Ten minutes to select the research reports you want to buy. Twenty minutes to complete the pro forma and a copy to me. Please put your group members’ names on it. Meet back here at 8:20, ready to discuss the case and make recommendations. SD Coors Table A$1,000 Table B$1,500 Table C$2,000 Table D$1,000 Table E$200 Table F$49.50 Table G$6,000 Table H$4,800 Table I$2,000 $18,550 To purchase research, bring a piece of paper with the requested reports & the total price.

Product Management Ability to develop and deliver superior-quality and/or customized goods and services. Communications Management and Brand-building capability Create value perceptions leading to high levels of brand equity, using effective: positioning, advertising, communications, Pricing Management Ability to extract the optimal revenue & profit from customers Channel Management Ability to establish and manage channels of distribution that effectively and efficiently deliver value to end-user customers Customer Relationship Management Leverage relationships with profitable prospects and customers to create superior customer-level profits. Market Sensing & Customer Insights Learn about customers, competitors, channel members and the broader market to develop actionable intelligence Marketing Planning & Implementation Implement marketing strategies that optimize the match between the firm’s resources and the marketplace Compared to Miller’s & Anheuser- Busch, Coors’ capabilities appear to be: InferiorEquivalentSuperior

Product Management Ability to develop and deliver superior-quality and/or customized goods and services. Communications Management and Brand-building capability Create value perceptions leading to high levels of brand equity, using effective: positioning, advertising, communications, Pricing Management Ability to extract the optimal revenue & profit from customers Channel Management Ability to establish and manage channels of distribution that effectively and efficiently deliver value to end-user customers Customer Relationship Management Leverage relationships with profitable prospects & customers to create superior customer-level profits. Market Sensing & Customer Insights Learn about customers, competitors, channel members & the broader market to develop actionable intelligence Marketing Planning & Implementation Implement marketing strategies that optimize the match between the firm’s resources and the marketplace Compared to other distributors, Brownlow’s capabilities appear to be: InferiorEquivalentSuperior

Opportunity Analysis/Customers Key Learning Points A general framework for managing market segments & individual customers. – Defining & Segmenting the Product Market – Selecting & Targeting Key Segments Acquisition, Retention & Expansion – Positioning Quantifying the Value of a Customer (Segment) w/customer-centric metrics – CRM, CLV, & Customer Equity 4

Customer Relationship Management (CRM) Retention & Expansion Segmentation Selection Targeting – Acquisition – CRM: Retention & Expansion Break market into groups (segments) that respond differently to elements of the marketing mix. Identify segments that will respond most positively (i.e., profitably) to firm’s offerings. Concentrated vs. differentiated targeting strategy. Determine how to best acquire, retain & expand purchases by the most profitable segments. CRM tracks customers behavior to select, target & retain most profitable customers. 5

Customer Relationship Management Programs Customer-centric Marketing Differentiation CRM Satisfaction, Retention & Relationship Expansion Frequency/Loyalty Programs AAdvantage Rewards Programs Capital One Cards Customization IBM Customer Service Nordstrom Community Building Facebook, Apple 6

Marketing Pro Formas Breakeven Analysis Customer Lifetime Value (CLV) Sales Forecasts Economic Value Analysis Channel Margin Calculus Demand Elasticity Financial Analysis in Marketing K&P Chapter 2 See the Final Exam sample questions.Final Exam 7

Customer Life Cycle Profit Pattern in the Credit-Card Industry 8

CRM Metrics If you don’t have these metrics, you don’t have CRM 1.Primary Customer Metrics a)Acquisition rate b)Acquisition cost c)Retention rate d)Survival rate 2.Popular Customer Metrics a)Share of category requirement b)Size of wallet c)Share of wallet 3.Strategic Customer Value Metrics a)Past customer value b)RFM value c)Customer lifetime value (CLV) d)Customer equity Traditional (Brand) Metrics 1.Sales – Volume & Revenues 2.Market Share 3.Sales Growth Traditional vs. CRM Metrics 9

Customer Lifetime Value (CLV) Useful Analysis at the Individual Customer & Segment CLV infinite lifetime = CM/(i* + 1 – r) – AC where CM=average annual contribution for the customer (segment) i*=i (=the risk-free discount rate) × risk factor r = retention rate for the customer (segment) AC=acquisition costs How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs? How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs? ― Growth rate 10

