BMT206 CUSTOMER RELATIONSHIP MANAGEMENT

Assignment 2: RFM, PCV, Palive , NPV and CLV Calculation

Consider XYZ Books, a seller of Professional Textbooks and Reference Books. Below is the purchase data of 6
customers over last 5 months. You are required to do analysis (using any spreadsheet program) for the month of
December (assume you are analysing the data in the month of December). The table below lists the rupee amount
that each customer has spent during the period:

Customer July August September October November

1 800 0 2000 300 700
2 300 600 0 1500 0
3 3000 0 500 0 400
4 600 200 0 400 0
5 300 2000 0 0 400
6 900 400 1300 1000 0

The number of purchases made by the 6 customers in each month are:

Customer July August September October November

1 1 0 2 1 1
2 1 2 0 3 0
3 1 0 1 0 1
4 2 1 0 1 0
5 1 3 0 0 1
6 4 1 3 1 0

1. Analyze each customer’s profitability in December using the RFM Method. Use the following table for arriving at
the RFM scores:

Recency = 20 points if purchased within the last 1 month

Relative weight 50%
Frequency =
Relative weight 20%
Monetary Value =
Relative weight 30%
Hint: RFM Score = (weightrecency X scorerecency) + (weightfrequency X scorefrquency) + (weightmonetary X scoremonetary)
10 points if purchased 2 months ago
3 points if purchased 3 or 4 months ago
(count only once i.e. If customer has purchased both 3 and 4 months ago (September and
August), the recency point is 3, not 6)
2 points if purchased 5 or more months ago
3 points for each purchase within the last 6 months
10% of ₹ volume of Purchase within the last 6 months

2. Assume that the gross contribution is 30% of the purchase amount. Compute each customer’s profitability (in the
month of December) using the Past Customer Value (PCV) Scoring method, and rank the customers accordingly.
Assume an annual discount rate of 15%. The formula for computing the
𝑻

𝑷𝑪𝑽 = ∑ 𝑮𝑪𝒊𝒏 𝑿 [𝟏 + 𝟎. 𝟎𝟏𝟐𝟓]𝒏

𝒕=𝟏
where i = customer
n = number of months preceding the current month when purchases were made (for e.g. n=1 for purchase in
November and n=2 for purchase in October)
GC = Gross Contribution

Hint: First calculate the gross contribution in each month for each customer and apply the appropriate discount factor. For example,
the discount factor for gross contribution in October is (1 + 0.0125)2. Summation of discounted gross contribution across all months
will give you PCV scores for each customer
3. Calculate for each customer the probability of that customer being active – P(alive) in the months of:
a) December
b) January
c) February

Hint: For calculating P(alive), use the following formula: P(alive)= tn

where, n is the number of months in which the customer has made purchases for the given period; and
t is the time of the last purchase (expressed as a fraction)
For Example, a customer bought 3 times in between July and November (Customer 4). We are at the end of November and want to
assess his probability of being alive in June.
t = (4/6) = 0.6667 (4 because last purchase was in October, 6 because the month that we are interested in is December)
n=3 (3 because Customer 4 bought 3 times)
Thus: P(alive) = (0.6667)3 = 0.296

4. You are also required to analyse profitability of each customer during the period December–February as of the
beginning of December using the CLV method. Assume that gross profits are 25% of the purchase value. XYZ
Books contacts its customers using: (a) through email campaigns guided to the online store, (b) by directly mailing
catalogs to the customers. For the month of December through February, the cost of contacting a customer once
via email is ₹ 0.25, and via direct mailers is ₹ 5.00. In each month on average, Customers 1, 2 and 3 are contacted
via email 2 times, and direct mail 5 times. Customers 4, 5 and 6 receive email 1 time, and direct mails 3 times per
month.
Calculate and analyze the CLV of each customer for the months of December, January and February as of
the beginning of December.

Hint:
The CLV of a customer is their NPV of GC minus their NPV of Marketing Costs.

Step 1: Calculate the probability of the customer being alive, P (alive), for each month and then calculate the Net Present Value of GC
of each customer using the formula:
𝑻
𝟏 𝒕
𝑵𝑷𝑽 𝒐𝒇 𝑮𝑪𝒊 = ∑ 𝑷(𝒂𝒍𝒊𝒗𝒆)𝒊𝒕 𝑿 𝑨𝑴𝑪𝑴𝒊 [ ]
𝟏+𝒅
𝒕=𝟏

where, NPV = Net Present Value

GCit = estimated expected gross contribution margin of customer i for a given month t
AMCMi = average monthly gross contribution margin based on all prior purchases
d = discount rate for month t (15% on a yearly basis, which is 1.25% per month)
i = customer
t is the month for which NPV is being estimated
T is the number of months ahead that are included in the forecast (December, January and February)
P (alive) is the probability that customer i is alive in month t (as previously computed)

Step 2: Calculate the Net Present Value of MC of each customer using:

𝒏 𝒏
∑ 𝒄𝒊𝒎𝒍 𝑿 𝒙𝒊𝒎𝒍 𝑨𝑴𝑴𝑪𝒊
𝑵𝑷𝑽 𝒐𝒇 𝑴𝑪𝒊 = ∑ = ∑
(𝟏 + 𝒅)𝒍 (𝟏 + 𝒅)𝒍
𝒍=𝟏 𝒍=𝟏
where, ci,m,l=unit cost of marketing to customer i through channel m in month l.
xi,m,l= number of contacts to customer i through channel m in month l.
d= discount rate for money. n is the number of months ahead included in the forecast.
AMMC= Average monthly marketing cost for all prior months

Step 3: Calculate CLV of each customer as: CLV= NPV of GC – NPV of MC

5. Compare the rankings of all the customers based on the results obtained from each of the four methods:
a. RFM method
b. PCV method
c. NPV of GC
d. CLV method

Why do you think the rankings differ?