STUDY GUIDE – SECOND EXAM

Customer lifetime value

You should be able to explain the basic idea of customer lifetime value and distinguish it from other

methods of valuing customers such as RFM, SOW, and PCV.

You have to be able to explain the difference between a transactional and contractual setting, and the

effect of the timing of payments (beginning of period, end of period) on the results of a CLV analysis.

You have to be able to compute CLV for simple scenarios based on a certain discount rate and a certain

rate of retention. You don’t have to memorize any formulas, but you have to be able to do the

calculations when given a formula.

You have to understand the notion of a switching matrix when there are several customer segments in a

CLV analysis.

You have to be able to interpret the output from a CLV analysis using ME (similar to what we did in the

Office Star illustration and the Northern Aero case).

You have to know how to compute the ROI of marketing investments.

Customer choice

You have to be able to explain the basic idea of a customer choice model (either the binary choice

model or the multinomial choice model). You also have to be able to explain the difference between the

two. You don’t have to memorize any formulas, but you have to understand the models conceptually.

You have to be able to assess the fit of the choice model based on the confusion matrix and compute a

hit rate. You also have to be able to construct a confusion matrix based on the observed choices and

predicted choice probabilities or predicted choices.

You have to be able to interpret the ME output under the segment tab. In particular, you have to be able

to interpret the estimated coefficients, assess their significance, and interpret both the same-brand and

other-brand choice elasticities.

You should be able to explain how the customer choice model can be used in a market segmentation

context, as in the ABB Electric case.

Conjoint analysis

You have to understand the difference between compositional and decompositional preference models.

You have to be able to explain the basic idea of conjoint analysis.

You should be able to explain the different steps of a conjoint study. For example, what is the difference

between a full factorial design and a fractional factorial design?

You should be able to compute the part-worths and relative attribute importances in a simple example

(similar to the laptop example discussed in class). You should also be able to compute the overall utility

of an option based on the part-worths from a conjoint study.

You have to know how to interpret the ME output from a part-worth analysis.

You have to be able to explain how conjoint analysis can be used for market segmentation, in new

product design, and for conducting trade-off analysis. In particular, you have to be able to show how

much can be charged for introducing a new product feature when price is one of the features included

in the conjoint study.

You have to know how to simulate market shares based on a conjoint study. In this context, you have to

understand the differences between the following choice rules: first choice, share of preference, and

logit choice rule.

Text analysis and search analytics

You should be able to explain the process of conducting a text analysis, including how to construct a

word cloud and how to do a sentiment analysis.

You should be able to explain the basic idea of search analytics and what kind of information you can get

from using Google Analytics. You should also be able to define the following terms: organic content vs.

paid content, session, user, pageviews, bounce rate, impressions, CPM, CTR, CPC, and CPA.

Review of Material for Second Exam

Second Exam

Review: CLV

A catalogue marketer groups its customers into two

segments: premier and regular. There are 1000

customers of each type. The contribution margins of

the two segments are $100 and $50, respectively.

The retention rates of premier and regular customers

are 60% and 50%, respectively. Each period 30% of

premier customers become regular customers and

10% are lost forever. Also, 10% of regular customers

become premier customers and 40% are lost forever.

Second Exam

Review: CLV

Second Exam

Review: CLV

Second Exam

Review: CLV

Second Exam

Computing the ROI of marketing investments

Assume that without a certain marketing investment

gross profit is $100,00, whereas with the investment it is

$200,000 (where the investment of $50,000 has not

been considered in the gross profit calculation):

𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑅𝑂𝐼 =𝐼𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔

Assume that without a certain marketing investment gross

profit is $100,00, whereas with the investment it is $150,000

(where the investment of $50,000 has already been

subtracted from the initial gross profit):

𝑀𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔 𝑅𝑂𝐼 =𝐼𝑛𝑐𝑟𝑒𝑚𝑒𝑛𝑡𝑎𝑙 𝑓𝑖𝑛𝑎𝑛𝑐𝑖𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡𝑖𝑛𝑔

Second Exam

Review: Basic idea of the

binary choice model

What determines choice when there are two choice

options?

Assume we have two possible influences on the choice

of a brand, (perceived) quality and price. The model is

𝑃 𝑌 = 1 =1

1 + 𝑒𝑥𝑝 −(𝛼 + 𝛽1𝑄 + 𝛽2𝑃)

We can rewrite this equation as follows:

𝑙𝑜𝑔𝑃 𝑌 = 1

1 − 𝑃 𝑌 = 1= 𝛼 + 𝛽1𝑄 + 𝛽2𝑃

Second Exam

Assessing model fit in choice models

Confusion Matrix on Estimation Sample

Comparison of observed choices and predicted choices (based on MNL analysis).

High values in the diagonal of the confusion matrix (in bold), compared to the non-diagonal values, indicate high convergence between observations and predictions.

Analysis has been performed on the estimation dataset, and measures the goodness-of-fit of the model.

Observed / Predicted Choice ABB GE Westinghouse Edison

ABB 13 3 0 1

GE 1 19 1 1

Westinghouse 4 0 23 0

Edison 0 1 2 19

Second Exam

Interpreting choice models

Coefficient Estimates [segment 1]

Coefficient estimates of the Choice model. Coefficients in bold are statistically significant.

