Customer-Centric organizations are 60% more profitable than the ones that are not customer-focused
Overview
Today, the market is saturated and every business has many strong competitors. It is very important for the companies to keep their customers’ satisfaction at a priority so that the customers will remain loyal to the company, as they form the key stakeholders of the company. Another important factor for the companies is to grow, generate more profit and expand their customer base.
Customer oriented companies like Amazon, Flipkart, and others spend a lot of money on advertisements, promotions, marketing, offers, and discounts, to acquire customers and keep them loyal over the years through valuable engagement.
The customers seldom provide returns more than the investment company’s made during the first year. But, through different engagement activities, the businesses see incremental returns that are greater than the investment made.
Many customers just make a couple of purchases and then switch to another company. The behavior can be attributed to different reasons, such as:
- The difficulty in understanding the platform
- Other platforms that are easier to use or have better offers, among many other reasons
Due to these factors, an attribute Retention Rate or Churn Rate gets associated with the company.
Customer Lifetime Value analysis is based on these factors or customer behaviors, helping the company identify the value that can be created for the customer over the average lifetime of engagement with the company to help them predict the profit over the acquisition cost.
Customer lifetime value is an important concept that encourages companies to shift their focus from quarterly profits to the long-term health of their customer relationships. Customer lifetime value is an important metric because it represents an upper limit on spending to acquire new customers helping in calculating payback of advertising spent in marketing mix modeling.
Early adopters of customer lifetime value models in the 1990s include Edge Consulting and Brand Science.
Solution Architecture
The TekLink solution leverages the true power of HANA systems and gives you real-time insights of customer lifetime value. This feature is a great benefit for those who want quick results. The solution is based on the above architecture where the built-in advanced analytics and multi-model data processing engines help to develop next-generation applications for the intelligent enterprise.
This interactive dashboard is created using SAPUI5 which follows the FIORI patterns and has a user-friendly interface. The dashboard is responsive to all devices and compatible with all browsers.
The computations are done on the fly using HANA Calculation Views, which returns the data in real-time. These HANA DB Artifacts can be directly leveraged in SAC, Power BI, Tableau, or any other visualization tools for a live connection.
Following are the features of our solution:
- Customer lifetime value without Discount
Customer Acquisition Cost: Investment made by the company to acquire the customers in the current year.
Number of Customers Acquired: Total number of new customers who made the purchase post the campaign.
Customer Value: Avg Sales Order value per customer * Avg Frequency of the sales order per customer.
Percentage Gain: Avg gain in the revenue in percentage over the period of the first 6 years of a customer.
CLV: Expected profit from the acquired customer in the current year over the next 6 years. Here we consider profit equal to Predicted Profit from Sales – Customer Acquisition Cost.
In our scenario, we can consider 6 years to be the average lifetime of a customer who stays loyal to the company.
The visualization says that if the company invests $ 4 Million and acquires 20 customers then in the lifetime of a customer for the first three years revenue will probably be negative and then it will rise positively yielding some profit over investment.
2. Customer Lifetime Value without Discount
Suppose the company decides to give a discount that is more than the expected profit in the lifetime of a customer, then, based on our assumption, during the 6th year of the customer’s association with the company, the profit over investment will increase.
3. Trend in the Retention Rate over the years
Every year a lot of customers get churned which affects the revenue and thus we consider it as one of the factors in calculating customer value. Here the visualization shows how the retention rate varies over a period of 20 years
The visualization shows that on average 9% of the total acquired customers made a purchase in the first year. It would mean that if the company acquired 20 customers, only 9% of them would actually end up contributing to the revenue.
4. Distinct Customers making purchase in cumulative years after the first purchase or after joining
Consider the year 1996:
13 unique customers who joined in 1996 have generated revenue for the company.
11 unique customers who joined in 1996 have generated revenue for the company in the third year from 1996 i.e., 1998.
5. Average Sales Frequency over the cumulative years from the acquired customers n different years
Using TekLink’s solution the business can understand consumer behavior by drawing better insights using historical data to predict future possibilities, and thus make intelligent decisions.
