|
Profit
From Retained Customers in Future Years
This measure calculates the discounted future profits represented
by retained customers from all customer cohorts.
| Computation
and Measure: |
 |
For each future
year, for each retained cohort, subtract incremental costs
from the gross dollar margin, and multiply by the cohort’s
survival rate. Sum the results across cohorts and discount
by the firm’s cost of capital or by the discount rate
it uses for customer investments. Then sum results across
all future years.
Mathematically this becomes:
|
Profit
from Retained Customers, Future Years =
|
|
where:
Nt-i
= the number of prospects targeted
t-i periods ago
rt-1-i = the survival
rate of customers remaining at the end of time t-1 who
were acquired i periods ago
rt,i
=
the retention rate for customers in period t who were
acquired i periods ago
cr,t,i
= the marketing
and customer service costs associated with retaining a
customer, acquired i periods ago,
during period t
d
= the discount
rate
mt,i
= the margin
at time t for customers acquired i periods ago. |
| Example: |
| |
We
will demonstrate this computation in several steps. Note that this computation does not put a time
limit on the analysis horizon. In reality, many firms
may feel more comfortable assessing the future profits
only up until a fixed time into the future. In that
case, the outer summation would be summed up to a fixed
time, T. Assuming
a fixed horizon, Balance
Table-3 extends Retention
Table-1 by forecasting out the customer survival
rates, margins, and marketing costs for additional periods. Estimating future profits from retained customers
requires estimating future retention rates, sales, gross
margin dollars and marketing costs. Because these statistics
are uncertain, a high discount rate (20 percent) was
used, which means that the sales projected into the
distant future have very little impact on the final
number.
Given the projected Survival Rates Balance
Table-4 computes the expected number of customers
from each cohort each year.
Using
the data in Balance
Table-3 and Balance
Table-4, Balance
Table–5 computes the discounted future profits from
retained customers. The Customer
Equity™
Balance sheet is completed by pulling together
all of the total figures together from Acquisition
Table-1, Balance
Table-1, Balance
Table-2, and Balance
Table-5.
Balance
Table-6 shows the complete balance sheet.
|
|
