Lifetime Duration…

• Differences between complete and

incomplete Customer Information
– Complete information when customers’ first
and last purchases are assumed to be known
– Incomplete information when either the time of
first purchase, or the time of last purchase, or
both are unknown.
 Types of Relationships
• Contractual (Lost for Good)
– Buyers engage in a specific commitment on duration
and/or level of usage
– Lifetime duration easy to calculate as both first and last
purchase known
– Company practically looses entire relationship once
contract is over
• Non-Contractual (always-a-share)
– No customer commitment on duration and/or level of
usage
– Customers may use several sources
– Calculation of Lifetime duration not straightforward
– The likelihood of a customer being active is measured
 CLD when information is incomplete

Buyer 1 Complete Info

Buyer 2 Left Censored

Right Censored
Buyer 3

Buyer 4
Left & Right
Censored
t0 t1
 P(Active)
• Probability of a customer being active in
time t in non-contractual cases
• Example
– 2 customers are observed for their activities
during a period of 12 months
– Customer 1 purchases in 1st, 3rd, 5th and 8th
month and makes no purchase thereafter
– Customer 2 purchases only in 1 st and 8th month
and no purchases thereafter
– Which customer has a higher probability of
making a purchase in the 12th month?
 P(Active)

• P(Active) = Tn
– n = number of purchases in a given period
– T = time of last purchase as a fraction of
observation period
 P(Active)

X X X X
Customer 1

Customer 2 X X

Month 1 Month 8 Month 12

 P(Active)
• For Customer 1
– T = 8/12 = 0.6667
–n=4
– P(Active) = Tn = (0.6667)4 = 0.197
• For Customer 2
– T = 8/12 = 0.6667
–n=2
– P(Active) = Tn = (0.6667)2 = 0.444
 Win Back Rate
• Both contractual and non contractual
settings
• Proportion of acquired customers in a
period who were lost in an earlier period
• Indicated a successful communication of an
important change in the product offering or
a change in customer needs
Customer Value Metrics
 Overview
• Popular Customer-Based Value Metrics
– Size of Wallet
– Share of Category Requirement (SCR)
– Share of Wallet (SW)
• Individual
• Aggregate
– Transition Matrix
• Strategic Customer-Based Value Metrics
– RFM
– Past Customer Value
– Ltv Metrics
– Customer Equity
• Popular Customer Selection Strategies
– Decision Trees
– Logistic Regression
• Lift Charts
 Popular Customer-Based Value
Metrics
• Help firms prioritize their customers so that
a higher proportion of resources can be
allocated to right customers
• To be used only if a correlations give
substantial results
• For eg. If the company finds a high
correlation between customer’s worth and
purchasing actions
 Size of Wallet
• Amount of a buyer’s total spending in a category
• Category sales of all the firms to that customer
• Measured in monetary terms
J

• Size of Wallet = Sj j 1

– Sj = sales to the customer by firm j

• Source of Information
– Primary Market Research for existing customers
– Segment level information for prospects
• Based on assumption that large wallet size
indicates more revenue and profits
 Share of Category Requirement

• j = firm
• V = Purchase Volume
• i = Customer who buy the brand
I
•  = summation of volume purchased by all i
i 1
customers from firm j
I J

•   = summation of volume purchased by

i 1 j 1
all i customers from all j firms
 Share of Category Requirement
• Sources of Information
– Numerator – internal records
– Denominator – Market and distribution panels,
primary market research but costly to gather
• The most commonly accepted measure of
customer loyalty for some categories with
frequent purchases
• Used in conjunction with Size of Wallet
• Higher SCR indicates that once a customer
buys a brand, he/she tends to prefer it more
as compared to competitors
 SCR Calculation Example 1

  Brand A Brand B Brand C Brand D

C1 10 9 2 1

C2 6 0 5 3

C3 0 3 7 0

C4 0 0 0 9

C5 5 5 3 4

C6 1 7 0 3
 SCR Calculation Example 2

  Brand A Brand B Brand C Brand D

C1 1 2 0 1

C2 3 0 4 1

C3 0 2 3 5

C4 0 1 5 0

C5 1 6 7 0

C6 3 4 0 4
 Share of Wallet (SW)
Individual
• Proportion of category value accounted for by the firm for a
buyer from all the brands purchased by the buyer in the
category
• Indicates the degree to which a customer satisfies his needs
in the category with the firm. J

• ISW(%) of firm to customer = Sj /  Sj

j 1

• S = Sales to the customer under study

• If a customer buys spends Rs. 5000 on monthly groceries,
and 3000 from Spencer, Spencer’s SW for the customer is
60% for the month
 ISW
• Information Sources
– Numerator – From Internal Records
– Denominator – Primary MR for a representative
sample and extrapolated
• Used as a measure of Loyalty, but does not
provide any future indications
 Aggregate SW (Brand/Firm Level)
• ASW is the proportion of category value
accounted for by the brand within its base of
buyers
• ASW(%) = Sum of Sales to the
observed customers /
Total expenditure of
these customers in the
category
 SW Example

  Brand A Brand B Brand C Brand D

C1 1000 2000 0 1000

C2 3000 0 4000 1000

C3 0 2000 3000 5000

C4 0 1000 5000 0

C5 1000 6000 7000 0

C6 3000 4000 0 4000

 SCR versus SW
• Inputs on SW more difficult to obtain
• SCR preferred for categories with less
variance of expenditures (FMCG) as
frequency is easier to remember
• SW used when this variance is high.
(Furniture, durables) as amount is also easy
to remember
• Both used simultaneously with Size of
Wallet
 Customer Segments along SW and
Size of Wallet

High Maintain and guard

Hold on

Share-of-wallet
Target for
Do nothing additional selling

Low
Small Large
Size-of-wallet
 SW versus MS
• MS calculated across buyers and non
buyers, SW calculated only across buyers

• MS = sum(SW * Size of Wallet) / total

sales in the category