Tangyslice had a recent post about customer retention metrics.  To his list, I would add lifetime value.  There are many ways to calculate lifetime value but let me tell you about one way I have calculated it.

A cellular phone company was losing customers due to churn and wanted help to retain their most profitable ones.  In other words, they wanted to know the future value of their customers.  With a lifetime value model, the company could increase ROI through targeted retention and provide one-to-one marketing.

In the cellular phone industry, most customers sign up for two year contracts.  However, some customers default on their contract and others continue their service even when the contract ends.   Thus, the lifetime value model in this example consists of two parts:

1. survival analysis which predicts survival probability, the likelihood that a customer will remain a customer
2. financial data that include revenue and costs used to determine future customer profit

The first step was estimating the tenure of each customer.   A proportional hazards model or baseline hazards model can be used to estimate tenure.  Once the tenure is determined, the next step is estimating the future value based on past average monthly spending by the customer and the cellular phone company’s costs.

The formula calculates the discounted profit.  In the calculation above, i= the cost of capital and the terminal value is an estimate of the revenue beyond the 36th month of tenure.

Does this bring back nightmares from Finance and calculating the discounted present value  of cash flow?  The same advice applies.   Be very careful how you calculate the terminal value because it can account for a large percentage of a customer’s estimated value.

## It is nice to be asked

Recently I received an e-mail from a local art gallery that was updating its subscriber list.  They sent me a brief e-mail letting me know that they were moving their e-mail list over to a new host and, due to its strict anti-spam policies, they asked that I confirm my desire to subscribe and receive periodic e-mails from them.  All I needed to do was click on an embedded URL to verify my subscription.  If I chose not to subscribe, I had to do nothing.  Ignoring this request would result in my deletion from their e-mail list.

This was a great e-mail, because it …

1. was short and to the point
2. made it extremely easy for me to re-subscribe by including the URL in the e-mail
3. followed best practices by asking for me to opt-in (it is best practices to ask consumers to opt-in but for businesses, it is more common to ask them to opt-out)

Consider asking consumers to opt-in.  The quantity of e-mail addresses in your subscription list will diminish but your list will be the better for it.  Only those engaged and interested in your products and services will remain.

## More on the Net Promoter Score

A few years ago I was presenting the results of a B2B customer survey.  It provided surprising insight into how customers were using a service provided by my client.  The survey was a great success, enabling us to refine campaign creative and messaging, build campaigns on the insight and compare self-reported usage to actual usage.  What was the first question I was asked at the end of the presentation?  What was the Net Promoter Score?

Frederick Reichheld wrote about the Net Promoter Score (NPS) in Harvard Business Review in 2003.  It has spawned an industry complete with a website, certification courses, conferences and papers for and against the methodology.  The basic idea behind NPS is that growth by an organization, brand, or product is correlated with the percentage of its customers who would recommend them.

Per the HBR article, it requires the following survey question to be asked: “How likely is it that you would recommend [brand or company X] to a friend or colleague?”  The possible responses should range from zero to ten.  Zero means not at all likely to recommend.  Five is neutral.  Ten means extremely likely to recommend.

This is where my friend’s survey question went wrong.  As per my earlier post, both of the NPS questions used a scale from 1 to 10.  With an even numbered scale (in this case 10 choices), there is no true midpoint.  In addition, I noted affect of the words used to describe endpoints of the scale earlier.

While many marketers I know have heard of NPS, they are less familar with the research challenging the NPS methodology.  If you are interested in learning more, here is a recent article from Quirk’s Marketing Research Review available from Business Over Broadway.