Litigation Support Results in Client Receiving Damages
As a subject matter expert (SME), I, Garry House, have been engaged to determine damages related to the defendant’s previous, current, and future use of a confidential customer list belonging to the plaintiff. This confidential customer list contains the names, post office mailing addresses, and email addresses of three thousand four hundred eighteen (3,418) customers of the plaintiff, South Central Audi.
There is not yet any universally accepted method of determining potential damages to a dealership from the unauthorized use of its confidential customer list by a competitor. The methodology used by this SME to determine damages is divided into three sections, each thoroughly discussed in this report: 1) establishing the lifetime value of a loyal South Central Audi customer, 2) projecting results of normal strategies used in marketing to the customers of a competitor, and 3) calculating the value of customers converted from South Central Audi to Audi of River Oaks.
The Lifetime Value of a South Central Audi Customer
Twenty-three years ago Carl Sewell, a multi-franchise, multi-location dealer authored a book titled Customers for Life. In Chapter 34 of his publication, Mr. Sewell discusses the lifetime revenue value of each of his customers, based solely on his/her individual purchases of vehicles, parts, and service. His calculations concluded that this value was $332,000, and that was in 1990. He goes on to say that every happy customer will tell his/her friends and many of them will also buy vehicles, service, and parts. However, the additional value of this referral business was not included in Mr. Sewell’s $332,000 calculation result.
Appendix 1 to this report displays the calculations for establishing the lifetime revenue value of a customer based on South Central Audi data, manufacturer data, industry best practices data, and, in two instances, a reasonable SME estimate. The “Primary Vehicle Consideration” develops a lifetime revenue value of $361,633, the “Additional Household Vehicle Consideration” develops a lifetime revenue value of $178,365, and the “Referral Customer Consideration” develops a lifetime revenue value of $301,125. Item 30 of Appendix 1 totals these lifetime revenue value “consider-ations” at $841,123 per customer. We must recognize, however, as a business fact, that not all customers will remain loyal to a franchise or to a dealership. Audi of America currently reports “franchise loyalty” at thirty-one percent (31.0%). Considering this metric reduces the lifetime revenue value of a customer loyal to the Audi brand to $260,748 (see Appendix 1, Item 33). Loyal Audi owners will not always remain loyal to the same dealer; some customers will move out of the Hometown area, and some Hometown Audi owners will transfer their loyalty to another dealer. Since there are only two Audi dealers in the Greater Hometown market, this SME estimates that 75% of loyal Audi owners will remain loyal to their dealer. Considering this metric reduces the lifetime revenue value of a customer loyal to the Audi brand and South Central Audi to $195,561 (see Appendix 1, Item 35).
It is therefore logical to conclude that if the defendant were successful in converting one of the plaintiff’s customers, using plaintiff’s confidential customer list, it would result in a loss of $195,561 in lifetime revenue to the plaintiff. Damages to the plaintiff cannot be based on lost sales revenue…they must be based on lost profits. South Central Audi reports a 1.5% net profit retention on sales, meaning that for every $1,000 in sales revenue generated, $15.00 is retained as net profit. This metric is slightly below the average profitability retention of those dealers who regularly report financial information to my available sources. Applying this metric to the loss in lifetime revenue per customer of $195,561, results in a loss of $2,933 in lifetime profitability to the plaintiff (See Appendix 1, Item 37). It is the conclusion of this SME that damages, for each customer that the Audi of River Oaks converts, using South Central Audi’s confidential customer list, be valued at $2,933.
Results of Defendant’s Conversion Strategies
The number of South Central Audi customers that the defendant is able to convert, using plaintiff’s confidential customer list, will depend on the type of marketing strategies employed by Audi of River Oaks and on the results of those strategies. Although the types of strategies that may be employed in marketing to this customer list are numerous and diverse, the results of each strategy type are highly predictable.
Strategy “type” includes three components: 1) Message Channel, 2) Message Frequency, and 3) Message Content. Since Audi of River Oaks, and its principal, Richard Stoughton, are very experienced in automotive retail marketing, this SME assumes that the “Message Content” will always be adequate, if not strong, in attracting potential customers.
“Message Channel”, to a great degree, is based on cost, and, using a confidential customer list, Audi of River Oaks could use any or all of three methods: 1) email marketing, which is virtually cost-free, 2) direct mail, to which both a production and postage cost must be applied, and 3) telemarketing, to which a personnel and telephone cost must be applied. The best results will always be achieved by utilizing all three “Message Channels”, because each separate “Message Channel” will not effectively reach all prospects. For this report, and the damage calculations therein, this SME has assumed that Audi of River Oaks uses only email marketing. Should all three “Message Channels” be utilized, the conversion rates, and damages to plaintiff, will be significantly greater.
