1) What is the LTV (looking 8 years out) of a customer who used auto-pay?
The Life time value of a customer who used auto-pay is $1670.69 (LTV net of acquisition costs= $1373.69)
2) 2)What is the LTV (looking 8 years out) of a customer who did not use auto-pay?
The Life time value of a customer who did not use auto-pay is $1361.87 (LTV net of acquisition costs= $1064. 87)
3) What is the maximum amount that Home Alarm could spend on customer and salesperson incentives to convert a residential customer to auto-pay?
The maximum amount that could be spent should be the difference between the Lifetime Value of customers that sign up for non-autopay service ($1064.87) and the LTV for the ones who opted for an autopay service ($1373.69); which is $308,82. So far, Home Alarm doesn’t assign any budget for marketing at the time of sign up, so it could be a good idea to invest this amount ($308,82), or less, for a marketing campaign during the acquisition period, emphasizing the convenience of the automatic payment contract.
4) What new pricing strategies and services should Home Alarm consider to sign up new customers with auto-pay?
One strategy to push new customers to sign up with autopay could be offering them the installation for free. In this case the cost of acquisition for each new customer who signs up for the autopay service would be $492 instead of $297. With this option, the lifetime value of each customer who opts for the autopay service will be $1178.69, lower than the amount that could have been earned had they chosen this solution anyway, but higher than the $1373,69 that the company would earn had they not chosen the autopay.
The main problem for this option is that we don’t have any information about the percentage of people that would choose the automatic payment without any incentive; indeed if we assume that 50% of the customer would choose the automatic payment in any case, we would earn 113,82 dollars (1178.69-1064.87) on average for each customer who decides to choose the automatic payment over the non automatic one, but we would lose $195 for each customer that would have chosen this method even without incentives. (Table 1) It could be worthwhile to offer just a reduction of the installation costs. For instance, offering a discount of 50% on the installation cost would increase the LTV of customers that choose autopay over non-autopay by more than $200 and would create a loss of only $97,5 per customer that would have opted for autopay without further incentive.
Another strategy could be offering the new customers who opt for an automatic payment service a fixed price for the first three years (not increased by the annual 3% rate). In this case the LTV net of the acquisition costs would be $1305,5, still higher than the one the company would earn whether the customer opts for a not automatic payment. Moreover, offering 8 years of fixed price ($480) is still more profitable than the case in which the chose a not autopay method, but it is, in my opinion, not recommendable, because of the negative effect that it could have on the customer that chose this option before. Indeed they could decide to resign the contract and try to get a new one with the more convenient conditions. (Table 2)
5) What new pricing strategies and services should Home Alarm consider to convert existing customers to auto-pay?
Taking in consideration the attrition rate during the past nine years, it seems to be more convenient try to convert the customers as early as possible; indeed the peak of the churn rate is between the third and the fourth year. One solution could be offering discounts for the customers that are willing to switch method, maybe offering them a reduction in the general rate. For example, the customers that opt for convert their payment method could see their price increase just by 2% per year instead of the 3%.
For instance, if the conversion happens during the first year, the LVT net of acquisition costs would be $1243.17 (the retention rate for the first year would be the same of the non autopay situation), significantly higher than the basic case. This numbers are obtained in the optimistic scenario where the attrition rate in case of switch would be exactly the same of the ones who initially chose for the automatic payment. (Table 3) Another option could be offering couple of years with a fixed price, as explained for the new customers.