Lifetime Value. The Art and Science: Building and leveraging a Lifetime Value Model. Greg Bright DataIQ Summit 2016

Transcription

1 Lifetime Value The Art and Science: Building and leveraging a Lifetime Value Model Greg Bright DataIQ Summit 2016

2 Life Time Value models LTV, done right, is one of the most powerful and commercially insightful tools at your disposal! But if done wrong, instead, is a fast way to wreck marketing effectiveness and destroy a business!

3 Campaigns are dead!

4 Campaign Design Old School Customer lifecycle campaign management used to be a complex series of individual campaigns. Easily 20+. Each row is a unique campaign. Each column is based on a query.

5 But now we can do this Build data-driven decisions into communications. Whole new experiences for campaign design. What s it really mean and an example to ponder. (Data-driven keep that in mind, I circle back to it)

6 Get Your Mind Around Continuous

7 Similar flow in the BlueVenn technology

8 The real-time message For those with real-time capabilities, send messages or trigger communications based on events: What created the spike? Can you deliver an based on the event? Abandoned cart Went to Subscription start page New Decisio n Made purchase

9 Continuous Design Moving to continuous requires some thought. Think in terms of lifecycle management. Onboarding which transitions handle what.. For ongoing lifecycle Feel good (how s your service) Reminders (going to have a bill coming your way soon) Upgrades (low FOD to higher, or printed bill to ez-pay) For status or event based triggers sitting in the background Missed paper in area (did you get yours) Missed paper made good (dispatched and delivered) Next day..did it arrive?

10 Continuous Design Discrete campaigns still have a place Credit card expires/declines Rate changes New carrier on route But even these can have branching. Card decline First decline..send Second decline..call Wait two days, check payment status call again LTV < 82 reduce payment grace by 32 days LTV > 88 increase grace by 14 days

11 Continuous in Words Let s think through an example: New start lifecycle Run Customer Lifecycle Continuous Campaign Phase 1: The onboarding selection Onboarding selection: check for new, check for zip, check for FOD output Welcome Piece 1 Wait for 2 days Onboarding Piece 2 (Service check) Wait for 6 days If still active test, then if not Activated, generate Digital Activation file send file to FTP for ESP Wait for 15 days If still active and not EZ-Pay, generate EZ-Pay upgrade file If still active and EZ-Pay, and FOD <> 7-Day. Phase 2: Mid-life nurturing Wait 35 days How we doing Piece 3 (Service Check)

12 Continuous breeds complexity Branching and timing have to be well thought though ahead of time. Think of the movie Inception you are jumping into the middle no beginning point...you are where you are at the moment the campaign fires. Draw it on a white board to see it Thus the graphical designer pallet in Indigo to help as well. Test the campaign branching thoroughly. Setup testing accounts to monitor. If your operation has an IT programming staff, you might run the logic by them they are very good at understanding branching logic.

13 Move beyond just communication of a lifecycle Move to communication that builds value Special events based on a customers lifetime value to you. Complexity breeds Opportunity

14 Deep Dive into Continuous: Value Targeting (A continuous targeting plan to build value not just communicate status) Lifetime Value

15 Indigo and LTV A continuous campaign allows real-time adjustment to target selections. Adding the LTV element is a great primary branch source for personalization decisions. Whether you buy or build your own LTV model, having conceptual knowledge of the magic behind the numbers is important in how you build your customer journeys.

16 It is not the number but what you do with it. The strength in a continuous program built around LTV model is that it will lead you to take a direct targeted action based on the value of each customer.

17 Should you even care? Determine value of customer relationship. Image Credit: Result of the Responsible Data Forum Resource Sprint, Oct 2014, Budapest

18 LTV Formula Highlights The Formula Annual profit contribution per customer X Average number of years that they remain a customer Less the initial cost of customer acquisition and service What information is needed? Initial cost of customer acquisition Annual profit contribution per customer Annual cost to service Average customer Retention rate

19 Standard LTV inputs

20 Looks easy: CLTV = M ( r ) 1 + i - r -aq Note, it is not the same as a net present value calculation as many confuse it to be, so this isn t NPV( ) formula from Excel. (Sorry folks, it is harder than that).

