To forecast the amount of profit the unlimited price plan product will generate for the organisation, the product lifetime uptake model is used in conjunction with the CLV modelling calculations. The input parameters for product NPV calculations are as follows:
Fixed expenses per month FEt R 750 000.00
Product acquisition cost PAC R 1 702 362.00
Once-off product overhead costs OC R 15 000 000.00
Table 16: Case study, Product NPV input parameters
7.3.5.1 Product NPV scenario 1
The first NPV scenario is conducted on the assumption that the product price will stay constant over the product lifecycle, and that the organisation’s marketing spend will also stay constant over time. The input parameters for the first calculation are used as presented in Table 16, while the CLV for the unlimited product customers with a constant price is R 11,669.01, as shown in Table 15. The number of adopters is calculated in the normal Bass model over a 48-month period, as presented in Table 10.
The net present value of the product is then calculated as follows:
𝑁𝑃𝑉(𝑈𝑛𝑙𝑖𝑚𝑖𝑡𝑒𝑑) = ∑(𝑛𝑡 × 𝐶𝐿𝑉) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 48 𝑡=1 − (𝑃𝐴𝐶 + 𝑂𝐶) Findings:
The total NPV for the unlimited product in scenario one yielded R 107,216,885.00
Figure 74 is a column chart of the predicted net present monthly worth of the unlimited product. The initial product acquisition costs and initial overhead cost were deducted on a monthly basis. Figure 75 is a column chart of the monthly cumulative net present worth of the unlimited product, where the initial product acquisition cost and initial overhead costs were deducted at time period 1.
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Figure 74: Case study, Unlimited monthly NVP, natural product diffusion, and constant price CLV
Figure 75: Case study, Cumulative unlimited monthly NVP, natural product diffusion, and constant price CLV
7.3.5.2 Product NPV scenario 2
The second NPV scenario is to analyse the influence of the marketing mix factors as determined in the generalised Bass model (Table 11) by taking the various CLV possibilities into consideration (Table 15). The NPV for the second scenario is then calculated as follows:
142 𝑁𝑃𝑉(𝑈𝑛𝑙𝑖𝑚𝑖𝑡𝑒𝑑) = (∑(𝑛𝑡 × 𝐶𝐿𝑉₁) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 + 18 𝑡=1 ∑(𝑛𝑡 × 𝐶𝐿𝑉₂) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 24 19 + ∑(𝑛𝑡 × 𝐶𝐿𝑉₃) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 + 30 25 ∑(𝑛𝑡 × 𝐶𝐿𝑉₄) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 36 31 + ∑(𝑛𝑡 × 𝐶𝐿𝑉₅) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 + 42 37 ∑(𝑛𝑡 × 𝐶𝐿𝑉₆) − 𝐹𝐸𝑡 (1 + 𝑖)𝑡 48 43 ) − (𝑃𝐴𝐶 + 𝑂𝐶)
The second NPV scenario is conducted on the assumption that the product price and the advertising spend will vary over the product lifecycle. Therefore the generalised Bass model is used within the NPV calculation. The advertising spend of the generalised Bass model is included within the fixed monthly expenses. However, where the advertising expense exceeds the R 120,000.00 monthly spend, as explained in Section 7.3.3.2, the additional monthly expense is also subtracted.
Findings:
The total NVP for the unlimited product in scenario two yields R 97,359,723.00
Both Figure 76 and Figure 77 are NPV diagrams of the unlimited product according to the CLV calculations and the product uptake of the generalised Bass model. Figure 76 is a column chart of the predicted net present monthly worth; the initial product acquisition cost and overhead costs were deducted per month. Figure 77 is a column chart of the monthly cumulative net present worth; the initial product acquisition cost and overhead costs were deducted at time period 1.
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Figure 77: Case study, Unlimited cumulative monthly NVP, generalised Bass model diffusion with varying price CLV
At this point in the implementation of the stochastic simulation and forecasting model, the product manager, in consultation with the framework implementation team, has to model various price estimates, using the generalised Bass model, the CLV model, and the product NPV model to predict the best product price and advertising spend strategy. For the purpose of this case study, the product price and advertising spend were held constant over the lifecycle of the product, as presented in Scenario 1, Section 7.3.5.1.
The unlimited product is a subscription product, and any decrease in price should be carefully considered because any decrease is not once-off, but applies to the entire subscription length of the product. If the decrease in price cannot be validated by an increase in customer acquisitions, the loss in profits is too big.
Figure 74 shows that the product should be replaced after 40 months. If the initial product acquisition costs and overhead spend are spread over the 48 month time period, the product will not generate any profits after 40 months. When referring to the cumulative NPV per month, as presented in Figure 75, the organisation can safely assume that the initial product acquisition cost and various initial overhead costs will be recovered within the first six months after the product launch.
The basic premise of the stochastic modelling and forecasting exercise within the integrated value proposition design framework is that the implementation team can get an estimate of the product worth at that point. In other words, the team can state that the unlimited price plan product’s
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goodwill firm value is presently R 107,216,885. At this point in the PLM process and the integrated value proposition design framework, this estimate can contribute immensely to the strategic decision-making process in the organisation. Ultimately the NPV of the entire organisation’s product portfolio will be calculated; this in turn will forecast the organisation’s goodwill firm value. Due to the limitation and sensitivity of data, the company’s goodwill firm value could not be presented in this case study.
7.4 CUSTOMER SEGMENT RATE CARD
At the end of the implementation of the integrated value proposition design framework, the implementation team has to create a customer segment rate card.
Figure 78 is an illustration of the customer rate card for the elite customer segment.
Figure 78: Case study, Elite customer segment profile parameters
The customer rate card of the elite customer segment adopting the unlimited price plan product indicates that the segment is relatively inelastic in price and advertising; the segment is driven rather by appealing value offerings and by word-of-mouth appraisal. The customer segment has a low churn rate, indicating that they are loyal. Their subscription period is 24 months, as the contract indicates. The crucial customer segment parameter is the CLV parameter for the customer’s engagement with the organisation in adopting the unlimited price plan product, which yields R 11,669.01. The total potential market size of the elite customer segment is 16,147 customers. On the
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right-hand side of the rate card, the product lifetime uptake model and the goodwill firm value model are recalled for convenience.