NPR as we have discussed is a bottom-up way of predicting future revenues. It starts with the actions of a single customer. Will that customer stay? Will that customer spend? Will that customer churn? Past actions as computed through an RFM (recency frequency monetary value) grid help compute the probabilities for what a single customer will do.
What is important here is the focus on a single customer. There is an equivalent idea in economics that is focused on a single individual as the unit of analysis – the concept of “methodological individualism.” Here is an explanation from The Encyclopedia of Libertarianism:
According to Ludwig von Mises, methodological individualism views “all actions [as] performed by individuals”—or, in the words of Karl Popper, that social phenomena “should always be understood as resulting from the decisions, actions, attitudes, etc., of human individuals, and that we should never be satisfied by an explanation in terms of so-called ‘collectives’ (states, nations, races, etc.).”
So, even as we think about customers as the collective, it is the single customer that should serve as the basis of analysis and action. The idea of CLV assigns a future revenue value to each individual customer. It is a bottom-up model, rather than just top-down extrapolation. It is forward-looking and predictive, rather than taking a number from the past.
In the real world, customers are masters of their own preferences. As such, they can continue with a brand or they can switch to another brand to get their job done. One brand’s churn is another brand’s acquisition. By starting with predicted revenue and layering churn and acquisition, it is possible to arrive at Net Predicted Revenue (NPR).
This becomes the most important metric for a marketer – change in NPR over a period of time will help provide early indications of the future health of a business. It is a lead indicator, a crystal ball into the future. NPR is the single magic number that CEOs who think profitability (rather than chase valuations) should be focused on.
Tomorrow: The One Number To Predict Revenue (Part 8)