21 First The Reality Each customer will have a different rate Every FOD option changes revenue contribution Delivery cost variation (delivery credits and/or route subsidies) Payment method impact to cost (EZPay vs. billed) Preprint revenue variations based on ZIP code or Zone Acquisition channel cost/commission differences Demographic (PRIZM) behavioral differences impact on retention Retention variations by all of the above Then Is the calculation done on the margin (new customers) or all customers? Marginal cost calculations (one additional paper printed is virtually free )

22 Implementation Headache Pick Two Simple Accurate Inexpensive

23 Formulas I like for LTV (The real secret sauce is in the granularity of retention calculations and determining true life of a subscription) Source: Modeling Customer Lifetime Value, Journal of Service Research, Vol 9, No. 2, November 2006,

24 How it works: Data Load Basic Variables CUSTOMER 1 CUSTOMER 2 CUSTOMER 3 CUSTOMER 4 CUSTOMER 5 CUSTOMER 6 Cust Reacquisition EZ Pay Mon-Fri Rate: 5D32 4-Week Term Carrier Delivery Route Unknown Personicx CPO: $0.00 Retention Rate: 68% Life*: 7.3 yr Cust: Voluntary PIA Mon-Sun Rate: 7D22 3-Month Term Carrier Delivery Route Family Matters CPO: $0.00 Retention Rate: 41% Life*: 10.1 yr Cust: Voluntary PIA Mon-Sun Rate: 7D22 13-WeekTerm Carrier Delivery Route Raisin Grandkids CPO: $0.00 Retention Rate: 36% Life*: 10.1 yr Cust: KIOSK PIA Thurs-Sun Rate: JUMPTHURSUN 52 Week Term Carrier Delivery Route Country Comfort CPO: $45.00 Retention Rate: 39% Life*: 9.2 yr Cust: UNKNOWN PIA Sun Only Rate: SD20 6-Month Term Carrier Delivery Route Clubs & Causes CPO: $0.00 Retention Rate: 28% Life*: 7.2 yr Cust: REACQUISITION EZ Pay Thurs-Sun Rate: TS33 1-Month Term Carrier Delivery Route Clubs & Causes CPO: $0.00 Retention Rate: 63% Life* 9.2 yr Other Variables Newsprint Ink Plates Production/Mailroom hours Discount Rate * Life represents the average subscription length for all active/former customers on each FOD, not the actual life of the subscribers shown.

25 How it works (Values into Formulas) CONSTANTS t The Average Customer Lifespan. How long someone remains a subscriber by FOD. This varies by many factors. 7-Day an average of 10.1 years is used. Limits in circ system inhibit this calculation. i The Rate of Discount. The rate of discount is the interest rate used in discounted cash flow analysis to determine the present value of future cash flows. Usually this number falls between 8% and 15%. For the publisher analyzed 10% was used. r p Customer Retention Rate. The percentage of customers, who, over a given period of time, retain their relationship. Formulas calculation varies rate based on acquisition channel, PRIZM/Personicx and Payment method. Profit Margin per Customer. The difference between the revenues (circulation and preprint) used in the calculation and the expenses included (newsprint, ink, plates, delivery fees and general administration). m Avg. Gross Margin per Customer Lifespan. Each individual customer has a unique profit margin (see constant p ). If a customer spends $3.67 per week with a 6.7 year life ( t ) this is $1, When the gross margin is applied over the customer lifespan yields $2,

26 Different ways to calculate LTV It is typical to use several different equations to calculate the LTV. In my model, four different equations are used (three are shown here). They are averaged together to compute an aggregate value. This is an example of a single customer thru the different LTV calculations. SIMPLE LTV EQUATION CUSTOM 1 LTV EQUATION TRADITIONAL LTV EQUATION 52(a) x t t(52 x s x c ( ) m r x p) -aq 1 + i - r -aq EQUATION FILLED EQUATION FILLED EQUATION FILLED 52(3.67) x 7.3 (.63 ) 7.3(52 x 3.67 x 5.05 x 231%) - 0 3, CALCULATED LTV CALCULATED LTV CALCULATED LTV $1, $16, $4, $7,369

27 Calculations as used across six customers: CUSTOMER 1 CUSTOMER 2 CUSTOMER 3 CUSTOMER 4 CUSTOMER 5 CUSTOMER 6 Method 1: Simple, ignores costs: 52(a) x t $1, $1, $ $1, $1, $2, Method 2: Custom, using margins: t(52 x s x c x p) $ $9, $4, $5, $18, $14, Method 3: Traditional: m r ( ) -aq 1 + i - r $4, $1, $ $ $1, $3, AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE $7,369 $4,247 $2,374 $2,575 $6,838 $6,646 The average of the calculations (and others) are computed and used as the final LTV for each customer

