user of Product 2 is then . In both cases, the gross profit per period generated in T+2 is P, which needs to be discounted accordingly. The last row of Table 2 sums the value created in the platform by both products. The exact set of transferal and retention events from one product to the next is detailed in Appendix A. Given that the gross profit per period is constant over time and identical for both products, it is easy to show that summing up the value created by both products from Period 1 to infinity results in the standard CLV of formula (Equation 2) with retention rate . Specifically, the total value does not depend upon the internal retention . For two similar products with constant and identical gross profit per period, cross promotion that will result in customer transferal does not create additional value. The Case of Changing Gross Profit per Period The aforementioned picture becomes more complex when customer profitability changes over time. To better understand how such a change affects overall platform profitability, we need to look at the two factors that drive CLV retention probability and per period profitability – and how these factors may change over time. – change To answer the question of a in individual retention probability over time, it is necessary to carefully distinguish between cohort and individual-level change. At the cohort level, average retention rates will increase over time even if at the individual level, customer retention remains stable. This is due to heterogeneity among customers in their retention rates under which lower-retention customers leave early (Fader and Hardie 2010), pushing up the average retention rate at the cohort level among the remaining customers. Consequently, a
user of Product 2 is then . In both cases, the gross profit per period generated in T+2 is P, which needs to be discounted accordingly. The last row of Table 2 sums the value created in the platform by both products. The exact set of transferal and retention events from one product to the next is detailed in Appendix A. Given that the gross profit per period is constant over time and identical for both products, it is easy to show that summing up the value created by both products from Period 1 to infinity results in the standard CLV of formula (Equation 2) with retention rate . Specifically, the total value does not depend upon the internal retention . For two similar products with constant and identical gross profit per period, cross promotion that will result in customer transferal does not create additional value. The Case of Changing Gross Profit per Period The aforementioned picture becomes more complex when customer profitability changes over time. To better understand how such a change affects overall platform profitability, we need to look at the two factors that drive CLV – retention probability and per period profitability – and how these factors may change over time. To answer the question of a change in individual retention probability over time, it is necessary to carefully distinguish between cohort and individual-level change. At the cohort level, average retention rates will increase over time even if at the individual level, customer retention remains stable. This is due to heterogeneity among customers in their retention rates under which lower-retention customers leave early (Fader and Hardie 2010), pushing up the average retention rate at the cohort level among the remaining customers. Consequently, a
Customer%20Retention%20in%20a%20Platform%20World%20Dec%202017%20final%20a%20-%20revised-1.docx