Assuming that email marketing is the only “Message Channel” utilized by Audi of River Oaks in promoting itself to customers on the plaintiff’s confidential list, the last strategy “type” to address is “Message Frequency”. Email frequency strategies vary from “Highly Aggressive” (daily to everyone) to “Minimum Contact Maintenance” (quarterly to everyone). The “Highly Aggressive” email marketers believe that a) if you don’t make someone mad every day, you’re not being forceful enough, and b) when someone is ready to buy, you want to be “in their face”. This SME knows of no automotive retailers currently in the “Highly Aggressive” category. On the other hand, those email marketers who espouse the much more passive “Minimum Contact Maintenance” frequency, believe that quality “Message Content” delivered to a prospect four times per year is sufficient. There are myriads of alternative frequencies between every day and every ninety days, but it needs to be understood that, regardless of customer perception and irritation, the greater the frequency, the better the overall result. Most automotive retailers that use email marketing today lean toward the “Minimum Contact Maintenance” frequency. In this damages report, the SME assumes that Audi or Orange Park will also adopt the “Minimum Contact Maintenance” strategy when marketing to the South Central Audi confidential customer list. In addition, it is further assumed that this strategy would demand that each customer receive a “Service Sales” solicitation every six months and a “Vehicle Sales” solicitation every six months, alternated by calendar quarter, over a minimum period of 36 months. Should a more aggressive contact frequency be adopted, the conversion rates, and damages to plaintiff, will be significantly greater.
Appendix 2 displays the predictable response rate, sales rate, and conversion rate percentages for three different scenarios, as they would relate to South Central Audi in terms of damages. A “Service Sales” solicitation, with a sound “Message Content” should develop a predictable response (“prospect show-up”) rate of between 1.75% and 2.50%. A “Vehicle Sales” solicitation, with a sound “Message Content” should develop a predictable response (“prospect show-up”) rate of between 1.25% and 1.50%. All prospects who respond to (“show-up” from) a “Service Sales” Solicitation will buy something, resulting in a Sales Rate of 100%. Of all prospects who respond to (“show-up” from) a “Vehicle Sales” Solicitation, the Sales Rate will vary from 25.0% to 40.0%. Assuming that when they leave the dealership they are “Happy Customers”, prospects responding to a “Service Sales” solicitation will experience a conversion rate of 25.0% - 40.0% to becoming permanent customers of Audi of River Oaks. Assuming that when they leave the dealership they are “Happy Customers”, those prospects responding to a “Vehicle Sales” solicitation, who buy a vehicle, will experience a conversion rate of 33.0% - 66.7% to becoming permanent customers of Audi of River Oaks.
The quantitative summary on the bottom of the pages in Appendix 2 indicate the following conversion rates:
Best Case Scenario for South Central Audi – – 111.5 Customers
Probable Case Scenario for South Central Audi – – 183.6 Customers
Worst Case Scenario for South Central Audi – – 286.2 Customers
Value of Customers Converted from South Central Audi to Audi of River Oaks
Appendix 3 is simply a mathematical table which multiples the number of customers on the South Central Audi List (3,418), times the Value of a Loyal South Central Audi Customer ($2,933), times the number of customers converted at different conversion rates, thereby producing a lost profit (damages incurred) amount for South Central Audi. Following are the results for the three scenarios discussed above.
Best Case Scenario for South Central Audi – $328,543 Lost Profit (Damages Incurred)
Probable Case Scenario for South Central Audi – $539,749 Lost Profit (Damages Incurred)
Worst Case Scenario for South Central Audi – $836,957 Lost Profit (Damages Incurred)
As discussed in previous sections, lost profits and damage estimates for South Central Audi could certainly be greater, depending on the strategies utilized by Audi of River Oaks.
Based on the methodology used for developing this report, the discussion and assumptions above, and the calculations developed and displayed in Appendices 1, 2, and 3, following is the opinion of this SME regarding damages that will be incurred by South Central Audi that will result from Audi of River Oaks having acquired, and marketed to, the South Central Audi confidential customer list:
Minimum Estimated Damages - $300,000
Probable Estimated Damages - $500,000
Maximum Estimated Damages - $1,000,000