -> Stratified Sample

If not: Heteroginity capture or randomness?

Heterogenity: Systemic Random

IF randomness: Simple Random

Data

Types of Data:

 Nominal: Categorical (Ex: Gender, Color, Department, Occupation)

 Ordinal: Categorical (Ex. Rank, Ratings, Designation)
 Interval: Difference between successive classes are equal (Ex Temperature)
 Ratio: has a real 0

104 degree Celsius but normal is 97 degrees: 7 degrees

377.15K, but normal is 370.15K: 7 degrees

Questionnaire Design (Survey)