Definitions and assumptions of the VortexDNA segmentation benefits calculator

Definitions

Reduction in Residual Error: The improvements that VortexDNA delivers due to providing better customer segmentation.

Revenue per Customer per Annum: The average annual revenue received (for example in insurance premiums) from each customer

Gross Margin: The average profit per customer as a percentage of revenue.

Market Size: The total number of customers for all companies in the market.

Number of customers: The number of customers for the company using VortexDNA's Segmentation.

Price Sensitivity of Demand: In this model, Price Sensitivity means the proportion of customers each term that will switch to a lower-priced competitor for a given difference in price. For example, if Price Sensitivity is 1, and the company is offering prices 10% lower than its competitors, then 10% of its competitors' customers will switch to that company each term.

As your market share grows, you take revenue away from your competitors. Assuming revenues generate profit, your profits will increase, while their profits decrease.

Desired Profit per Customer per Annum: The profit target that the company seeks to earn for an average customer - i.e. the average difference between their charges and their costs.

Average Cost per Customer per Annum: The average amount that a customer costs the company (due to, for example, insurance losses, loan defaults, or expenses).

Percentage of Higher Costs to Pass On: If this is 0%, the company does not raise its prices for higher risk customers. If it is 100%, the company passes on the full costs to higher risk customers.

Percentage of Lower Costs to Pass On: If this is 0%, the company does not charge lower prices to lower risk customers. If it is 100%, the company reduces its prices for lower risk customers by the full amount.

Assumptions

Assumptions built into the model include:

• All customers decide whether to stay with their current company or switch to a competitor once per year, at the end of the year.
• Customers switch between companies at a rate determined by the difference in the price charged multiplied by the price sensitivity of demand (e.g. if competitors are 10% more expensive than the company being modeled, and price sensitivity of demand is -0.5, 5% of the competitors' customers will switch to sign up with the company.
• All companies have an equal proportion of high-cost and low-cost customers when the model begins.
• Variables (price sensitivity, average high-risk cost, etc.) do not change in value from year to year.
• The competitors do not use the improved segmentation that VortexDNA provides.

Help

If you have any questions please contact Martin martin@vortexdna.com