MARK 7397
Spring 2007
Customer Relationship Management:
A Database Approach
Class 7
James D. Hess
C.T. Bauer Professor of Marketing Science
375H Melcher Hall
jhess@uh.edu
713 743-4175
Review of CLV approximation
before calculating customer assets
CLV= St=1 m(1+g)t rt/(1+i)t =
m r(1+g)
1+i-r(1+g)
where
m is contribution margin
g is growth rate of margin
r is retention rate
i is interest rate
Note: if the world stopped after T=5 periods then this might
exaggerate the total by about 20%.
CDNow Customer Acquisition
Customer acquisition costs ~ $30-55
Gross margin m ~ $10-20
Growth in margins g ~ 0
Retention rate r ~ .51-.68
Interest rate i ~.12
Best case CLV ~
20 .68(1+0)
= $30.90
1+.12-.68(1+0)
Worst case CLV ~
10 .51(1+0)
= $8.36
1+.12-.51(1+0)
It does not pay to acquire new customers!
Bertelsmann purchase of CDNow
Gross margin m ~ $15
Growth in margins g ~ 0
Retention rate r ~ .70
Interest rate i ~.12
Typical CLV ~
15 .70(1+0)
= $25
1+.12-.70(1+0)
Size of CDNow house file ~ 3,290,000 customers
Value of house file = 253,290,000 = $82 million
In July 2000 Bertelsmann bought CDNow for $117 million!
Capital One Customer Retention
Gross margin m ~ $14*4
Growth in margins g ~ 0.02
Retention rate r ~ .85 or .90
Interest rate i ~.12
Low retention CLV ~
14*4 .85(1.02)
= $192
1+.12-.85(1.02)
High retention CLV ~
14*4 .90(1.02)
= $255
1+.12-.90(1.02)
Capital One could afford to pay $63 to increase retention rate by 5%.
AT&T’s Acquisition of TCI and Media One
Customer acquisition costs per customer ~ $4,200
Gross margin m ?
Growth in margins g ~ 0
Retention rate r ~ .90
Interest rate i ~.12
Breakeven CLV ~
m .90(1+0)
= $4,200
1+.12-.90(1+0)
m = $1,027
Profit margin ~ 0.45
Breakeven Sales = $1,027/.45 = $2,280
or $190/month
To justify the acquisition, AT&T needs ALL customers to sign up for cable,
high speed internet, and cable telephone. This is unrealistic.
Can we predict CLV using the past?
Prediction is very difficult, especially about the future.
Neils Bohr
Malthouse and Blattberg took data and pretended to move back to the future:
history
now
future
They ran a regression to explain the future CLV using historic variables on the calibration sample.
They then used the regression to predict CLV for the validation sample.
Actual
Bottom 80
Top 20
Bottom 80
85%
55%
Top 20
15%
45%
Predicted
False positive
False negative