Marketing Models and Applications

Case 1
A typical example of this case could be an insurance

company trying to estimate its CLV. Suppose that the

company pays, on average, Rs. 50 per customer yearly
(happens in the middle of each year always for all the
cases to come) on promotional expenses. The yearly
retention rate is 75%. The period of cash flows projection
is 10 years. The yearly gross contribution per customer is
expected to amount to Rs. 260. An appropriate discount
rate for marketing activities is 20%.

Case 1 Solution
CLV = {260 * *(.75)i /(1 + .2)i]}
- {50 * [(.75)i-1 / (1 + .2)i-0.5]}
=

568.78

Case 2a-What if the purchase

takes place semi annually
A typical example of this case could be a health club

trying to estimate its CLV. Suppose that customers

subscribe for services on semiannual basis. The company
pays Rs. 25 per customer semiannually on promotion.
The semiannual retention rate is 80%. The period of cash
flows projection is n= 4 years. The gross contribution
margin per semiannual subscription amounts to Rs. 125.
An appropriate (annual) discount rate for marketing
activities is 20%.

Case 2a Solution
CLV = {125 * *(.8)i /(1 + .2)i/2]}
- {25 * *(.8)i-1 / (1 + .2)(i-0.5)/2]}
= 354.69

Case 2b-What if the purchase

cycle is more than one year
Consider the case of a car dealership where customers

lease cars for 3 years. The company pays Rs. 95 per

customer on promotion, yearly. The cyclical retention
rate is (only) 30%. The average gross contribution margin
per car lease per cycle is Rs. 7,000. An appropriate
discount rate is 20%. The company wants to project its
CLV for the next 12 years (12/3 = 4 purchase cycles).

Case 2b Solution
CLV = {7000 * *(.3)i /(1 + .2)3i]}
- {95 * *(.3)(i-1)/3 / (1 + .2)i-0.5]}
= 8,273.31

Case 3: Gross Margins Change

Over time
Consider the case of a credit card company that expects

its profit per newly acquired customer to accelerate over

time. Profit per customer starts at a low level of Rs. 20.
This profit is, however, expected to grow at an increasing
rate until year 5. Afterward, profit will continue to grow,
but at a decreasing rate. Profit is not expected to exceed
a ceiling of Rs. 200. The retention rate is 90%, and the
discount rate is 20%.

Case 3 Solution
CLV = {(4t2 + 20) * [(.9)t / (1 + .2)t]}
+ {(4 * 52 + 20) + [80 (1 e-t+5)]}
* [(.9)t / (1 + .2)t]}
= 212.163

Case 4:Customer Migration Model

In this case, we use purchase history, particularly

recency, to predict repeat purchase behaviour. The

Customer Migration model uses empirical evidence of
purchase recency to predict repeat purchase
behaviour. From past data, the purchase propensities
of each recency cell have been estimated. The
probability of purchase for members of each recency
cell is as follows:

Case 5 (contd..)
Purchase Probabilities - Customer Migration Model

Recency Cell

Probability of Purchase
(Pt-j) (for the current
year, t)

If last purchase was in year (t-1)

0.30

If last purchase was in year (t-2)

0.20

If last purchase was in year (t-3)

0.15

If last purchase was in year (t-4)

0.05

If last purchase was in year (t-5)

0.00

Case 5 (contd..)
Number of Customers Customer Migration Model
Time 1
30%

1,000

Time 2
30%

300

90
140
230

700

Time 3
6
9

Time 4

58.5

42
84_
195

32.2

210
25.2

161
560

168

476

23.8
139.7