Using Average Retention, Margin, and Cost Data
to Compute Retention Equity

To get a quick feel for the retention value of a customer, this is a satisfactory method. There are 4 basic steps:

1. Determine the average retention rate of the cohort of customers.
2. Compute the average expected relationship duration of a customer with this retention rate.
3. Determine the average per period margin and costs that are associated with retaining this customers.
4. Multiply the period net profits by the number of periods the relationship lasts.

	Step 1:	Suppose a historical record shows that the retention rate of a cohort of customers has been 70%, 71%, 72%, and 71% over a 4 year period. This equates to an average retention rate of around 71% (i.e., 71 =(70+71+72+71) / 4 ).
	Step 2:	Given the average retention rate, the expected relationship duration for the average customers is 1/(1-average retention). In this case that is 3.45 years.
	Step 3:	After analyzing the historical data over the same 4 year period, the firm has determined that the average margin is $999 and the average costs over this period $260. This equates to a net margin of $739.
	Step 4:	Using the duration from step 2 and the net margin from step 3 the expected retention equity is $2548 per customer ($739*3.45=$2548).