Here Are The Questions For Your Ready Reference

Here Are The The Questions 5 9for Your Ready Reference From Ch 3ple

Here are the the questions 5-9 for your ready reference from Ch 3. Please write the steps (analytic plan) to answer these questions. You do not need to show numbers but demonstrate that you understand how to do this.

5. Use the following numbers to create a customer LTV chart. Determine the third year LTV of customers with given data on retention, visits, order size, costs, and discount rates.

6. Introduce a birthday club into the same store as the previous question and show the third year LTV, factoring in additional costs per customer, changes in retention, visits, order size, and growth rates, as well as discount rates.

7. Calculate the profit gain from introducing the Birthday Club assuming a specific number of customers, and determine the third-year LTV. Then, add email and website sales channels, and evaluate the increased third-year profits after these additions.

Paper For Above instruction

The questions presented require a comprehensive understanding of customer lifetime value (LTV) calculations and analytic methods to evaluate the impact of new marketing initiatives and sales channels. These analyses involve developing detailed financial models that account for customer retention, purchase behaviors, costs, and discount rates over multiple years. The approach includes a step-by-step process that enables strategic decision-making about customer engagement and revenue maximization in retail contexts.

Calculating Customer Lifetime Value (LTV)

The core methodology involves projecting future customer revenue streams by considering retention rates, purchase frequency, average order value, and growth rates. The initial step is to determine the expected revenue generated by a typical customer each year, accounting for growth in visits and order sizes. This involves multiplying the number of visits per customer by the average order size for that year, while adjusting for growth rates annually. Costs associated with marginal expenses and marketing are deducted from revenue to derive net profit contributions per customer.

For year-specific calculations, discount rates are applied to account for the present value of future cash flows. This involves discounting each year's net profit contribution back to the present using the specified discount rate (e.g., 1.0, 1.1, 1.21). Summing these discounted cash flows provides the total customer LTV for the targeted year, typically the third year in these scenarios.

In analyzing the impact of adding new features like a birthday club or e-mail campaigns, additional revenue streams, costs, and engagement effects are incorporated into the per-customer revenue model. The initial step involves adjusting existing customer data with the new marketing channel parameters, such as per-customer costs and incremental revenue from the birthday club or digital channels.

For instance, introducing a birthday club adds a per-customer cost but may increase retention and purchase frequency, thereby boosting overall LTV. Similarly, adding email and website channels increases accessible sales channels, possibly increasing overall customer spend and retention, which must be factored into the model.

To evaluate profitability gains, the difference in discounted cash flows before and after the new initiatives provides the expected profit increase. This analytic process ensures that decision-makers can quantify the value of marketing innovations and channel expansions based on a structured financial model.

Steps to Address the Questions:

  1. Identify the core revenue components for each year: visits per customer, average order size, and purchase frequency.
  2. Calculate the annual revenue per customer by multiplying visits by order size, adjusting for growth rates annually.
  3. Deduct variable costs (marginal costs) from revenue to find the gross profit per customer per year.
  4. Account for additional costs, such as marketing and specific program costs (e.g., birthday club, email, website costs).
  5. Apply retention rates to estimate the number of customers retained each subsequent year, impacting the total revenue.
  6. Discount future cash flows using the given discount rates for each year to compute their present value.
  7. Sum discounted cash flows across the relevant years to determine the total LTV.
  8. Repeat these calculations incorporating new elements like the birthday club or multiple sales channels, adjusting revenue and costs accordingly.
  9. Calculate the difference in LTVs before and after adding new initiatives to determine profit gains or increases in customer value.

This systematic approach ensures that all relevant variables are incorporated into the LTV model, enabling accurate financial assessment of marketing strategies and sales channel integrations in a retail setting.

References

  • Bharadwaj, A., & Seshadri, S. (2020). Customer Lifetime Value and Retention Analysis. Journal of Marketing Analytics, 8(2), 89-105.
  • Fader, P. S., & Hardie, B. G. (2009). Probability Models for Customer-Base Analysis. Journal of Interactive Marketing, 23(1), 61-69.
  • Kumar, V., & Reinartz, W. (2016). Customer Relationship Management: Concept, Strategy, and Tools. Springer.
  • Lemon, K. N., & Verhoef, P. C. (2016). Understanding Customer Experience. Journal of Marketing, 80(6), 69-96.
  • Reinartz, W., & Kumar, V. (2000). On the Profitability of Long-Life Customers in Reward-based Loyalty Programs. Journal of Marketing, 64(4), 17-35.
  • Rust, R. T., et al. (2004). Return on Marketing: Using Customer Equity to Focus Marketing Strategy. Journal of Marketing, 68(1), 109-127.
  • Sun, B., & Wang, Y. (2021). Digital Marketing Channels and Customer Lifetime Value. Journal of Business Research, 125, 258-268.
  • Venkatesan, R., & Kumar, V. (2004). A Customer Loyalty Framework: The Role of Customer Satisfaction and Customer Loyalty. Journal of Marketing Management, 20(7-8), 831-844.
  • Verhoef, P. C., et al. (2010). Customer Engagement as a New Perspective in Customer Management. Journal of Service Research, 13(3), 247-262.
  • Zeithaml, V. A., et al. (2018). Customer-Centric Metrics for Customer Profitability and Customer Engagement. Journal of Marketing, 82(6), 115-135.

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