August 22, 2011

Value Grids and Lifetime Value

You probably already have something like this posted to your office/cubicle, right?

The "Value Grid" is a table that illustrates how much twelve-month profit you will generate from a customer with various Recency/Frequency attributes.

Freeze your file as of August 22, 2010.  Segment customers into Recency/Frequency combinations.  Then measure customer profitability across these segments, from August 23, 2010 to August 22, 2011.

Your benchmark is the Recency = 1 / Frequency = 1 segment.  This is how much profit you generate in the next year by acquiring a new customer.  If you lose $22.00 profit acquiring a customer, then you've got problems, because in this table, the customer pays back $6.52 in the next year.  Oh boy!

Similarly, you explore the cost to reactivate a customer against future payback.  If you have a 36 month 3x buyer with $2.43 future value, you might be willing to spend a few extra dollars to convert the customer to a 4x buyer.

Then look at the customers who pay the bills!  In this case, customers who purchased recently and purchased five or more times generate a boatload of profit, don't they? 

Create a Value Grid.  Post it on the wall of your office/cubicle.