All right, so today what we're going to be discussing is using the tools that we talked about in our previous sessions with the purpose of managing customer equity. And what exactly I mean by that we'll get into in just a little bit. Just to serve as a recap for us, we've talked about using logistic regression analysis tool designed for binary data. So anything over the form yes or no, zero or one. But we've talked about using that for the customer acquisition decision. So, is the customer acquired, yes or no, based on marketing activity, based on demographic factors. We've also discussed using that choice modeling foundation for both acquisition and retention decision. So, for example, if we wanted to deconstruct a retention decision into a sequence of binary decisions that can be analyzed using logistic regression, the customer who churns after four months, while we can think of that as providing us with four distinct observations. After a month one, the customer decided not to churn. After a month two, the customer decided not to churn. After a month three, the customer decided not to churn. And in month four, the customer churned. Well, we can recast that in terms of the retention decisions. The customer was retained in month one, was retained in month two, was retained in month three, was not retained in month four, so those four data points can be modeled using logistic regression. So that provides us with a simple means of incorporating any predictors that we might have. Both those that are outside of our control such as demographics, as well as those factors that are within our control, such as marketing activity. We can incorporate that into the retention decision, we can similarly incorporate that into the acquisition decision, and those are going to be two of the big pieces that we're going to be looking at in terms of customer equity today. The foundation for customer equity rests on the idea that we can view customers as providing companies with cash flows. And so if we think of the firm's customer equity it's its total value of its customers overtime. And so that means that we gotta take a look at what are the customers providing in terms of value today, as well as what those customers are going to be providing in value over the long term. Now if we take a look at the customer lifetime value or CLV of the individual customer. This equation on here is going to give us a general foundation. Let me just going to kill back the layers to understand what exactly goes into this. In the numerator we are looking at the expected value that that this particular customer is providing at each point in time. So what is the expected value provided by this customer in period one, what is the expected value provided by this customer in period two, in period three and so forth. The denominator, this is where we're taking into account the time value of money. That a dollar today is worth more than getting that same dollar tomorrow, so we're going to discount the value of dollars that we're planning on receiving well into the future. Now this might look a little bit like formulas out of financial analysis and doing net present value. And it is drawn on that same foundation of time value of money. The big difference is going to come in when we're talking about what is the expected value that the customer is providing the organization with in each of these time periods. Because the distinction between NPV and customer lifetime value is going to hinge on the fact that the company does not own its customers. At any point of time customers might churn and when we lose those customers we are losing their cash flow. So we need to take into account the likelihood that customers are going to be retained for a given period of time and it's only if customers are retained that we continue to generate revenue from those customers. So if we take a look at the different ways that customer decisions are going to impact customer equity, well for an individual firm, three different aspects of the customer relationship that we need to consider. First part of that is customer acquisition. Is the customer acquired at all? When does that happen? Well we can only generate revenue from customers that we ultimately acquire, so we have to take into account the likelihood that we will actually acquire the customer in order to generate that revenue stream. The second piece that we've got to look at is once we acquired the customer, the depth and breadth of the customer relationship. How many services or how many products are they buying from us? In which different categories are they making the purchases? How much are they spending with us as opposed to spending with their competition? The intent in developing a customer relationship, we'd like them conducting more business with us. We'd like them conducting business with us more frequently. We'd like them doing it in multiple product categories, if we have offerings in those different product categories. All right so, we wanted to identify as many ways as possible to generate revenue from the relationships we have, with the customers that we've acquired. The final piece that we have to keep in mind is how long does that customer stay retained? The longer that customer sticks around, the more revenue we're producing that we're able to derive from that customer. So in terms of marketing activity, what do we want to look at? First, how does marketing activity affect the acquisition process? Yes or no, do we get that customer? Second, once we have that customer, now we've got to look at it in two different pieces. The depth and breadth of that relationship. So how much