Increasing the Retention Rate


All the factors in a lifetime value table can be influenced by marketing programs: the average order size, the number of orders per year, and the retention rate. To see the way this works, let’s focus on only one factor, the retention rate, and see what would happen if WardChem could increase that rate by 5 percent—an achievable goal for most companies. Let’s see how WardChem could go about it.

  • It could set up a relationship-building team for its top customers.

  • It could provide a much higher level of customer service.

  • It could set up a super-customized Web page for each customer.

  • It could put thousands of pages of technical information about its chemicals on the Web for its customers (only) to use.

Let’s assume that the cost of all these additional relationship-building activities is about $110 per customer per year, or about $5 million. There could be two results: The retention rate might go up by 5 percent, and the number of orders might go up by one-half order per year. Table 5-8 shows what could happen.

Table 5-8 : Revised Lifetime Value

Year 1

Year 2

Year 3

Retention rate

75%

80%

85%

Retained customers

45,000

33,750

27,000

Average order

$2,500

$2,700

$2,900

Orders per year

8.5

9.5

10.5

Total revenue

$956,250,000

$865,687,500

$822,150,000

Cost rate

75%

71%

69%

Variable costs

$717,187,500

$614,638,125

$567,283,500

Acquisition cost ($1,400)

$ 63,000,000

0

0

Retention costs ($200/yr)

$ 9,000,000

$ 6,750,000

$ 5,400,000

Total costs

$789,187,500

$621,388,125

$572,683,500

Gross profit

$167,062,500

$244,299,375

$249,466,500

Discount rate

1.01

1.09

1.17

Net present value of profit

$164,767,265

$223,953,322

$212,564,425

Cumulative NPV of profit

$164,767,265

$388,720,586

$601,285,011

Lifetime value

$3,661

$8,638

$13,362

Lifetime value in the third year has gone up from $11,907 to $13,362. What does that mean for WardChem in terms of profits? As Table 5-9 shows, it means more than $65 million more profits—after taking into account the extra $5 million per year spent on relationship-building activities.

Table 5-9 : Gains through Retention-Building Activities

Year 1

Year 2

Year 3

New LTV

$3,661

$8,638

$13,362

Old LTV

$3,462

$7,926

$11,907

Difference

$200

$712

$1,454

Times 45,000 customers

$8,987,305

$32,046,283

$65,451,072

Lifetime value charts like these are used in calculating the value of a name. They are very powerful predictors of success in database marketing.




The Customer Loyalty Solution. What Works (and What Doesn't in Customer Loyalty Programs)
The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs
ISBN: 0071363661
EAN: 2147483647
Year: 2002
Pages: 226

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