28 Having Fun with Numbers The LTV calculations will yield results that look wrong: They are really the extreme ends of the distribution curves and must be taken with a grain of salt and as odd as they look could be right over the long run. High retention rates push LTV up. High profit margins on a subscription push LTV up. EXAMPLE: Sunday only rate of $2.64 (per week) Preprint revenue of $0.95 Distribution cost of $0.40 Production/other cost of $0.34 Profit per week: $2.85 or a 389% margin Because of a 97% retention rate for a particular combination of attributes in the model: FOD, PRIZM, start source, paytype, etc yields a $9, LTV at 4.7 years

29 A few LTV triggers for branching Age based branch With over a $1,400 difference in the average LTV between the two groups, a branch to a different message may help close the gap. $1,442 Younger $7,213 Older Group $8,655

30 Another branching point Payment method branch The average LTV in the sample data of an EZPay customer is almost $2,000 more than that of an pay by mail customer $1,936 Trigger to message encouragement to move to ezpay. Pay By Mail $7,295 EZPay $9,231

31 One more branch Acquisition channel to branch for retention premium selection (for the phase portion of the campaign). Due to the initial cost of the sampling program, a start from a sample* in the example market used has a very large acquisition cost to overcome. The impact is shown in nearly a 50% drop in LTV between Telemarketing and Sample orders. $2,415 For Reference: Kiosk $5,508 Direct Response $3,959 Door Crew $7,371 Voluntary $7,365 Sample Start $2,882 Telemarketing $5,297 *Based on value from circ system of the last start

32 Applying the data: Target Design Demo Cluster Based Target grid Value Add Impact ZONE Ultra high LTV. Saturated penetration.

33 Sidebar: LTV into your acquisition targeting? Not that using LTV in acquisition is recommended, because: This means applying a LTV value calculated on existing customers to prospects. Prospects are not customers, only potential customers build a focused acquisition model! They have no current value only potential value not until you have all of the inputs for the person can you determine value. So, since a prospect is not a customer, a process for establishing an expected value is needed to help the process along. Some vendors only apply a LTV value to active customers. ( ( pr -aq ) PM 1 + i - pr EV = T ap ( ) T = Target, ap = Anticipated probability of acquisition

34 So, how do I do this in the real world? Combining technology from Blue Group and reporting tools. In the end, the LTV values for each customer are loaded into BlueVenn as a table. Extract subscriber data Rate code, route, FOD, original start, PRIZM/Personicx, and any low level data to model Extract route data Route, rate, subsidy Extract subscriber history Build a retention table by the level of granularity you plan on using as the denominator in the models Revenue data collection Preprint revenue by ZIP Code, by day Expense data Complex to determine what to collect what to ignore: newsprint/ink/plates/transportation, etc.

35 So, how do you do this? Moving the data around (hadoop, SQL Server or just plain Excel). Extract subscriber data Rate code, route, FOD, original start, PRIZM/Personicx, and any low level data to model Extract route data Route, rate, subsidy Extract subscriber history Build a retention table by the level of granularity you plan on using as the denominator in the models Revenue data collection Preprint revenue by ZIP Code, by day Expense data Complex to determine what to collect what to ignore: newsprint/ink/plates/transportation, etc.

36 Bits and pieces under the hood

37 Applying it into the Continuous Campaign Start with your original flow wireframe Insert branching for LTV value range buckets: Black, Gold Silver. Remember LTV is meant to move people UP value not just target a range.

38 Before you rush in the LTV game Introducing LTV into your campaigns can do a lot of damage; but if done right, they can be an incredible tool. Begin with the assumption that marketing actually works, and therefore; the customers with the greatest potential (not current) to be high value customers need to be the focus. LTV helps address message changes to handle issues such as We lost this high value customer, how much I can afford to spend to win them back? or Which customers should I be targeting to maximize my return on investment? In addition to answering these questions, correctly implemented LTV models can bring logic and evidence to marketing decisions and elegance to the strategy of who we are targeting, why, when and with what offer. LTV, done right, is one of the most powerful and commercially insightful tools at your disposal! But if done wrong, instead, is a fast way to wreck marketing effectiveness and destroy a business.