CLV (i=10%) as a function of Contribution Margin ($ ) and Retention Rate (0-100%) $200$182$200$222$250$286$333$400$500$667$1,000$2,000 $190$173$190$211$238$271$317$380$475$633$950$1,900 $180$164$180$200$225$257$300$360$450$600$900$1,800 $170$155$170$189$213$243$283$340$425$567$850$1,700 $160$145$160$178$200$229$267$320$400$533$800$1,600 $150$136$150$167$188$214$250$300$375$500$750$1,500 $140$127$140$156$175$200$233$280$350$467$700$1,400 $130$118$130$144$163$186$217$260$325$433$650$1,300 $120$109$120$133$150$171$200$240$300$400$600$1,200 $110$100$110$122$138$157$183$220$275$367$550$1,100 $100$91$100$111$125$143$167$200$250$333$500$1,000 0%10%20%30%40%50%60%70%80%90%100% $286 $271 $257 $243 $229 $214 $200 $186 $171 $157 $143 40% $667 $633 $600 $567 $533 $500 $467 $433 $400 $367 $333 80% $222 $211 $200 $189 $178 $167 $156 $144 $133 $122 $111 20% 11

Customer Lifetime Value (CLV) Useful Analysis at the Individual Customer & Segment CLV infinite lifetime = CM/(i* + 1 – r) – AC where CM=average annual contribution for the customer (segment) i*=i (=the risk-free discount rate) × risk factor r = retention rate for the customer (segment) AC=acquisition costs How valuable/profitable is each customer (segment) given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs? How valuable/profitable is an acquisition or retention campaign given prices & variable costs (i.e., contribution), retention rates, discount rate, risk level & acquisition costs? ― Growth rate 12

How much was a Facebook Customer Worth? 2008 Revenues: $300  $350 million 2008 Unique Users: 80,000,000 CM (90%) ≈ $3.65  Round to $4.00 for simplicity CLV infinite lifetime = CM/(i* + 1 – r) – AC If CM=$4 i*=.06 r =.90 AC= $0 = 4/( ) – 0 4/.16 $25 CLV infinite lifetime See Sample Acquisition Value CLV Final Exam QuestionAcquisition Value CLV 13

Customer Equity Useful Analysis at the Company Level At Facebook 2008 Unique Users: 80,000,000 (and growing) CLV ≈ $25 Customer Equity = $2,000,000,000 = # Customers × CLVCustomer Equity Internal Valuation July 3, 2008: $3.75 B Microsoft’s investment (2007) valued $15 B 14 ~1.9x multiple

Customer Equity Facebook Update June 2009 At Facebook 2009 Unique Users: 250,000,000 (and growing) If CLV ≈ $25 Customer Equity = $6,250,000,000 = # Customers × CLVCustomer Equity External Valuation May 29, 2009: $10.00 B 15 ~1.6x multiple

Customer Equity Facebook Update January 2011 At Facebook January 2011 Unique Users: 500,000,000 (and growing) Revenue ≈ 1.97 B; CM (90%) ≈ $4 CLV ≈ $25 Customer Equity = $12.5 B = # Customers × CLVCustomer Equity External Valuation January 2011: $50 BJanuary 2011 Goldman 16 ~4x multiple

Customer Equity Facebook Update January 2012 At Facebook January 2012 Unique Users: 800,000,000 Revenue ≈ 3.7 B; CM (90%) ≈ $4 CLV ≈ $25 Customer Equity = $20B = # Customers × CLVCustomer Equity External Valuation January 2012: ~$82 BJanuary ~4x multiple

Customer Equity Facebook Update April 2012 At Facebook April 2012 Unique Users: 900,000,000 Revenue ≈ 3.7 B; CM (90%) ≈ $4 CLV ≈ $25 Customer Equity = $22.5B = # Customers × CLVCustomer Equity External Valuation May 2012: ~$100 BMay ~4.4x multiple

Customer Equity Facebook Update July 2012 At Facebook July 2012 Unique Users: 955,000,000 Revenue ≈ 4.7 B; CM (90%) ≈ $4.4 CLV ≈ $27.50 Customer Equity = $26.3B = # Customers × CLVCustomer Equity External Valuation August 2012: ~$50BAugust ~1.9x multiple

Tracking Customer Equity & Facebook’s Market Valuation 20

Review Questions What are the 3 steps in the general framework of customer relationship management (CRM)? How do you define and segment a product market? Which types of segmentation variables are most frequently used in CRM? What is the formula to calculate infinite customer lifetime value (CLV)? Customer Equity? Assignment for Next Week: NetflixNetflix 21