Customer Relationship Management

MARK 70350

Group Case Retail Relay

Date 01/20/2016

Submitted By:
James Kwok
Ashley Mascari
Manik Vaish
Vinay Vyas
Lis Zhang

Q1. What is the expected customer lifetime value of a newly acquired

customer? Use an annual discount rate of 10%.
To calculate the expected customer lifetime value of a newly acquired customer, we
made an assumption that the trucks are loaded everyday with $3200 worth of
products. From the information given in the case, we know the following:

Having obtained the cost incurred on per dollar revenue earned, we can calculate
the total cost incurred on each order. To get this we can multiply the average order
size dollar value by 0.0656. We also know from the case that the maximum margin
available to Retail Relay on the sale of products is 15%. Thus, to get the net margin,
cost incurred on each order was subtracted from the 15% available margin. For the
sale number 2 & 3, Retail Relay provided additional rebate and that was also taken
into account to obtain the net margin.
Also, the case provides information about the probability of occurrence of n th
transaction. However, these probabilities are not absolute, but are conditional on
the occurrence of the previous purchase. For this, we calculated absolute probability
occurrence by assuming 100 people making the first purchase and filtering them as
described below:
No. of people making 1st purchase = 100
Probability of making 2nd purchase = 68%
No. of people making 2nd purchase = 68% of 100 = 68.

And probability of making 3rd purchase = 80%

No. of people making 3rd purchase = 80% of 68 = 58.
Finally, by converting the 10% annual discount rate into a 3 week discount rate =
0.55%, we calculate present value of each transaction and added them up to obtain
the CLV = $32.48.

2. For Q1, should you use the full study data or the pilot data? Why?
The pilot data will provide a better estimation of customer retention rate. Although
the sample size is larger in a full study data, the sample contains many individuals
who had only recently become customers who would not be able to observe
anything other than their first few purchase occasions. Using pilot data allows us to
focus on customers who have been with the company for at least 9 months to have
a better sense of customer retention rates. Since the customer retention rate will
greatly affect the calculation of CLV, we would prefer the data with the more
accurate customer retention rate. We could also observe from the two exhibit
sheets that the average dollar amount of purchases are similar between the two
studies.

3. Do you think this value (CLV) is likely to increase or decrease as Retail

Relay grows into a larger company?
The keys to improving Lifetime Value are:
*
*
*
*
*

Reduce direct costs

Reduce marketing costs
Reduce acquisition costs
Increasing the retention rate
Increase sales per customer

Direct costs will be reduced as Retail Relay grows its market share. As it progresses
from niche player to power player, it would be able to command better prices from
suppliers.
Marketing costs will be reduced as Retail Relay grows because, with social media
like Facebook page, costs are often fixed. It costs Retail Relay the same to maintain
its Facebook page. With the growth of the company and the established brand
name, there will be a network effect for the company to gain more followers. There
would also be increased word of mouth publicity.
Acquisition costs might be reduced as Retail Relay grows because management will
grow institutional knowledge as to which methods are effective for the business and
which are not -- Retail Relay will not be buying flyers again, for example. The
company could also afford to hire an advertising agency that could measure better
the advertising performance for them and design campaigns with higher marketing
ROI.
The reduction in costs, as Retail Relay grows, will allow Retail Relay to become more
price competitive by lowering its list price. The 80% redemption rate using the 10%
and 5% coupons indicates that customers are price sensitive, given that the
redemption rate is substantially higher than the attrition rate of 45% --if people
have a discount, they'll buy, else, they won't.
Ultimately, the longer a customer stays with the company, the more sales they will
bring to the company. As indicated in the appendix, a customer's first purchase has
an average sales amount of $49.51 whereas the customer's 30th purchase
averages $99.70 in sales.
However, it would still remain a challenge for them to increase the customer
retention rate as the customer base is going to grow bigger and other companies
might join the competition. Therefore, more efforts should be put into providing
better customer experience and deliver more value to them.
Overall, with the growth of the company, the CLV is likely to increase.

4. Is the Valpak promotion worth pursuing at a larger scale? What about

door-hanger coupons?
To find out the feasibility of Valpak promotion and Door-hanger promotion we need
to compare per customer acquisition cost with per customer CLV calculated in Q1.
Both promotions are different and have different reaches to customers. Valpak
promotion has a very low cost and the acquisition percentage is very low whereas
the cost and the acquisition percentage is higher is in Door-hanger promotion when
compared to Valpak promotion.

