Calculations
What is the lifetime value of this, or these, groups i.e. the “top two boxes” from the customer satisfaction survey
Rebuy number for somewhat satisfied customers= 55% X 40= 22%
Rebuy number for very satisfied customers = 80% X 30= 24%
Total number of loyal customers= rebuy number for somewhat + rebuy number for satisfied customers very satisfied customers = 22% + 24% = 46%
Invitations sent.
No. increases by 15% quarterly: i.e. 360(1+0.15)4
If 80% of invitees attend the cocktails, then:
No. on list in yr 1= 360, yr 2 = 504, yr 3= 882, yr 4= 1544, yr 5= 2702, final yr is after 5½ yrs =3567,
Yr 1: 46% X 360= 165.6, Yr 2: 46% X 504= 231.8, Yr 3: 46% X 882= 405.7, Yr 4: 46% X 1544= 710.2, Yr 5: 46% X 2702= 1242.9, Last Yr 5½: 46% X 3567= 1640.8
Outfits bought in a year by a loyal customer:
The lifetime value of these, groups i.e. the “top two boxes” from the customer satisfaction survey
The result of a 10% increase in the rebuy rate of the customers in the “top two boxes” of our customer satisfaction survey
Rebuy number for somewhat satisfied customers= 65% X 40= 26%
Rebuy number for very satisfied customers= 90% X 30= 27%
Total number of loyal customers= rebuy number for somewhat + rebuy number for satisfied customers very satisfied customers = 26% + 27% = 53%
Yr 1: 53% X 360= 190.8, Yr 2: 53% X 504= 267.1, Yr 3: 53% X 882= 467.5, Yr 4: 53% X 1544= 818.3, Yr 5: 53% X 2702= 1432.1, Last Yr 5½: 53% X 3567= 1890.5
The lifetime value of these, groups i.e. the “top two boxes” from the customer satisfaction survey
The result of a 10% increase 10% decrease in the rebuy rate of the customers in the “top two boxes” of our customer satisfaction survey
Rebuy number for somewhat satisfied customers= 45% X 40= 18%
Rebuy number for very satisfied customers = 70% X 30= 21%
Total number of loyal customers= rebuy number for somewhat + rebuy number for satisfied customers very satisfied customers = 18% + 21% = 39%
Yr 1: 39% X 360= 140.4, Yr 2: 39% X 504= 196.6, Yr 3: 39% X 882= 344, Yr 4: 39% X 1544= 602.2, Yr 5: 39% X 2702= 1053.8, Last Yr 5½: 39% X 3567= 1391.1
The lifetime value of these, groups i.e. the “top two boxes” from the customer satisfaction survey
If the lifetime” of the customers is increased to 6 years:
6th-year increase in invitees will be 3378 X 1.75 = 5912
80% attendance= 0.8 X 5912= 4729
46% X 4729= 2175.4.
Conclusions from the calculations
The calculations of lifetime value indicate that Alta Mada will be able to gain a lot of revenue from customers who make repeat purchases. Alta Mada produces clothing that is in the goods category of marketing. Nonetheless, the business can approach its marketing activities as though it is in the service industry. By turning their approach to customer management, Alta Mada will be able to gain from the same clients for five and a half years.
This will be more reliable than having to depend on new customers who have to be attracted to the business (Dwyer 1989; Gupta & Lehmann 2005). According to Rust, Zeithaml, and Lemon (2000) attracting new customers is more expensive as compared to retaining the same clients who already know about a company and its products. From the calculations presented above, it is clear that the potential total value that Alta Mada will be capable of obtaining if they successfully retain their loyal customers is very high.
Even though the value of customers decreases after the third year, the earnings that are obtained in the long run make the customer management approach worth pursuing. The total amount of customer value after six years was higher than that of five or five and a half years even though the value depreciates at a rate of 17%. This indicates that as long as Alta Mada increases the number of invitees who attend their cocktails, they will be able to create more value in the long run. The loyalty of customers is ensured if the satisfaction rates are high so that the majority of clients fit in the category of ‘satisfied’ customers.
Importance of lifetime value to Alta Mada
From the calculations above, it emerges that the lifetime value is a marketing metric that encourages clothing businesses to improve their perspective of customers (Berger & Nasr 1998). Customers are not just tools that will enable Alta Mada to make profits. Rather, customers are valuable assets who should be treasured so that they become loyal to the organization (Persson & Ryals 2010).
