Customer Lifetime Value Analysis

This past semester one of the most valuable tools that I was exposed to was that of Customer Lifetime Value (CLV). I was familiar with the concept; however, in my previous job the numbers were always given to me and it was not my responsibility to calculate them. Seeing first-hand what goes into a quality CLV analysis was eye-opening and something that I found incredibly interesting. I have a strong fondness for Excel and analysis so being able to utilize Excel to explore and analyze key marketing concepts is something that really peaks my interest.

Below is a brief excerpt from my analysis on Rosewood Hotels as they were deciding whether or not to switch from a House of Brands model where each resort has a unique identity and Rosewood is kept secondary to a Branded House model or corporate branding strategy where the brand of Rosewood is kept at the forefront for each hotel.

Rosewood CLV

By switching to a corporate branding strategy the average number of visits per year, per guest is expected to increase by 8% resulting in an increase in average guest retention rate of 6.4%. The increase in number of visits per year also results in an increase of $48 gross profit per guest. Even with the $1,000,000 investment required for marketing, the CLV per guest is expected to increase $77 with the corporate branding strategy. Assuming that the number of unique guests is 115,000 with either branding strategy the resulting increase in overall customer CLV is $8.9 million. It is recommended that the corporate branding strategy be pursued; however, there are potential risks.

 

Potential Risks

One potential risk of changing the branding strategy is that some previously loyal guests may defect to the competition. Assuming 115,000 unique guests with our current branding strategy, it would take 15,000 guests to defect (a retention rate of 17.43%) in order for the overall CLV to be equal in both strategies (appendix D). It is unlikely that the change in branding strategy will result in the loss of 15,000+ guests so this risk is small and can be mitigated further through proper marketing and customer service.

Another potential risk is that the marketing budget will be more than expected. The breakeven point for the marketing budget where the overall CLV for both strategies is the same is $8.65 million or $205/guest (appendix D). This is almost 8 times more than what is expected so there is a lot of wiggle room in the marketing budget.

Other potential risks of switching to a corporate branding strategy are losing our main point of differentiation which is providing unique, one-of-a-kind properties for our customers, and upsetting those who are strongly associated with our current individual hotel brands

Conclusion

The analysis shows that the corporate branding strategy will increase CLV and that the increase in CLV will cover the marketing costs associated with the change in branding strategy. While the numbers look great, it is important be aware of and plan for the service offerings and the overall culture shift that is necessary to successfully change to a corporate branding strategy without losing the overall brand identity and points of differentiation.

 

The Beginnings

E-commerce is an ever-growing part of the retail marketplace and something that I find extremely interesting. Before starting my MBA journey at Sauder I really wanted to experiment with the entire gamut of e-commerce from website creation, to monetization, to social media marketing and all the way through to order fulfillment. I also have an interest in fashion and at the time I had a small men’s fashion blog. I wanted to combine these two interests so the natural progression was towards a men’s fashion e-commerce site. However, with having to save my money in order to pay for my MBA the initial investment had to be minimal so I would have to handle everything on my own and even create the product. What can I possible sew myself having never used a sewing machine? I asked my fiancee this as she has been sewing for years and she suggested pocket squares & bow ties. After a brief intro and tutorial on the sewing machine I decided to give it a shot and Spare a Square was born in May 2013.

The Process

Wanting to learn as much as possible and needing to keep the initial costs down led to a sole proprietorship where I did all of the steps in the following process.

• Create the website – Shopify was used due to the simplicity and built-in cart
• Pick out and purchase the fabric from local fabric stores
• Create prototypes of each SKU in order to take pictures for the website
• Advertise via Twitter, Facebook, Instagram and Google AdWords
• Create all marketing material and packaging
• Fulfill the orders
• Manage the website

Experience Gained

Throughout this process I gained a lot of valuable experience such as:

• An understanding and familiarity with both paid and free social media marketing methods
• An understanding of various payment portals and the pros and cons of each
• Website creation and maintenance
• The effect of promotions and sales on brand identity

Mistakes Made & Lessons Learned

Having started my own small business before my MBA has paid huge dividends during the program as I have a point of reference that can provide context for many of the concepts that I am learning. Looking back, there are a lot of things that I would have done differently.

• Pricing – The major player for pocket squares and ties is The Tie Bar. They are a company that is often featured in GQ and they provide quality products at extremely low prices. Due to economies of scale and outsourcing, this model works for them. I attempted to emulate their model even though I was offering handmade, unique products that warrant a price premium. Before launching I should have done more research into the market, picked a target market and built my pricing structure around the value proposition of being handmade and unique. That would have increased my margins substantially.
• Promotions – I started running sales and contests too early on which led to my customer base anticipating sales and thus not purchasing as often at full price. Of course this lowered my margins.
• Advertising – Being a very visual product, Instagram ended up being the best form of advertising and generated 5,000 Instagram followers within a few months which led to 80% of my sales coming from Instagram. This advertising was free as I was posting the pictures to my own account and ended up being quite successful. Facebook paid advertising and Google Adwords had a much lower ROI as very few actual purchases were generated through either of them. Further down the road, Facebook paid advertising and Google Adwords could have proved profitable but with such a new brand it was difficult to obtain premier placement on a small budget.