AI News, Machine Learning for Transactional Analytics: Customer Life time Value v/s Acquisition Cost
Machine Learning for Transactional Analytics: Customer Life time Value v/s Acquisition Cost
With the tsunami of start ups in recent times and the immense money flow in businesses, customers find lucrative offers from companies for acquisition, retention &
Collecting and analysing your business data on all aspects such as acquisition cost, operational cost, base profit, revenue growth, referrals etc can help in providing the lifecycle profit patterns from a customer.
Firstly, to estimate the value of a new customer, we have to know the annual profit patterns or cash flow patterns if cash flow pattern differs from profit pattern from a customer.
Customer who stays 2 yrs will generate $26 of profit ($80 acquisition cost balanced in first 3 years profits $40 &
It would not be wise to spend $760 today for a customer who will stay with company for 10 years as the profit generated in future would not be equivalent to $760 today.
Instead of trying to calculate the value of single, average, static customer at a single moment, we need to think in terms of annual classes of customers at different point in their life cycle.
At constant rate of defection of 10%, we may be dangerously wrong in deciding the money to be invested in customer acquisition whereas the actual defection rate shown in above image make this number to only $ 172 from $304.
When we plan targeting a customer based on machine learning based marketing campaign then why not to calculate Customer life time value for every unique customer.
One can also add that every organisation is getting more and more transactional data every day making it difficult to manage especially, in the presence of numerous acquisition dependent variables, to get the accurate accounting numbers.
By making use of RFM ( Recency-Frequency-Monetary)- “magical marketing triangle” with advanced statistical methods considering customer irregular transactional behaviour, can help in creating a probabilistic machine learning model to do wonders to business economic predictability.
We here at DataToBiz connects businesses to data and excels in cutting-edge ML technologies in order to solve most of the simple and trivial problems of business owners with the help of data.
The Value of Keeping the Right Customers
Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.
An annual rate is the default for most companies but any company that prices product on a monthly basis — think mobile phone service providers, gyms, and software as a service companies — looks at customer churn rate by month.
Marketing managers will typically look at churn rate at a segment level — how many of our 18-25 year old customers left this month, for example.
“I’ve seen a lot of firms use churn rate to not only understand what happened in the last period, but also to predict what’s going to happen in the next.” Avery points to HubSpot, a Boston-based firm that provides “inbound marketing” software tools to small and medium-sized businesses to attract prospective customers to their websites, as one of the more “sophisticated churn managers”.
When the economy crashed in 2008 and the company’s churn rate shot up, HubSpot delved deep into its churn data to see what it could find out about which customers were more likely to leave and when.
Using that analysis, the firm targeted customers they suspected might cancel and offered services, like extra training on particular features, to convince them to stay.
Jonah Lopin, HubSpot’s vice president of services, summed up this problem well in Avery’s HBS case on the company’s development of a Customer Happiness Index: “By the time you see an increase in your churn rate it is six or eight months after the point in time when you actually failed the customer.
If churn is your only measure of customer happiness, then you’re always six months too late to influence your future.” HubSpot and many other firms have developed analytics and accompanying metrics to predict who is going to leave.
“The truth is that what’s acceptable varies widely by business model and is largely dependent on how quickly and efficiently a company can acquire customers and how profitable customers are in the short and long term.
“It’s really a metric that shows how well you’re managing your customer relationships, and you can usually always improve your performance in that area.” The final mistake is not seeing that often a high churn rate is the result of poor customer acquisition efforts.
Those deals may have helped companies bring on new customers, but they were typically high-churning customers who didn’t stick around to make another purchase when a heavy discount wasn’t offered.
Acquiring New Customers Is Important, But Retaining Them Accelerates Profitable Growth
One is silver, the other gold.” Similarly, a long-term customer is of more value than a single-deal customer, and it’s a lot less expensive to keep a current customer than to acquire a new one.
This is not to say that we shouldn’t go out and get new customers, but if we can keep a larger percentage of those customers for a longer life cycle, we build on a revenue foundation that is more profitable and predictable;
Customer satisfaction and loyalty mean nothing if you can’t remember exactly who it was that did that phenomenal job of cleaning your carpets two years ago, or where that little jewelry shop is that did such a great job of resetting your diamond when it was loose last year.
When you connect with your customers on an emotional level, they will never go anywhere else.” Skipio advises that a texting system works best when following a few simple rules: For a business to survive in coming years, it’s critical to personally connect with every customer because with advances in technology and increased competitive pressures, if you don’t connect someone else probably will.
How Valuable Are Your Customers?
Even if you don’t have to calculate CLV yourself (there are lots of tools that will do the math for you), it’s important to understand the concept so you can decide whether to use it when making marketing and sales decisions.
Here’s a basic definition: The amount of profit your company can expect to generate from a customer, for the time the person (or company) remains a customer (e.g., x number of years).
The math behind CLV is not something you can do on a cocktail napkin, but the interactive illustration below can calculate it for you — and help you understand how the various elements of the calculation influence the final number.
This interactive illustration shows you one way.) To use the interactive, adjust the sliders on the left hand side to see how each factor influences the CLV over five years and expected customer contribution margin for each year.
Now imagine you own a print shop and you’d like to figure out which set of your customers are more valuable to you: small businesses that buy from you semi-regularly or larger businesses that only use you a few times a year for significant purchases.
And perhaps more importantly you can use the interactive before to see how you might influence the CLV by doing things like increasing the number of purchases per year (just one additional purchase yields a CLV of $1,157!), decreasing marketing costs, or improving your acquisition response rate.
Retention Marketing: Grow Your Business by Selling More to Current Customers
It’s true for many businesses, especially in the crowded ecommerce arena where clicks and conversions always seem to be increasing in cost.
