SyPhone Case Discussion

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Apr 3, 2024

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The SyPhone case features a (fictitious) cell phone company that sells contracts to small to medium-sized companies. The goal of this case study is to introduce students to the concept of customer lifetime value and how it can help companies think strategically about what types of customers are valuable to them in the long run. To access the case study dashboard, please log in to your Enginius.biz account, select "dashboard" at the top, then choose your license. On the left-hand side of the manual, select "case studies" and then pick SYPHONE (LIFETIME). The case study data is already uploaded, and you can begin analyzing it from there. CLV results can be different based on the options you selected in the menu. Please insert a screenshot of the parameters selected in your model in your report. Using the Enginius CLV model and a discount factor of 10%, answer the following questions: 1

Question 1.1 What is the lifetime value of a typical customer in each of the four segments, in current dollar values? [Here are several hints for you: 1) When calculating the lifetime value (LTV) of a typical customer in each of the four segments, it is important to consider whether to include "next-period costs" and "acquisition costs". In this case, the marketing costs mentioned can be considered next- period costs. However, the decision to include these costs in the LTV calculation will depend on the available data and other factors. 2) When calculating the lifetime value of a typical customer in each segment, it is crucial to select either a transactional or contractual model. The decision should be based on the specific attributes of the business and the data that is accessible. Please clarify the reasons for your selection of either model over the other? - I chose the contractual model because typically cell phone plans have contracts for at least the first year 3) It is recommended to consider whether a discount rate should be applied to the first period. Typically, this decision is linked to the selection of the transactional or contractual model. If customers are currently under a contract, there is a commitment to the current period, and thus, no discount rate would be applied to the first period. Conversely, if customers are free to leave at any time, it would be appropriate to apply a discount rate to the first period cash flow. - Because I chose the contractual model, I would not apply a discount rate in the first year because that is the typical length of the contract. To maintain the customer base after the first year I would suggest running a 10% discount. 4) How much is a typical customer worth in each of the four segments, in current dollar values? Please provide your responses for each segment separately.] Customer lifetime value ($) Large accounts $ 130 402.60 Large accounts, rebate $ 97 714.29 Small accounts $ 19 126.92 Small accounts, rebate $ 16 300.00 - After calculating the customers lifetime value, we see that the large account customers have an average of $130,402.60, the large accounts with rebate have a lifetime value of $97,126.92, the small account customer have a value of $19,126.92 and the small accounts with rebate customers have a value of $16,300.00. - We can see that the large account customers who do not have rebate have the highest customer lifetime value. 2

Question 1.2 What is the value of the customer base, in current dollar value? [Hints: The concept of the value of customer base and lifetime value of a typical customer are distinct. The key difference between them is that while the value of customer base considers the overall worth of all customers to the company, the lifetime value focuses on the profit generated from individual customers.] - In the model I have calculated; the predicted customer base evolution and selected discount rate, the customer base is currently valued at $478,514,486. This value does not include any customer acquisition fees. Question 1.3 Compare the lifetime value of a typical customer in each of the four segments to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison? [Hints: To properly compare the lifetime value of customers in each of the four segments with the "Gross margin" figures in the original spreadsheet, it is important to consider the relationship between the two. While customers in the large account segment who do not negotiate a rebate generate gross margins 75% higher than those who do, their lifetime values do not follow the same pattern. For example, the gross margin for large accounts is $63,000, while for large accounts with a rebate it is $36,000, resulting in a 75% increase [(63,000-36,000)/36,000]. Similar calculations can be made for the percentage increase in their CLV values. The same trend is observed for the small accounts segment, where both sub-segments have lifetime values that differ from what the gross margins suggest. Therefore, it is crucial to thoroughly examine the data and comprehend the reasons behind any inconsistencies between the lifetime value and gross margin figures. What factors may contribute to the disparities between the lifetime value and gross margin figures?] - Although the Large accounts have the highest Gross Margin, when it is applied to the Customer lifetime Value the Large accounts with rebates have a higher percentage outcome. - The same is true for small accounts and small accounts with rebates. - This can conclude that accounts with rebates have a higher long-term value for SyPhone whereas the accounts without rebates are more profitable short-term. Number of customers Gross margins ($) Marketing costs, next period ($) Customer Lifetime Value Customer Lifetime Value (as percentage of Gross Margin) Large accounts 500 63000 5000 130402.6 207% Large accounts, rebate 2000 36000 4000 97714.29 271% Small accounts 5000 10800 1500 19126.92 177% Small accounts, rebate 7500 7200 1000 16300 226% 3

