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Table 4-3 Final Repurchase Rates
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Totals Repurchase rates 50.10% A Model 39.00% B Model 45.20% C Model 51.60% D Model 70.60% E Model 71.00%
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Table 4-4 Lifetime Value
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B Model cars Revenue Repurchase rate Customers Net pro t per car Net revenue Costs Acquisition cost per car Acquisition cost Marketing costs ($20/yr) Total marketing and sales Pro t Discount rate NPV of pro t Cumulative NPV of pro t Lifetime value Years 1 3 45.20% 264,124 $4,000 $1,056,496,000 $400 $105,649,600 $ 5,282,480 $110,932,080 $945,563,920 1.11 $851,859,387 $851,859,387 $3,225.23 Years 4 6 47.40% 119,384 $4,000 $477,536,192 $300 35,815,214 2,387,681 38,202,895 Years 7 9 51.20% 56,588 $4,000 $226,352,155 $275 15,561,711 1,131,761 16,693,471
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$ 439,333,297 1.31 $ 335,368,929 $1,187,228,316 $44,94.97
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advertising and promotion costs, which are not re ected in these numbers. The marketing costs ($20 per customer per year) are the amounts that Asian spent annually on the database and on communications with customers. This is a high number. Many car companies spend only a fraction of this amount on marketing to existing customers. The pro t is equal to the revenue less the costs. This pro t has to be discounted to re ect the net present value of the funds involved. The net present value is the current (today s) value of money that you are going to receive in the future, as $1000 to be received a year from now is not worth as much as $1000 received today. To compute the value of $1000 to be received a year from now, you have to discount it by an amount that re ects the cost of waiting. Waiting has a cost, because if you had the $1000 now, you could invest it and receive a return. By waiting, you forgo that return. We discount all future pro ts in a lifetime value chart to produce net present value. The numbers behind Table 4-4 are shown in Table 4-5. The discount rate re ects the fact that for Asian, automobile sales are a business-to-business transaction between Asian and its dealers. See 2 for the formula for the discount rates. Finally, of course, the lifetime value of a customer is derived by dividing the cumulative net present value number in each of the three
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Table 4-5 Discount Rate Conversions
Factor Time delay 1 3 years Time delay 4 6 years Time delay 7 9 years Risk factor Cost of capital Rate 2.0 5.0 8.0 1.20 4.6%
time periods by the original 264,124 customers. What we are computing is the lifetime value of these 264,124 customers. Table 4-4 tells us that the value of a newly acquired customer to Asian is $5010 in the ninth year.
What You Can Do with the Numbers
Knowing what the lifetime value of a customer will be 9 years from now is not very valuable unless you can use that number to drive marketing strategy in some way that will increase company pro ts. That is exactly what we are going to do. Let s look again at the repurchase rate by model (see Table 4-3). The average Asian repurchase rate is about 50 percent, but the repurchase rate for B Model cars is only 45.2 percent. The B Model is Asian s most popular car. Suppose the repurchase rate for this car could be raised so that it was equal to the average repurchase rate for all Asian cars, namely 50 percent. This is certainly an achievable goal. If it were to be reached, what would it do for Asian s pro ts We can calculate that by making two assumptions: 1. We can come up with strategies that raise the repurchase rate of this model of car. 2. The strategies will succeed in bringing the repurchase rate up to 50 percent, or about even with the repurchase rate for the average Asian car. What might these strategies be There are many things that Asian might offer its customers:
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