When was the last time you made an effort to re-engage customers to get them to come back? If you've yet to market to current customers after the sale, now is a good time to build a cohesive strategy for customer retention.
Customer retention is the collection of activities a business uses to increase the number of repeat customers and to increase the profitability of each existing customer.
A retailer selling high-end leather furniture is going to be categorically different than a store selling tea and coffee.
store whose customers purchase high value items frequently will have the highest customer lifetime value (CLV).
Thankfully, calculating your repeat customer rate is fairly straightforward and only requires two pieces of information: This refers to the number of customers who have made more than one purchase in a specific period of time.
Using the same time frame you chose for your repeat purchase rate (e.g., a single month), divide your store’s total number of orders by the number of unique customers.
This metric is known as average order value, and refers to the amount of money a customer spends in your store on each transaction.
Just like purchase frequency, your average order value should be calculated using the same time frame you set for your repeat purchase rate.
When you write out this equation, it looks like this: Total Revenue Earned / # Orders Placed Whether you hope to increase these metrics one at a time or simultaneously, the ultimate goal of retention marketing is to increase customer value.
Customer Value = Purchase Frequency x Average Order Value Now is the best time to create a customer retention strategy to see how improving each of these metrics can help grow your business.
We’ve explored why developing a strategy to retain our current customers can be just as valuable as finding ways to acquire new ones.
If you're on Shopify and your customer accounts are optional, you can send customers direct invitations to encourage them to activate an account after they’ve completed a purchase.
A support system can help both pre- and post-sale by enabling you, or a customer service rep, to clearly communicate with the customer.
Having a live chat or help desk tool available can turn a customer question into a sale or a customer complaint into a resolution. Very often, an effectively resolved complaint or problem can turn an unhappy customer into a loyal, repeat customer.
Depending on your niche, product mix, and margins, sending a small gift to your best customers can be a great way to remind them to return while adding the element of surprise and delight.
Giving an unexpected gift also plays to the law of reciprocity, which refers to our tendency to respond to a positive action with another positive action.
Loyalty programs are an effective way to increase purchase frequency because they motivate customers to purchase more often in order to earn valuable rewards.
Shopify data from Black Friday Cyber Monday also shows that, relative to other sources, email has the highest conversion rate at 4.29%, followed by search in second.
Making additional product recommendations and sending invitations for upcoming sales and promotions for new products are great ways to keep the conversation going with first-time buyers.
If you have a product that is perishable, consumable, or otherwise needs to be refreshed over time, knowing your products’ lifespan and sending well-timed emails can be the perfect way to bring back dormant customers.
This tactic can be particularly effective because ideally, you’ll be delivering the right message to the right person at the right time.
For example, Luxy Hair mentions in their FAQ section that their hair extensions will last three to six months on average, or up to a year depending on wear.
Knowing this, Luxy could set up a series of automated emails to go out after three months, six months, and one year that explain to customers the benefits of a fresh set of hair extensions.
These emails would help educate a first-time buyer, keep Luxy top-of-mind, and encourage repeat business, all while providing customers with a great experience.
When you discount your products you enter a perpetual race to the bottom that conditions customers to expect dropping prices, which ultimately results in a loss of revenue for your store.
Your current customer base is the best asset your store has. Customers already know your brand, they know your products, and they appreciate your service.
Focusing your time and energy on improving the experience for this group as oppose to always trying to find new customers can be a powerful way to supercharge revenues for your store.
5 Unique Ways to Increase Customer Retention (and Increase Profits!)
Post summary: If you work in sales, then you know that finding new ways to increase revenues is always top of mind.
And when it comes to growing sales, many sales people are so focused on gaining new clients and customers that they fail to effectively address the need to retain those they already have.
An Econsultancy report found that there was an increase in investment in getting new customers from 31% to 34% yet a decrease in keeping customers down from 24% to 18%.
Having an effective retention program gives you the ability to identify, track and sell more to these customers who are most likely to become your long-term sources of revenue.
And when asked, “Which of the following do you believe will be the most significant drivers of your company’s revenue growth in the next 1-3 years?” It was customer retention that was cited as the biggest revenue driver, according to KPMG.
In this blog post we will explain why and how customer retention is essential to growing your sales, and we will also provide you with five tips and practical examples of how CRM software can help you carry out the ways to sell more to your existing customers.
Every business needs new customers, but remember the easiest and most predictable source of new revenue is right under your nose: it comes from the existing customers who already know your company and have already bought from you.
And if you’re reading and still feel that customer retention plays a small role in the growth of your businesses, here are a few statistics you might be interested in.
There’s plenty of customer retention strategies on the web and you’re most likely using some of them, but before showing you some useful tips, I want to share some of the expectations from the customers’ point of view.
Once you start thinking and putting your efforts into customer retention, it is essential to consider the reasons and factors that enhance repeat purchase of your product or service.
Here are 5 customer retention techniques you can implement using your CRM software to keep additional revenue from walking out the door, with examples.
You can now follow up with these VIP customers and find out the reasons why they were not purchasing and look to prevent them leaving your business, which, if you consider the 80/20 rule, this investment is bound to pay off!
CRM software lets you view a customer’s purchase history so that you can determine what kind of offer will be most appealing to each individual and increase relevancy, which will keep your brand on your customers’ minds.
Now, you can start to follow up and let them know about the rewards and incentives in order to make them feel special, so they continue to stay as your most profitable customers.
The effects of personalization cannot be understated, as recent research in the UK found that personalization using purchase history, user preferences and other relevant information found in CRM software delivers a high impact ROI.
- On Tuesday, March 26, 2019
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