I ran a simulation on a customer loyalty model with & without incentive based on basic RISK Model

About the Model

Imagine there are x number of total customers and a company has y% Market Share. Few customers switch to other company & reverse also happens. 

Challenge is to make sure that Number of customers coming in >= Number of customers leaving.

In reality, that doesn't happen. If companies don't offer incentives, eventually market share will get eroded. Now, the question is how much incentive should be offered and will it erode the profitability? or will it actually increase profitability by getting more customers overall?

This simulation tries to solve exactly that.

Assumptions

  • Total customers (target) : 5,25,000

  • Marketshare: 30%

  • Customers who stay: 85%

  • Customers switching into: 10% (without incentive)

  • Customers switching into: 15% (with incentive)

  • Avg Customer Spent: Rs. 500 /-

  • Profit Margin: 35%

  • Incentive: Rs. 100 /-

  • Years: 20

  • Rate: 10%

 

Simulation Details

  • Number of Iterations: 5,000

  • Number of simulations: 5

 

Conclusion

Yes the company should go ahead with the incentive because it increases overall NPV per customer.

  • Customer NPV with incentive: Rs. 586.10 /-

  • Customer NPV without incentive: Rs. 545.97 /-

  • NPV per customer with the incentive only has a 5% chance of being less than without the incentive.

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