MKT 449 Week 4 Customer Loyalty Analytics Example

Who Comes Back for More Socks: Recency, Frequency, Spending and Lifetime Value for the Direct Customers of a Vermont Wool Brand

[Student Name]

University of Phoenix

MKT/449: Marketing Analytics

Week 4 Assignment

[Instructor Name]

[Date]

Hollow Brook Sock Company and its customer file are composites written for a model paper.

The previous weeks showed that Hollow Brook Sock Company, an invented Burlington maker of merino wool socks, has low penetration outside New England and modest brand recognition. Growth will require new buyers, but the company also wants to know how well it keeps the buyers it has. Founder Grace Thibault believes customers love the brand, citing enthusiastic reviews. Her direct customer file, holding three years of website orders from 61,000 customers, allows a test of that belief. This paper defines customer loyalty, analyzes the file with repeat purchase, RFM and lifetime value measures and recommends a loyalty program for each segment.

Two Kinds of Loyalty

Behavioral loyalty is repeat buying. Attitudinal loyalty is a favorable attitude, such as preference or willingness to recommend. The two often differ: a customer may praise the brand and still buy a cheaper sock next time, or may keep buying from habit without strong feelings. Because sales depend on behavior, this analysis treats purchase data as the main evidence and survey data as context.

Repeat Purchase and Retention

Of the 24,800 customers who made a first purchase two years ago, 8,430 bought again within 12 months, a repeat purchase rate of 34 percent. Among all customers active in a given year, 38 percent bought again the following year, which is the annual retention rate. Customers who first bought hiking socks returned more often than those who first bought a holiday gift pack, of whom only 19 percent returned.

RFM Scoring

Each customer received three scores from 1 to 5. Recency measured the months since the last order, with 5 for the most recent fifth of customers. Frequency measured the number of orders in three years. Monetary value measured total spending. Fader et al. (2005) demonstrated that how lately and how often someone bought can jointly forecast later buying, and that customers with the same expected value can have quite different combinations of the two, which they mapped as iso-value curves. Their work supports using all three dimensions rather than spending alone.

Five Segments

The scores grouped customers into five segments. Champions, 4,900 customers or 8 percent, ordered recently and often and spent heavily; they produced 31 percent of direct revenue. Loyal regulars, 9,800 customers or 16 percent, bought two or three times a year. Promising new buyers, 11,600 or 19 percent, bought once in the past six months. At-risk customers, 8,500 or 14 percent, bought several times but not in the past year. Lapsed one-time buyers, 26,200 or 43 percent, bought once more than a year ago.

Lifetime Value

Gupta et al. (2004) showed that the value of a firm's customers can be estimated from the margin each customer generates, the retention rate and the cost of acquiring new customers, and that customer value tracked the market value of several firms reasonably well. A short-cut version takes one year's margin and scales it by the retention rate, then divides by a denominator built from the discount rate plus the share of customers lost each year.

For an average direct customer, annual spending is $74 and gross margin is 55 percent, giving $40.70 in annual margin. With retention of 0.38 and a discount rate of 0.10, lifetime value from future years is $40.70 multiplied by 0.38 divided by 0.72, or about $21.48, plus the first year's margin, for a total near $62. For champions, with annual margin of about $160 and retention of 0.80, the same formula gives future value of about $427, or about $587 including the current year.

One champion is worth roughly as much as nine average customers, which is why they deserve their own program.

The Net Promoter Question

The company's annual survey asks how likely customers are to recommend the brand, producing a net promoter score of 58, which the founder cites as proof of loyalty. Keiningham et al. (2007) tested the claim that the net promoter score is the single best predictor of growth using data from many firms and found that it did not outperform other satisfaction and loyalty measures. Hollow Brook's high score comes mostly from champions and regulars, who are most likely to answer the survey, while the lapsed segment is silent.

Where Customers Leave

The steepest drop happens after the first purchase. Two-thirds of first-time buyers never order again, while customers who make a second purchase have a retention rate above 60 percent in later years. The second order is therefore the turning point in the relationship. Reviews of first-time buyers who did not return mention sizing problems more than any other issue, especially for the women's medium, which runs small. Fixing the size chart and offering a free exchange may do as much for retention as any email program.

Programs by Segment

Champions will receive early access to new colors, a free pair on their purchase anniversary and invitations to review new designs; the goal is to keep their retention above 80 percent. Loyal regulars will receive a replenishment reminder after six months, since wool socks wear out on a fairly predictable cycle. Promising new buyers, the most important group for retention, will receive a three-email welcome series explaining care and fit and offering a second-pair discount within 90 days. At-risk customers will receive one personal note and a modest offer; those who do not respond will move to low-frequency emails. Lapsed gift buyers will receive one holiday reminder each year and nothing else, to save cost.

Measuring the Programs

Each program will hold out a random 10 percent of its segment as a control group that receives no special treatment, so the effect can be measured. The main target is to raise first-year retention of new buyers from 34 percent to 40 percent within a year.

Conclusion

Purchase data show that Hollow Brook's loyalty is real but concentrated: a small group of champions produces nearly a third of direct revenue, while many first-time buyers never return. RFM scoring, lifetime value estimates and research on customer valuation turn that picture into segment programs, and control groups will show which ones work.

References

Fader, P. S., Hardie, B. G. S., & Lee, K. L. (2005). RFM and CLV: Using iso-value curves for customer base analysis. Journal of Marketing Research, 42(4), 415-430. https://doi.org/10.1509/jmkr.2005.42.4.415

Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Marketing Research, 41(1), 7-18. https://doi.org/10.1509/jmkr.41.1.7.25084

Keiningham, T. L., Cooil, B., Andreassen, T. W., & Aksoy, L. (2007). A longitudinal examination of net promoter and firm revenue growth. Journal of Marketing, 71(3), 39-51. https://doi.org/10.1509/jmkg.71.3.039