For Valpak promotion, the cost of dropping envelopes at 60,000 households was
$1,100, which gained Retail Relays 58 new customer and 10 existing customers
used the promotion. Total cost of Retail relay for the promotion was around $16 per
customer for all customers. Based on proportions, we found that retention cost was
around $2 per customer and acquisition cost was around $14 per customer and the
calculated CLV is $32.48. Per Customer Lifetime Gain is $18.68.
For Door-hanger promotion, the cost of manually giving the promotion vouchers at
2,000 households was $1,200, which gained Retail Relays only seven new customer
used the promotion. Total cost of Retail relay for the promotion was around $171 per
customer for all customers. The acquisition cost was around $171 per customer and
the calculated CLV is $32.50. Per Customer Lifetime Loss is $138.95.
The above analysis shows that the Valpak promotion is feasible and Door-hanger is
a direct loss to the company if continued.
Also, we made a second analysis using the concept of Prospect Lifetime Value (PLV).
The expected PLV will be the value expected from each prospect minus the cost of
prospecting. Using the logic from HBR article of Darden Business Publishing on CLV
(UV5761).

PLV = a * ($Mo + CLV) - $A

For Valpak promotion, a, expected fraction of prospect is 0.10%, $M 0 is $6.68, which

is 15% of the average basket value from the pilot program minus the $5
promotional discount as the initial purchase is less than $100, CLV is $32.50, $A,
acquisition cost per prospect is $0.02. The PLV comes out to be $0.02 per prospect
or $1,171 for 60,000 prospects.
For Door-hanger promotion, a, expected fraction of prospect is 0.35%, $Mo is $6.68,
which is average basket value from the pilot program minus 10% of the average
basket value, CLV is $32.50, $A, acquisition cost per prospect is $0.60. The PLV
comes out to be - $0.46 per prospect or - $923 for 2,000 prospects.
Thus, the PLV analysis also shows that the Valpak promotion is economically
attractive and Door-hanger is not attractive economically.
5. Would you recommend any adjustments to the companys social media
marketing campaign?
First, we would recommend the company to look into the effectiveness of e-mail
promotions and social media marketing campaigns. As they are the largest
promotional investment, it would be crucial to see how effective these campaigns
are in new customer acquisitions.
Additionally, we recommend Retail Relays to add coupons to their social medial
platforms such as Facebook since its free and the company can reallocate the
budget for other sources of marketing/mail promotions. According to the Census
Bureau, 25.1% of residents are either under 18 or over 65, leaving almost three
quarters of residents between ages 18 and 64. Knowing this age demographic, I
would recommend moving more of their promotions onto Facebook and reworking
their promotions so that coupons are usage specific. One promotion that the
company can run is for customers to "like" their page or even comment/share a
coupon promotion as a requirement for them to receive additional discounts. This
provides free advertising for the company. Our goal is to increase the CLV and by
reducing some of the marketing costs would help accomplish that goal.

Furthermore, we would recommend the E-mail promotions to include direct links to

the website/social media platforms and also include promotions if it applies. If its a
reminder e-mail, then there should be a hyperlink that takes the reader straight to
the website.

6. Should it move forward with the Richmond expansion?

Full expansion throughout the city of Richmond would be costly. Initial thoughts is
that since the city population is 200k, 4 times bigger than Charlottesville, it would
be a simple decision to expand. Richmond is also connected to a metropolitan area
of approximately 1.2 million people. However, there are several factors in addition
to those stated in the case that might be a cause for concern. First, the economic
breakdown is more diverse. This makes it more difficult as the business model of
Retail Relay relies on people with a higher level of income and/or a high level of
education. Second, Charlottesville had a perfect demographic that had a high level
of interest towards local and organic foods.
Depending on the cost of new customer acquisition and the true retention rate
(Charlottesville was ideal, Richmond and other areas might not be as ideal), it will
not be a good idea to expand rapidly. The costs of acquiring a new customer is very
high and it wouldnt be ideal to enter a new market without having more
information on the demographics of the population and ideal neighborhoods to
penetrate.
Further research into the demographics provided by the Census Bureau states that
approximately 49.9% of Charlottesvilles residents have a bachelors degree and the
median household income is $44,601. The land area of the town is 10.24 square
miles and there are 4,246 people per square mile. As for Richmond, only 34.8% of
residents have bachelor degrees or higher education levels and a median household
income of $40,496. The land area of the city is 59.81 square miles with 3414 people
per square mile. However, it's also important to remember that the metropolitan
area of Richmond holds 1.2 million people, which means that the number of highly
educated and financially secured people would be significantly higher than
Charlottesville.
With all things considered, our recommendation is to fully expand throughout the
city of Richmond, focusing more of their marketing campaigns on social media
(Facebook, Instagram, Pinterest, etc,) and Valpak promotions. Considering that the
business has a low barrier of entry, it wouldn't be a good business decision to
expand slowly like they did in Charlottesville. The slow opening phase of
Charlottesville was just an introduction for the company and future expansions into
other cities should be treated with haste. As previously mentioned in question 3, the
growth of the company will most likely increase the CLV and with an improved focus
on the marketing campaigns, we feel that a quick expansion into Richmond will be

successful. Furthermore, as the business grows, they can observe more reductions
in expenses. Additional considerations would include key pickup locations based on
surrounding demographics and increasing marketing campaigns that focus on word
of mouth such as referral coupons.