are they spending with us in each time period, as well as how long are they sticking around. Ideally, we conduct marketing activity is going to increase the length of the customer relationship. We're going to do a better job at retaining our customers. Ideally marketing activities are also going to lead customers to conduct more of their business with us as opposed to their competitors, right? So, let's first talk about the acquisition process. Two different approaches, and I provide a little bit of description for each of these that can be used for acquiring customers. One approach is to go after particular prospects, the direct approach. Very much in the spirit of direct marketing, I have a list of perspective customers I'm going to engage in direct marketing. Whether it's postcards, catalogs, emails, targeted social media messages, but I'm going to go after the specific targets. The individual targets where the particular segments that we've identified as being interested in our offerings. The other approach that we might use is more of an indirect approach. So, we're engaged in our general business operations, and we come across a prospect that may be interested in what we have to offer but we haven't directly gone after those customers. So we have the direct and the indirect approach, we also have are we going to go with a broad-based strategy or more of a targeted and selective strategy. And this grid, this two by two kind of breaks down, four potentially different ways of approaching this. So if we look, for example, at a broad-based strategy that relies more on indirect marketing, yeah, that's where we might be focused on mass marketing, traditional marketing efforts, buzz marketing. If we're looking at the indirect approach to marketing and being more selective, we might rely on referrals. So relying on our existing customer-based becoming active in helping us to identify new customers and refer them to the business. As far as the direct approach, where we go out and reach out directly to the prospects. We've got a selective approach such as building customer profiles doing scoring of prospects and going after those particular individuals. More of a broad-based approach would be purchasing a list of potential prospects, or engaging in something like telemarketing or direct marketing. So, those are just four different approaches to looking at customer acquisition. As far as the analysis approach, logistic regression would be appropriate in any of these scenarios when we're looking at the acquisition of individual customers. So our outcome yes or no, was the customer acquired? That's a wide variable for the logistic regression. Whichever of the acquisition approaches that we're using, whether it's direct marketing, whether it's mass marketing, whether it's rely on word of mouth referrals, all of that can be captured by the predictors that are going to serve as the x variables in those regression analysis. So, there's a lot of emphasis on customer acquisition. And if we take a look here are some examples of companies or industries where the emphasis of marketing is on the customer acquisition process. So yeah, if we look first as Fusion ProGlide offer by Gillette from Procter and Gamble. Procter and Gamble has a strategy of sending out whatever the current model of their razors are. To men every time whenever their 18th birthday hit, they send them the razor, they send them the cartridges. And that marketing push is focused on getting those new prospects to stick with that brand for the rest of their lives. Yeah, there's this strategy. It's referred to as a razor and blade strategies. We're going to let you require the product itself, the razor, at a relatively low price and if we get you acquired as a customer, you're going to keep on replacing those razor blades and that's where we're going to generate revenue in the long term. So first and foremost, we have to get you to acquire this particular product. We've got to get you to adopt our brand, and then we're going to continue to get benefits based on your usage. In terms of magazine subscriptions, saying we'll give you that first issue for free, or we'll give you three, four months of the magazine for free, it's getting over that hurdle of will the customer or will the prospect at least try us out. And in a lot of cases people will maintain their subscriptions especially if they're using credit cards and you have auto renew set for those payments. So the biggest challenge is getting new readers for the subscriptions. And same idea if we're talking about the telecommunications industry. Lots of discounts offered upfront if you're willing to switch your provider. If you move into a new area, they're willing to give you, let's say, a year's worth of promotional pricing for those new customers. Because, again, that's where the challenge is. It's harder to acquire customers, often times, compared to keeping those same customers around. So a lot of spending focused on customer acquisition, because, well, in order to generate any revenue, we have to acquire that customer. The challenge comes in when we're trying to figure out how much should we be spending on perspective customers. And which perspective customers should we be spending that money on? And we want to balance how much we invest in acquiring customers against well, how much do we expect to generate in revenue from that customer over the long term? So we've gotta identify what does it cost to get that person. Is it going to pay for the revenue that is produced? Is that going to at least cover our acquisition costs? If not, it might not be a good prospect to go after.
