Taking the approach that loyalty is

common driver of both customer retention as well as usage behavior.

The more loyal I am to a particular provider,

whether it's a telecom provider or a financial services, provider.

Or let's say a performing arts center not only am I going to use more of

the services that they provide.

But I'm also going to stick around longer as a customer, all right?

So we're hitting both on the retention aspect as well as the relationship

development aspect, the breadth and depth of the relationship.

So how do we connect customer attention to customer value?

And this is a graphic that has been taken out of work by Gupta, Lehmann and

Stuart from 2004 that relates the customer retention decision.

And what they try to do in this research is tie the customer acquisition,

customer retention behavior to stock price movements.

So let me walk you through what you see in this schematic right now.

So a given cohort, these are customers who were acquired at the same point in time.

So let's focus for a second on Cohort 0.

We begin with a number of customers n sub 0, and that's in the first period.

Well in the second period,

we're going to make the assumption that we lose some of those customers.

So we retain a fraction r, of those customers.

So after one period, how many customers remain?

What's the fraction r multiplied by how many customers we started out with n0

of those customers, of the n0 times our customers we have after one period.

Those that remain, if the next period,

if we assume the retention rate are as constant.

Then it 's going to be n0 times r squared, that will retain one more period.

N0 times R cube, that will retain a period after that,

n0 times r raised to the teeth power.

So gradually, we're losing customers over time.

But we're retaining our fraction of the previous customers, all right?

So that for customers who started in Cohort 0.

What about the customers who started in time 1, in period 1?

Well same story, they started out in period 1 with n1 customers.

After one period, if our retention rate is constant.

They have n1 times r customers,

n1 times r squared customers 2 periods after they began,

n1 times r cubed 3 periods after they began, all right.

And so that's looking cohort by cohort, but what if we were to say,

let's look at time 0, time 1, how many customers do we actually have?

Well if we look at time 0, we started out with n0 customers,

that first cohort, all right.

What about at time 1?

Well at time 1, we've got n0 times r customers.

So those from the initial Cohort 0 that are still with us,

and then we have n1 customers that came in with the new cohort.

What about at time 2?

In time 2, we're going to have n0 times r squared,

people who've been around for 2 periods, n1 times r.

Customers from Cohort 1 who stuck around at least for

one period and then new customers coming in Cohort 2, n2.

All right, so the schematic looks both at the retention behavior within

a given cohort as well as at the acquisition behavior.

So if we're looking at n0, n1, n2,

this is looking at the customer acquisition process, right?

So the value for this particular organization,

if we take these three cohorts.

We've got three cohorts of acquired customers, and

within each of those cohorts, do we retain the customers?

And we're making the assumption that each of these cohorts provide us with margins

potentially based on how long they've been around as customers.

So we can use this approach to say, all right,

well, suppose we observe a company's behavior or

their customer's behavior in terms of the number of customers that they have around.

If we have an estimate for that retention rate,

we can identify the rate at which customers are being acquired.

And we can come up with projections for, not just the value a particular cohort,

but an estimate value of the total customer base.