39 Data-Driven Decisions If we have data, let s look at the data. If all we have are opinions, let s go with mine. - Jim Barksdale, former CEO of Netscape

40 Questions? Go slay the Jabberwocky! Anthony Botibol bluevenn.com Greg Bright

41 Appendix The LTV Manifesto Originally appeared in Alert! Magazine/Marketing Research Association

42 1. LTV is often incorrectly used to identify supposedly high lifetime value customers, and can create a self-perpetuating model of actually targeting CURRENT high value customers as opposed to FUTURE potential. Companies take current customer values, slice off those of the highest current value saying they are the best customers and call them high value customers. If we do the right thing to low value customers, maybe we can turn them into a high value customer? Originally appeared in Alert! Magazine/Marketing Research Association

43 2. The very notion of a high value and a low value customer is actually misleading. The two have much in common - namely that the cost of losing either of them is massive, on the basis of the considerable cost of recruiting a new customer. Low value customers should potentially be seen as MORE valuable because the cost of recruiting them is often lower than a (supposedly) higher value customer. The true, and far more equal value, of customers (when you think about the cost of replacing them) makes you turn many retention priorities on their head, realizing that the difference between a low value and high value customer is over-stated. Originally appeared in Alert! Magazine/Marketing Research Association

44 3. In any case, low value and high value customers make up part of the jigsaw puzzle that a company can profitably serve all of. A company should be capable of profitably harvesting from all segments of the market with appropriate products and services for every niche. Supposedly low value customers can contribute considerably to overhead, create scale economies, and ensure an overall enhanced profitability business model. Originally appeared in Alert! Magazine/Marketing Research Association

45 4. However, LTV is under-used as a dynamic model output for assessing different scenarios. Many clients have thought of LTV as a fixed number; an input into a marketing scenario. This is wrong. LTV is something that is a variable number; an outcome, depending on what they do. If you increase retention, your LTV increases. If you reduce your acquisition costs or cost to serve, your LTV increases. If you increase your cross-sell (preprints for example), your LTV increases. All of these can be captured in a dynamic LTV model. Thinking of LTV dynamically can help drive reduced acquisition cost through a business. Originally appeared in Alert! Magazine/Marketing Research Association

46 5. LTV can cause some companies to under-value the aggregate segment of low value customers. The many low value customers outweigh in value a smaller number of high value customers. In other words, there are more low value customers than high value, so the aggregate segment value is higher. Because the individual value is lower, one more purchase per year by each of the low value group, makes a huge percentage difference to aggregate segment value. (FOD movement). Originally appeared in Alert! Magazine/Marketing Research Association

47 6. Marketing to higher value customers will have a far greater proportionate impact than marketing to low value customers. Basic arithmetic would suggest targeting supposedly high value customers (who are actually saturated) with marketing efforts can give a lower ROI than targeting the low value customers, e.g. persuading a low value customer to move from Sunday Only to Weekend has a more dramatic impact on their value than a high value customer because there is little movement possible. Also, because, generally, there are so many more low value customers than high value customers, the aggregate benefit of adding a day or two with the low value customers can be dramatically greater. As a GROUP, low value customers are worth more than high value customers, and marketing to them can give a far higher ROI for that marketing spend. In the majority of cases, LTV models are used so badly that they justify marketing strategies completely counter to what a correctly applied LTV model would suggest. Originally appeared in Alert! Magazine/Marketing Research Association

48 7. LTV models sometimes incorrectly focus attention of marketers on activities to the high value group. But think of how political elections are decided by a small number of swing voters - this is where the marketing attention needs to be addressed. Similarly, there is no point in marketing to these folks because they re not going to buy any more insurance, cell phones, mops or whatever. Target your marketing dollars where they can make a difference. Originally appeared in Alert! Magazine/Marketing Research Association

49 8. The concept of "brand" and LTV are closely related. Why? Because loyalty most dramatically impacts LTV. In the markets where LTV is most often used (TelCo, Financial Services) the level of saturation actually means that brand is a CRM concept. Who is the brand re-positioning communications really aimed at? Potential switchers? That's a pretty small part of the population. It's the installed base of existing customers we're trying to prevent churning and trying to up-sell. Once you realize that in most markets, brand is a CRM concept, the close relationship between brand and LTV becomes clearer. Brand spending influences LTV models (and values), but because in so many companies there is a separation between a marketing function (looking after brand and communications) and a commercial team (looking at CRM activities and LTV type models); this powerful connection is lost. Dynamic LTV models can be a powerful way of bridging this divide. Originally appeared in Alert! Magazine/Marketing Research Association

50 Summary Go slay the Jabberwocky! In conclusion, LTV models can do a lot of damage; but if done right, they can be an incredible tool. Begin with the assumption that marketing actually works, and therefore; the potential (not current) high value customers need to be the focus. LTV models can then help address issues such as We have lost this high value customer, how much I can afford to spend to win them back? or Which customers should I be targeting to maximize my return on investment? In addition to answering these questions, correctly implemented LTV models can bring logic and evidence to marketing decisions and elegance to the strategy of who we are targeting, why, when and with what offer. LTV, done right, is one of the most powerful and commercially insightful tools at your disposal! But if done wrong, instead, is a fast way to wreck marketing effectiveness and destroy a business.