6

Finally, the sales manager of SyPhone, Nadia Morel, has the following concern: Although she is comfortable that the lifetime value you have computed takes into account the revenues and costs of a customer once that customer has been acquired, she feels strongly that you have overlooked many other factors, such as the costs of acquiring an account (e.g., sales representatives, advertising, trade shows, promotions) and the fixed costs incurred once an account is acquired (e.g., setting up and configuring the server and material, managing the transition).

Here are some figures Morel suggests:

Pre-sales costs are about $7,000 for a large prospective account and $1,500 for a small prospective account. These figures include such costs as sales representative efforts and promotions, which are incurred in the process of trying to acquire a new account, whether successful or not. .

20% of the proposals to large accounts translate into signing a new customer. When a large discount is offered, this ratio goes up to 35%. For small accounts, the win rates are 25% (without rebate) and 40% (with rebate)..

The fixed costs associated with winning a new customer are important. It costs about $20,000 for SyPhone to set up a large account. These are one-time, internal costs and are not billed to the client, but they will be recouped over the years. To set up a smaller account costs much less, about $3,000.

7-

Build an Excel spreadsheet to estimate how much a prospective customer is worth, depending on whether that customer is offered a rebate. What do you learn from the updated spreadsheet? Explain the logic behind your findings and conclusions. On the basis of these results, what sales and marketing strategies would you recommend for SyPhone?

Hint: Suppose you have 100 prospective customers in each of the four segments. Compute how much it will cost to manage the pre-sale process, how many customers will be won, and the fixed costs associated with these new customers. Finally, include the lifetime values you computed previously (use the 35% discount factor figures). Divide the final figure by 100 to compute how much a prospective customer is worth.

	Customer Lifetime Value				Contractual
	Individual's customer lifetime value (discount rate 10%), per segment.
	Segments / Segment description	Number of customers	Gross margins	Marketing costs, next period	Customer lifetime value
	Large accounts	500	$63,000	$5,000	$118,548
	Large accounts, rebate	2000	$36,000	$4,000	$88,831
	Small accounts	5000	$10,800	$1,500	$17,388
	Small accounts, rebate	7500	$7,200	$1,000	$14,818
	Lost customers	0	$0	$0	$0
	Number Of Customers Per Segment
	Simulations of number of customers per segment, over 5 periods.
	Segments / Periods	N+1	N+2	N+3	N+4	N+5
	Large accounts	500	275	151	83	46
	Large accounts, rebate	2000	1550	1190	908	689
	Small accounts	5000	2900	1682	976	566
	Small accounts, rebate	7500	5350	3803	2696	1907
	Lost customers	0	4925	8174	10338	11793
	Customer Base's Lifetime Value
	Customer base's lifetime value (discount rate 10%) and discounted net margins, over 5 periods.
	Margins and costs / Periods	N+1	N+2	N+3	N+4	N+5
	Gross margins	$211,500,000	$142,965,000	$97,915,950	$67,860,689	$47,525,715
	Marketing costs	$25,500,000	$25,500,000	$17,275,000	$11,842,250	$8,205,518
	Net margins	$186,000,000	$117,465,000	$80,640,950	$56,018,439	$39,320,197
	Discount factor (10%)	0.91	0.83	0.75	0.68	0.62
	Discounted net margins	$169,090,909	$97,078,512	$60,586,739	$38,261,347	$24,414,749
	Discounted net margins (cumulated)	$169,090,909	$266,169,421	$326,756,161	$365,017,508	$389,432,257
	Retention Rate (Large accounts)
	Retention rate of a customer currently in the "Large accounts" segment.
	Segments / Periods	N+1	N+2	N+3	N+4	N+5
	Large accounts	1.00	0.55	0.30	0.17	0.09
	Large accounts, rebate	n/a	0.10	0.13	0.13	0.11
	Small accounts	n/a	0.00	0.00	0.00	0.00
	Small accounts, rebate	n/a	0.00	0.00	0.00	0.00
	Lost customers	n/a	0.35	0.57	0.71	0.80
	Retention Rate (Large accounts, rebate)
	Retention rate of a customer currently in the "Large accounts, rebate" segment.
	Segments / Periods	N+1	N+2	N+3	N+4	N+5
	Large accounts	n/a	0.00	0.00	0.00	0.00
	Large accounts, rebate	1.00	0.75	0.56	0.42	0.32
	Small accounts	n/a	0.00	0.00	0.00	0.00
	Small accounts, rebate	n/a	0.00	0.00	0.00	0.00
	Lost customers	n/a	0.25	0.44	0.58	0.68
	Retention Rate (Small accounts)
	Retention rate of a customer currently in the "Small accounts" segment.
	Segments / Periods	N+1	N+2	N+3	N+4	N+5
	Large accounts	n/a	0.00	0.00	0.00	0.00
	Large accounts, rebate	n/a	0.00	0.00	0.00	0.00
	Small accounts	1.00	0.58	0.34	0.20	0.11
	Small accounts, rebate	n/a	0.02	0.03	0.02	0.02
	Lost customers	n/a	0.40	0.64	0.78	0.87
	Retention Rate (Small accounts, rebate)
	Retention rate of a customer currently in the "Small accounts, rebate" segment.
	Segments / Periods	N+1	N+2	N+3	N+4	N+5
	Large accounts	n/a	0.00	0.00	0.00	0.00
	Large accounts, rebate	n/a	0.00	0.00	0.00	0.00
	Small accounts	n/a	0.00	0.00	0.00	0.00
	Small accounts, rebate	1.00	0.70	0.49	0.34	0.24
	Lost customers	n/a	0.30	0.51	0.66	0.76