Using Average Response Rates, Margin, and Cost Data
to Compute Add-On Selling Equity

This approach builds on the similar approach outlined in the retention equity computation. There are 4 basic steps:

1. Use the average retention rate to determine the expected relationship duration. This process was done in steps 1 and 2 of the retention equity computation.
2. Determine the average per period margin and costs that are associated with add-on purchases.
3. Determine the average likelihood that a consumer will make an add-on purchase.
4. Multiply the net profits by the likelihood of purchase and the expected relationship duration.

	Step 1:	This is the same as steps 1 and 2 in the retention equity section that uses average retention, margin and cost data. In that section we determined that the expected relationship duration is 3.45 years.
	Step 2:	Historical data over a 4 year period show that the average margin from an add-on purchase is $200 and the average expenditures necessary to generate a purchase is $10. This equates to a net margin of $190 per add-on purchase.
	Step 3:	In the past 4 years, the firm has implemented 6 promotional campaigns aimed at existing customers. The goal of those campaigns was to get the existing customers to purchase additional products are related to the original product purchase. The response rates from those campaigns were fairly consistent; 2%, 3%, 2.4%, 3.1%, 2.6%, 2.9%. The average of all of these response rates is 2.67%. Thus this figure is used as the average add-on selling response rate and represents the likelihood that a customer will make an add-on purchase.
	Step 4:	To compute the expected profits from add-on selling, multiply the net profits in step 2 by the expected relationship duration in step 1 and by the likelihood that the a customer will make an add-on purchase(i.e., $190*3.45*2.67=$1750.19). The results in $1750.19 in add-on selling profits over the expected duration of the customer-firm relationship.