Abstract
This chapter provides definitions of the most widely diffused customer metrics, namely Customer Profitability (CP), Customer Lifetime Value (CLV), Customer Equity (CE). We refer to the marketing literature that extensively covers these metrics and illustrate their interrelationships. We point at applications in business settings that have a contractual, subscription-based model and mention potential challenges to compute CLV in non-contractual settings. To illustrate the implementation and impact of customer metrics in a real-world context, we provide a case study focused on the computation of CLV in an Internet-based, subscription-based company. The case presents a simulation that applies cohort analysis in an attempt to fill the void between theoretical CLV models and its implementation in practice. The main rationale is to provide CFOs and CMOs a better understanding of new and latent customer preferences in a typical subscription-based business model by directly observing the customer’s purchase behavior and subsequently linking this data to estimate CLV and firm performance.
The world’s most valuable resource is no longer oil, but data.
—The Economist
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Notes
- 1.
Customer churn is the standard term used among SBEs.
- 2.
Paid search advertising entails advertisers competing for top listing positions through bidding in ongoing auctions and then paying when users click on their advertisements, making paid search a flexible and accountable form of advertising (Laffey 2007). Pay per click ads are one of the most cost effective advertisement tools. These are the ‘sponsored ads’ that are displayed at the top and right of the search results on Google, Facebook, Yahoo, Bing and similar search websites. Payment of these ads occurs whenever someone actually clicks on an ad, not when it gets displayed. The cost per click can range anywhere from a few cents to several dollars, depending on the type of industry and keywords.
- 3.
CEcur can be considered a special case of CEtot, where the acquisition of future customers is a project with a Net Present Value of zero (Bonacchi et al. 2015).
- 4.
Advertisers can now set a bid they are willing to pay to reach a certain typology of Facebook users. These are audiences Facebook can reliably deliver thanks to demographic data collected among its users, while other ad exchanges might have to guess or infer about who fits an advertiser’s desired demographic. For more details on this topic, please refer to: http://techcrunch.com/2012/09/18/facebook-mobile-ad-network/
- 5.
In theory, the issue of the time value of money must also be considered, usually discounted in the CLV formula, in order to get an estimate of future profits. Discounting may be very appropriate in some businesses, particularly for firms operating in markets with a very long-cycle, high ticket retail and B2B. However, it is believed that the discounted practice may confuse the analysis in a B2C where the environment is very dynamic and it is better to adopt a simplified approach.
- 6.
When a user searches for a specific keyword, the order of the results the user obtains is determined by current bids in the auction. Payment is made by advertisers each time a user searches for a term and then clicks on their link.
- 7.
Using the same rationale at Company.net also computes Revenue per Thousand Customers (RpK) focusing on projected revenues instead of margin. In the following example, we will concentrate our attention on the MpK evolution, however the same report can be adopted for RpK, since in fact gross margin is a percentage of the revenue (in this example 65%) and the difference between Rpk and MpK is merely a question of scale. Our choice to present MpK is because with this metric we are allowed to calculate CE.
- 8.
When it comes to make informed prospecting decisions, there are at least two ways of considering acquisition spending (Pfeifer et al. 2005). Either not include acquisition spending and compare the Lifetime Value (LTV) to CoA; or alternatively, include acquisition spending in the specification of customer value, correctly labeled as CLV, and compare the value of CLV to zero.
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Bonacchi, M., Perego, P. (2019). Customer Analytics: Definitions, Measurement and Models. In: Customer Accounting. SpringerBriefs in Accounting. Springer, Cham. https://doi.org/10.1007/978-3-030-01971-6_2
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