The lifetime value metric was designed to enable marketers to be able to quantify the value that customers add to the organization (Gupta & Lehmann 2005). Before the LTV was developed, customers could only be quantified by the number of products that they bought. The real value of the customers could not be established and so valuing them was difficult to justify. Alta Mada is fortunate enough to be able to quantify the value of their customers through the use of the lifetime value metric.
Through the LTV calculated above, Alta Mada is also able to establish the outcome of alterations made on customer satisfaction levels. If Alta Mada can increase the levels of customer satisfaction, it will be able to improve its total earnings.
The total value of all loyal customers increases when the percentage of satisfied customers increases (Kumara & Rajan 2009; Ryals 2008). This is irrespective of whether the variable that has increased is the group of somewhat satisfied or very satisfied customers. The calculations reveal that an increase in either or both of these variables leads to increased total value from loyal customers. This indicates that what Alta Mada should focus on is finding ways to create greater levels of customer satisfaction so that there can be repeat purchases.
If there is a decrease in the rebuy rate, the total earnings end up decreasing in the long run. Alta Mada risks suffering decreased revenue if their loyal customers do not practice repeat buying. The rebuy rate indicates that customers are satisfied with the services and products offered by the store. A reduction of the rebuy rate is something Alta Mada should endeavor to avoid as it would lead to the failure of the achievement of their real potential. The purpose of business is to maximize profits and so when the rebuy rate decreases, the profitability of Alta Mada is not capitalized.
Recommendations
Positioning
Alta Mada is a fashion chain store that targets women with professional occupations. Their products include business, casual, and semi-casual outfits. Because they desire to provide this target market with clothing that is elegant and fashionable, there are several factors that they ought to consider.
- Consumer lifestyle- professional women have high incomes and are good potential customers for a fashion store. These people are however very busy since their jobs are usually demanding. Thus, they do not have plenty of time to go around shopping and comparing prices and products. Alta Mada can benefit from getting this customer segment to become loyal to its products. If the chain store can convert trial buyers into loyal customers, then it will be assured of greater returns from additional customers due to high lifetime value (Anderson, Fornell & Mazvancheryl 2004). It has been revealed that the greater the number of satisfied customers, the higher the rebuy rate and total returns. Alta Mada should capitalize on the busy lifestyles of professional women by providing them with elegant and long lasting outfits such that they never develop complaints about products. This will make them loyal customers of the store.
- Advertising- Alta Mada mainly markets its products through cocktails where they target sales. There are other methods of marketing that are just as effective as this. Fashion is something that appeals to the eye. Alta Mada needs to appeal to professional women through other platforms such as outdoor advertising and visual media. Billboards displaying women in stylish business suits and casual wear will appeal to the professional class. This customer segment will also view these billboards on their way to work and while in traffic jams. Alta Mada should also consider getting contacts from their customers so that they can mail them with brochures in addition to invites for the cocktails. The brochures should contain pictures of models wearing stylish outfits. This will increase professional women’s desire to attend the cocktail parties so that they check out the outfits. The brochures can also be passed around in the office and so there will be more exposure to the company’s products.
Reference List
Anderson, EW, Fornell, C & Mazvancheryl, SK 2004, ‘Customer Satisfaction and Shareholder Value’, Journal of Marketing, vol. 68, pp. 172–85.
Berger, PD & Nasr, NI 1998, “Customer lifetime value: Marketing models and applications.” Journal of Interactive Marketing, vol. 12, pp. 17–30.
Dwyer, R 1989, “Customer lifetime valuation to support marketing decision making,” Journal of Direct Marketing, vol. 3, iss. 4, pp. 8-15.
Gupta, S. and Lehmann, DR 2005, Managing Customers as Investments: The Strategic Value of Customers in the Long Run, Wharton School Publishing, Pearson Education, Upper Saddle River, NJ.
Kumara, V & Rajan, B 2009, ‘Profitable Customer Management: Measuring and Maximizing Customer Lifetime Value’, Management Accounting Quarterly, vol. 10, no. 3, pp. 1-18.
Persson, A and Ryals, L 2010, “Customer assets and customer equity: Management and measurement issues,” Marketing Theory December, vol. 10, no. 4: 417-436.
Rust, RT, Zeithaml, VA & Lemon, KN, 2000, Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy, The Free Press, New York.
Ryals, L 2008, Managing Customers Profitably, John Wiley & Sons, Chichester.