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Lost customers 0 0 0 0 0% 4

Question 2.1 Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years? [Hints: Assuming that the current year is N, what will be the number of SyPhone's customers in N+5 years, taking into account the possibility that customers may switch segments during this period? One possible approach to answering this question is to determine the number of customers lost during this five-year period.] - In the model I have calculated, of the current 15,000 customer today, in 5 years there will only be (15,000-11,793)= 3,207 remaining. This model does include customer acquisitions over the next 5 years Question 2.2 What is the overall churn rate after five years? [Hints: The churn rate is a metric that represents the percentage of customers who discontinue their use of a service during a specific timeframe. For instance, if you currently have 100 customers and 70 of them will have discontinued your service in five years, while the remaining 30 will still be active, your churn rate would be calculated as 70/100 = 70%.] - In the model I have calculated the churn rate after 5 years is (11,793/15,000)= 78.62%. 78.62% of original customers will discontinue their service after 5 years. Question 2.3 What is the churn rate of each segment? Compared the churn rate you calculated for each segment, what insight the rates show us? [Hints: Please note that the question at hand is distinct from the overall churn rate, as it pertains to the churn rate for each segment specifically. The overall churn rate refers to the percentage of all customers who left the company during a given time period, while the churn rate for each segment represents the percentage of customers who left a specific segment during that period. For instance, if a company has two segments and an overall churn rate of 30% after five years, the churn rate for Segment A might be 40%, while the churn rate for Segment B could be 20%. 5

This would indicate that more customers in Segment A left the company than in Segment B. Analyzing the churn rate for each segment can help a company identify areas that are performing well and those that need improvement, allowing for adjustments to customer retention strategies in segments with high churn rates. To determine the churn rates for each segment, please refer to the CLV of one customer tables in the customer lifetime value per segment report.] - Below is the table of the churn rate by segment over a 5 year period. Small accounts have a significantly higher churn rate compared to Large accounts. Also customers with rebates have a higher churn rate than customers without rebates. 6

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To address the uncertainty associated with future revenues, firms often adjust their discount factors. In the case of SyPhone, top management has determined that the previously used discount factor of 10% is insufficient. With a highly competitive and rapidly evolving market, the potential for future revenues to be impacted by new technologies is a significant concern. As such, top management has requested a new analysis using a discount factor of 35% and applying the discount rate to the first period to reflect the uncertainty of future revenues. Question 3.1 With a discount factor of 35%, recalculate the lifetime value of a typical customer in each of the four segments. What changes do you notice? Where did the revenue go? [Hints: You are required to recalculate the CLV analysis by modifying the discount factor and applying it to the relevant time period. Did the CLV values increase or decrease for each segment? If there was a decrease in CLV, where did the revenue go? It is important to consider why discount rate is utilized in the CLV calculation.] - The customer lifetime value with the significant discount factor drastically decreases their probability in each segment as shown in table below. - We continue to see the same trend as with no discount that the Large customer with rebate have a larger Customer Lifetime Value percentage than the Large customers without rebate. We see the same outcome respectively with the Small accounts as well. 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 7

(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 15% (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. Question 3.2 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. [Hints: Before beginning your analysis, it's important to understand the distinction between prospects and new customers. A prospect is an individual or organization that has shown interest in a product or service but has not yet made a purchase, while a new customer has made a purchase and become an active consumer. It's crucial to note that pre-sales costs, such as sales representative efforts, advertising, promotions, and other marketing expenses, are associated with prospects, even if they don't end up becoming customers. While the goal of pre-sales activities is to convert prospects into customers, not all prospects will convert, and the costs associated with these prospects may not be recouped. In the case of SyPhone, pre-sales costs for a large prospective account are around $7,000, even if that prospect doesn't ultimately become a customer. These costs are necessary to generate leads and prospects for the business, as some of them will eventually convert into paying customers. It's important to note that businesses rely on a steady stream of new customers to maintain growth and profitability. Without a steady flow of new customers, a company's revenue and profits will decline over time. To ensure profitability, it's essential to make sure that the cost of acquiring a new customer is less than their estimated lifetime value. Therefore, it's important to factor in all costs associated with acquiring and maintaining customers, including pre-sales costs, in your calculations. To conduct your analysis of the SyPhone case, you will need to construct an Excel spreadsheet utilizing the information given in the case study. Assuming there are 100 prospective customers 8

in each of the four segments, you can use the formulae provided in the table below to compute the number of accounts won, total costs, total margin, total net value, net value per account, and net value per prospect for each segment. The relevant formulae required for calculating these values are provided in parentheses in the table. Input the pertinent data for each segment into the corresponding formulae and calculate the results.] - These results show that the cost of acquiring accounts without rebates are higher than acquiring accounts with rebates Question 3.3 Based on these results, what sales and marketing strategies would you recommend for SyPhone?" [Hints: When addressing this question, it's crucial to present a comprehensive and elaborate response, rather than simply listing a few brief points. You should clarify the rationale behind each strategy and describe how it would affect the various customer segments. This may include offering specific examples of marketing tactics, advertising channels, promotional activities, and pricing strategies that SyPhone could utilize to improve its sales and profitability. By providing thorough and well-supported suggestions, you can exhibit a more profound comprehension of the variables that contribute to SyPhone's prosperity and how it can enhance its sales and marketing initiatives. - The data showed us that the steep discount of 35% would decrease the CLV in all segments. The company should run further analysis to see how a 10% or 15% discount would fare to the overall CLV. - Customers without rebates are more profitable in the short term whereas customers with rebates stayed with the company longer and produced a higher CLV after 5 years. - The overall Net Value per prospect in each segment is highest in the Large Customers (with and without rebates). Because of this the company should spend they sales and marketing budget with the Large Customers offering a mix of rebates and no rebates offered. 9

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SyPhone Case Discussion

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