Using Customer Lifetime Value for Acquiring Retaining and Winning Back Profitable Customers

UsingCustomerLifetimeValue AboutIMA IMA®,theassociationofaccountantsandfinancialprofessionalsinbusiness,isoneofthelargestandmostrespectedassociationsfocusedexclusivelyonadvancingthemanagementaccountingprofession. Globally,IMAsupportstheprofessionthroughresearch,theCMA®(CertifiedManagementAccountant)program,continuingeducation,networking,andadvocacyofthehighestethicalbusinesspractices.IMAhasaglobalnetworkofmorethan65,000membersin120countriesand200localchaptercommunities.IMAprovideslocalizedservicesthroughitsofficesinMontvale,N.J.,USA;Zurich,Switzerland;Dubai,UAE;andBeijing,China.FormoreinformationaboutIMA,pleasevisitwww.imanet.org. 2FoundationforAppliedResearch UsingCustomerLifetimeValue UsingCustomerLifetimeValue ForAcquiring,Retaining&WinningBackProfitableCustomers AbouttheAuthors V.Kumar(VK)istheRichardandSusanLennyDistinguishedChairProfessorofMarketing,andExecutiveDirector,CenterforExcellenceinBrand&CustomerManagement,J.MackRobinsonCollegeofBusiness,GeorgiaStateUniversity,Atlanta,Georgia30303.Phone:404.413.7590;Fax:404.413.7585;Email:vk@gsu.edu. Theauthorthanksseveralfinancialservices,pharmaceutical,grocery,hightech,telecommunicationandretailerfirmsforagreeingtosharetheircustomerdatabasesforthisstudy. PublishedbyInstituteofManagementAccountants 10ParagonDrive,Suite1 Montvale,NJ07645www.imanet.org ©2014intheUnitedStatesofAmericabyInstitueofManagementAccountantsAllrightsreserved FoundationforAppliedResearch3 FOUNDATIONFORAPPLIEDRESEARCH USINGCUSTOMERLIFETIMEVALUE ABOUTTHEAUTHOR *V.Kumar(VK)istheRichardandSusanLennyDistinguishedChairProfessorofMarketing,andExecutiveDirector,CenterforExcellenceinBrand&CustomerManagement,J.MackRobinsonCollege ofBusiness,GeorgiaStateUniversity,Atlanta,Georgia30303.Phone:404.413.7590;Fax:404.413.7585; Email:vk@gsu.edu. Theauthorthanksseveralfinancialservices,pharmaceutical,grocery,hightech,telecommunicationandretailerfirmsforagreeingtosharetheircustomerdatabasesforthisstudy. FORACQUIRING,RETAINING&WINNINGBACKPROFITABLECUSTOMERS Publishedby InstituteofManagementAccountants10ParagonDrive Montvale,NJ07645www.imanet.org Copyright©2009intheUnitedStatesofAmericabyInstituteofManagementAccountants Allrightsreserved FOUNDATIONFORAPPLIEDRESEARCH ABSTRACT i Inthisageofincreasedmarketingaccountability,thereisapersistentneedtoquantifytheeffectofseveralmarketingactionsattheindividualcustomerlevelthroughthefinancialmetricsthatwouldbeofinteresttoaChiefFinancialOfficer(CFO).ThroughthisExecutiveSummary,weproposethatmeasuringandmaximizingCustomerLifetimeValue(CLV)willhelpcompaniesaddressthisissue.WhendecisionsarebasedontheCLVparadigm,companiescanmakeconsistentdecisionsovertime,about: (a)whichcustomersandprospectstoacquireandretain;(b)whichcus-tomersandprospectsnottoacquireandretain;and(c)determinethelevelofresourcestobespentonthevariousmicro-segments.UsingtheCLVframework,thisExecutiveSummaryestablishesthat: ■AcquiringandretaininghigherCLVcustomersimprovesprofitabilityofthefirm ■Profitablyloyalcustomers(asagainstjustloyal)arethemostvaluablecustomersforafirm ■Contactingtherightcustomersattherighttimeandencouragingthemtoadoptmultiplechannelsresultsinhigherfirmprofitability ■Aproactiveinterventionstrategybyidentifyingcustomerswhoarelikelytodefectandwhentheyarelikelytoquithelpsfirmstoretainprofitablecustomersandtherebyincreasefirmprofitability ■OptimallyreallocatingresourcesfromlowerCLVcustomerstohigherCLVcustomersensuresprofitablecustomermanagement ■Predictingwhatthecustomerswouldbuynextandwhenthepur-chaseislikelytohappenhelpsthefirmindesigningup-sellingandcross-sellingeffortsandtherebyimprovingprofitability ■CLV-basedmarketingstrategiesdirectedtowardincreasingthecustomerequitycanincreasethestockpriceofafirmandtherebythefirm’smarketcapitalization Theprovenstrategiesdiscussedherehelpsfirmsacrossvariousindus-triesinselectingandnurturingcustomersbasedontheCLVapproachandtherebyincreasethefutureprofitabilityofthecustomers. FOUNDATIONFORAPPLIEDRESEARCH TABLEOFCONTENTS 1.Introduction1 2.CustomerLifetimeValue—Aforwardlookingmetric2 3.Howdowedeterminewhichtypesofcustomersandfuture prospectstoretain,grow,acquireorwin-back?.3 3.1.WhomtoAcquireandRetain?.4 3.2.MakingCustomersProfitablyLoyal.7 3.3.GrowingCustomers.10 3.4.HowtoRetainCustomers/PreventChurn?14 ii 4.Howdowedeterminewhichtypesofcustomersandfuture prospectsnottoretain,grow,acquireorwin-back?19 5.Howmuchshouldbespentonthevariousmicro-segments toretain,grow,acquire,andwin-backthesecustomers?23 5.1.OptimalResourceAllocation23 5.2.Up-Selling&Cross-SellingtoRetainedCustomers.27 6.LinkingCLVtoShareholderValue32 7.ImplementingCLV-basedstrategies.33 References34 FIGURESANDTABLES FIGURE1:ApproachtoCLVMeasurement3 FIGURE2:AcquiringandRetainingProfitableCustomersacross threeindustries6 FIGURE3:ManagingLoyaltyandProfitability8 FIGURE4:PredictingPropensitytoQuit16 FIGURE5:ProactiveInterventionStrategy17 vi FIGURE6:CustomerSegmentationbasedontheirCLVScores20 FIGURE7:MarketingActionstakenbytheFirmbasedonthe CLVandSOW22 FIGURE8:OptimalResourc