Marketing Engineering - Syphone Case

ASSIGNMENT 1

CASE: SYPHONE (CLV)

Question 1: What is the lifetime value of a typical customer in each of the four segments, in current dollar values? Compare these figures to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison?

Answer:

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Table 1.1: Customer Lifetime Value (SyPhone case)

1.1 What is the lifetime value of a typical customer in each of the four segments, in current dollar values?

The lifetime value of a typical customer in each segment is shown in Table 1.1 above.

• Large accounts segment = $118,548
• Large accounts (with rebate) segment = $88,831
• Small accounts segment = $17,388
• Small accounts (with rebate) segment = $14,818

1.2 Compare these figures to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison?

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Table 1.2: Customer Lifetime Value (SyPhone case), % CLV growth from Gross Margin added

The percentage of growth in CLV of all segments is proportionate to gross margins. Taking a closer look, though the gross margins of segments with rebate is lower as compared to segments without rebates, customers with rebate of both account sizes contribute higher growth in CLV as compared to segment without rebate. Promotion and marketing campaign of SyPhone should be allocated more to the segments with rebate, since they yield higher growth in CLV. According to table 1.2, “Large accounts with rebate” segment is the most interesting segment since it gives highest percentage of CLV growth as compared to the gross margin.

Question 2: Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years? What is the overall churn rate after five years? Answer the same questions, segment per segment.

Answer:

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Table 2: Number of customers per segment (SyPhone case)

2.1 Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years?

According to the table, there will be 3,207 customers from all segments left in year 5.

2.2 What is the overall churn rate after five years?

The overall churn rate of all segments after 5 years is calculated as follow,

[(15,000 – 3,207)/15,000] x 100 = 78.62%

2.3 Answer the same questions, segment per segment.

For each segment:

Large accounts: There will be 46 customers in this segment, giving churn rate of 90.85% (≈ 91%).

Large accounts, rebate: There will be 689 customers in this segment after 5 years, giving churn rate of 65.55% (≈ 66%).

Small accounts: There will be 566 customers in this segment after 5 years, giving churn rate of 88.68% (≈ 89%).

Small accounts, rebate: There will be 1,907 customers in this segment after 5 years, giving churn rate of 74.58% (≈ 75%).

Question 3: With a discount factor of 35%, reconsider Question 1. What changes do you notice, in both absolute and relative terms? In terms of customer value, what is the consequence of focusing on the short term?

Answer:

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Table 3.1: CLV comparing between 10% and 35% discount.

3.1 What changes do you notice, in both absolute and relative terms?

With 35% discount rate, there is a great reduction of CLV of all segments.

• Large accounts: CLV decreases from $118,548 to $77,299 (34.79% reduction)
• Large accounts, rebate: CLV decreases from $88,831 to $52,099 (41.35% reduction)
• Small accounts: CLV decreases from $17,388 to $11,730 (32.54% reduction)
• Small accounts, rebate: CLV decreases from $14,818 to $9,197 (37.93% reduction)

The % CLV growth rate also decreases across all segments.

• Large accounts: % CLV growth from gross margins decreases from 88.17% to 12.06%
• Large accounts, rebate: % CLV growth from gross margins decreases from 146.75% to 18.12%
• Small accounts: % CLV growth from gross margins decreases from 61% to 5.35%
• Small accounts, rebate: % CLV growth from gross margins decreases from 105.81% to 13.47%

3.2 In terms of customer value, what is the consequence of focusing on the short term?

By focusing on the short term (higher discount factor), CLV decreases with a great amount (ranging from 35% to 42% reduction in each segment). Therefore, company should focus more on the quick-win strategies rather than investing in maintaining customer’s lifetime.

Question 4: Build an Excel spreadsheet to estimate how much a prospective customer is worth, depending on whether that customer is offered a rebate. What do you learn from the updated spreadsheet? Explain the logic behind your findings and conclusions. On the basis of these results, what sales and marketing strategies would you recommend for SyPhone?