Magazine article Marketing

CUSTOMER LIFETIME VALUE: Judging the Lifetime Value of Customers - Some Firms Are Trying to Get More for Their Marketing Investment by Focusing on the Most Profitable Customers

Magazine article Marketing

CUSTOMER LIFETIME VALUE: Judging the Lifetime Value of Customers - Some Firms Are Trying to Get More for Their Marketing Investment by Focusing on the Most Profitable Customers

Article excerpt

Heard the one about the Swedish bank that analysed the profitability of its customer base and found that older people were costing it money to service. As a result, the bank redesigned the entrances to its branches, making them difficult for old people to negotiate, in an attempt to deter them from doing business with it.

The story illustrates the flaws in customer lifetime value (CLV) techniques.

On the face of it, CLV is an appealing concept. A company identifies its most profitable customers and focuses its resources on delighting them, while 'de-marketing' its least valuable customers. CLV estimates customers' long-term profitability by using several years of customer information to project the future.

But there are three principal problems with this approach. The first is the analysis itself. There needs to be at least five, ideally ten, years of data on customers, which has to be analysed and modelled - a massive feat.

The second is that the pace of change is exponential and nothing stands still long enough to be researched to the Nth degree.

Finally, how can businesses ever know enough about a superficially unprofitable customer to decide to de-market them? 'That customer might be a valuable customer's mum,' says marketing consultant Mike Sommers, former chief marketing officer at Sequence, Royal & SunAlliance's property services.

'How much damage is that going to do to your brand?'

Nevertheless, CLV contains a core of sense. It costs less to serve loyal customers than to acquire and serve new ones. Any information that helps firms attract and retain more loyal or high-spending customers - the two are not necessarily the same - is valuable.

'But where the concept leaves planet earth,' says Tim Ambler, senior Fellow at London Business School, 'is when you start trying to project current profitability into the future, where it really is no more than speculation.' Ambler adds that companies can determine how much to invest in people to get benefits later through simpler means, such as classic payback techniques.

Many companies are having are now turning to CLV. But, says Robert Shaw, managing director of management consultants MBPI, 'most of them are struggling in terms of how to use it and put it into practice.'

As with customer relationship management (CRM), software vendors are cavalier in their claims to be able to offer CLV, says Shaw. 'But software is only about 20% of the issue: the secret is how you use it.'

Britannic Assurance claims to have increased the average response rate of its DM campaigns from 0.5% to 1.4%, resulting in significant new business since implementing CLV.

It began to build an advanced marketing database that would give it a comprehensive understanding of its customers four years ago. The system combines customer data - such as their propensity to lapse and to buy additional products - with actuarial calculations of the value of their policies to provide an overall CLV figure.

Not only did this help it target its higher net worth customers more effectively, it has also guided decisions on the type and level of service, and the kind of products it offers. The insurer has now switched its focus from door-to-door to direct selling and offers higher-value products. …

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