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New
Customer Future Profits
Future Customer
Equity™ for new
customers equals the sum of discounted future profits for
all periods after the initial period.
| Computation: |
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Compute
the expected margin per customer per period by multiplying
the survival rate by the per customer gross margin per
period. Subtract
per-customer incremental costs and discount the difference
by the firm’s cost of capital or by the discount rate
it uses for customer investments.
This is done for each period and then summed over
all periods. |
| Measure: |
 |
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New
Customer Future Profit at time t =
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where:
Np
= the number of prospects
rt-1 = the fraction of
customers remaining at the end of time t-1 (i.e., the
survival rate at time t-1)
rt =
the retention rate (i.e., repeat purchase probability)
at time t,
mr,t =
the per customer retention margin at time t
cr,t =
the marketing and customer service costs associated with
retaining a customer at time t
d =
the cost of capital for the firm.
Instead of taking
an infinite sum, some firms may want to sum the expected
profits over a fixed number of periods (for example 10
periods). The
number of periods that is reasonable will vary from business
to business. |
| Example: |
| |
Using
the initial assumptions outlined in Table
Acquisiton-1, Table
Balance-1 shows this computation over 12 periods
for the entire cohort of customers acquired in the year
2000. Unlike
Table
Acquisiton-2, note that this computation only focuses
on the future value of the new customers acquired in
2000.
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