Variables / Coefficient estimatesCoefficient estimates

Standard deviation

t-statistic

Price 2.180581 0.586578 3.717459

Energy Loss 2.655609 0.673706 3.941794

Maintenance 0.593692 0.437028 1.358475

Warranty 1.140702 0.330995 3.446286

Spare Parts -0.13262 0.21757 -0.60955

Ease of Install 0.520023 0.172875 3.00808

Prob Solver 2.03218 0.549676 3.697052

Quality 2.639412 0.687749 3.837753

Const-1 -0.12379 0.678549 -0.18244

Const-2 -0.67122 0.71941 -0.93301

Const-3 -0.68723 0.715046 -0.96111

Baseline n/a n/a

Second Exam

Interpreting choice models (cont’d)

Elasticities [segment 1]

Elasticities of coefficients.

Elasticities of Price ABB GE Westinghouse Edison

ABB 3.634615 -1.16131 -1.02297 -0.57694

GE -1.47175 1.875311 -0.25952 -0.4711

Westinghouse -1.47324 -0.36913 1.823584 -0.59071

Edison -0.65209 -0.42557 -0.46378 1.599235

Elasticities of Energy Loss ABB GE Westinghouse Edison

ABB 4.643836 -1.51686 -1.28784 -0.72463

GE -1.94066 2.440147 -0.39206 -0.52371

Westinghouse -1.85753 -0.44457 2.298155 -0.76626

Edison -0.77233 -0.52113 -0.58805 1.960819

Second Exam

Estimated probabilities

Estimation Sample Details

Choice probabilities, predicted and observed choices, segment membership probabilities and predicted segment for the sample used to estimate the model.

Respondents / Choice

probabilities

ABB proba-bility

GE proba-bility

Westinghouse proba-bility

Edison proba-bility

Predicted ABB

Predicted GE

Predicted Westing-

house

Predicted Edison

Observed ABB

Observed GE

Observed Westing-

house

Observed Edison

Customer 1 0.153 0.823 0.024 0.000 0 1 0 0 0 1 0 0

Customer 2 0.000 0.000 0.026 0.974 0 0 0 1 0 0 0 1

Customer 3 0.747 0.253 0.000 0.000 1 0 0 0 1 0 0 0

Customer 4 0.488 0.397 0.000 0.115 1 0 0 0 0 0 0 1

Customer 5 0.020 0.000 0.980 0.000 0 0 1 0 0 0 1 0

Second Exam

Conjoint analysis

A conjoint study was conducted for LCD TV’s,

using three brands (LG, Samsung, and Sony),

three screen sizes (46, 54, and 63 in.) and three

price levels ($2,300; $2,800; and $3,600).

The utility differences between the lowest and

highest levels of each attribute were 3 for brand

name, 2 for screen size, and 5 for price.

Based on these findings, what are the relative

importances of brand name, screen size, and

price?

Second Exam

Conjoint analysis (cont’d)

Based on the conjoint study, LG management

knows that a price increase from $2,300 to $2,800

leads to a decrease in utility of 3. If utility goes up

by 1 when the screen size is increased from 46 to

54 inches, how much can LG charge for the TV set

with the larger screen?

Consumer A Consumer B

Attribute level Mean for level

across all

profiles

Mean as

deviation from

zero

Range on

attribute

Percentage

importance

Mean for level

across all

profiles

Mean as

deviation from

zero

Range on

attribute

Percentage

importance

Apple 5.67 -.83 1.66 14% 9.50 +3.00 6.00 50%

Dell 7.33 +.83 3.50 -3.00

160HD 6.17 -.33 .67 6% 5.50 -1.00 2.00 17%

320HD 6.83 +.33 7.50 +1.00

2RAM 6.33 -.17 .33 3% 6.00 -.50 1.00 8%

4RAM 6.67 +.17 7.00 +.50

12.1in 5.83 -.67 1.33 11% 5.33 -1.17 2.33 19%

15.4in 7.17 +.67 7.67 +1.17

$900 10.25 +3.75 7.75 66% 6.75 +.25 .75 6%

$1200 6.75 +.25 6.75 +.25

$1500 2.5 -4.00 6.00 -.50=11.74

Second Exam

Exceeds

9%

Exceeds

5%

Meets

specific

ations

Short by

5%

6

months

9

months

12

months

15

months600K 700K 800K 900K

Installed,

with 2-year

warranty

Installed,

with 1-year

warranty

Installed,

with

service

contract

FOB,

with

service

contract

Chev 20 5 0 0 20 10 5 0 20 15 10 0 40 20 0 0

TXU 50 40 10 0 10 8 3 0 10 5 2 0 30 20 10 0

AEP 10 10 10 0 10 6 4 0 35 30 25 0 25 4 0 0

Gen

Mills28 20 13 0 40 28 18 0 11 6 8 0 21 14 7 0

Krispy

Kreme15 10 3 0 45 40 5 0 10 7 3 0 30 25 2 0

Ave 27 17 8 0 31 19 9 0 19 13 6 0 20 14 6 0

Part-worths

Second Exam

Market Share Simulations

Market share predictions for different scenarios, using the First-Choice Rule.

Scenario / Product profiles

Wastewatch Thermatrix Advanced AirNew Product Profile

Predicted market shares 45% 4% 51% n/a

...with Servair DX 38% 2% 42% 19%

...with Premier DX 43% 1% 41% 14%

...with Base model 44% 4% 43%9%

Predicted market shares