Wednesday, June 20, 2007

About Life Time Value of Customers

Adelino started the discussion about LTV (Life time value) of a customer a week back and Jim Novo and Ron Shevlin took it forward. I am adding something to the discussion.

While Adelino seems to be averse in using this metric, other two seems in favor of its use. I could also find that Adelino, even if he explicitly say once to drop all unprofitable customers, has some how recommended some engagement plans to act for that segment to bring them to profitable category.

LTV is one metric I am a big fan of. I have seen many corporates grow by the effective prediction of this metrics. I have seen two Indian banks grow by just focusing on getting more bank accounts in the corporate sector as employee salary account when the profit from these accounts were low or negative for freshers. Trend says, they turn profitable when the freshers start saving and using other products from the bank. The already established relationship with one bank through bank account drives huge cross sells.

I don't say to keep all the customers in the unprofitable segment but dropping all of them is not at all a good way. Marketing is first about engagement and then profit (similar to Customer Centric approach which talked in this post). A LTV analysis just help there. Before cleaning the unprofitable customers list, doing a LTV will actually benefit in applying the forced (customer) migration strategies.

Once I suggested a charity organization to follow this metric to see the donors charity trend and overall potential. The findings were too interesting. They could make very good improvement in their business.

So, the weakness is not with this metric LTV but with using it. There are very few smart people in the world who actually can use this metric in good way and also there are few companies who can actually make the business manager of their client understand this fully. And I think, guys are just blaming the metric for not being able to use it properly.

Earlier I gave an example of two Indian banks, these are no other than top two private banks in India, ICICI and HDFC. The short term benefit is good, but if it keeps the long term interest intact. And, if properly planned and executed, the long term strategy gives better fruit than their short term counterparts.

The bottom line :
1. Most profitable customers are not loyal
2. Brand can be of two different meaning, one line Apple other like IBM. Apple (before iPod) was a strong brand with very less business volume but high per customer profitability while IBM was a strong brand with the mix of profitable and non-profitable customers, thus IBM has bigger business and thus enhanced brand equity in extended market space. Apple remained strong in a very small market segment.
3. Profit may be direct or indirect. Indirect profit like word-of-mouth is very hard to determine. I have seen that loyal but unprofitable customers are very good source of advertising. I would say they are investment for advertisement.
4. There is another type of profit that comes with huge volume. In most cases as the volume of business increases, the cost of production comes down. This makes the direct unprofitable customers actually profitable for long run.

2 comments:

John said...

One thought on LTV which I don't think has been picked up.

At the aggregate level, segments are reasonably predictable in the manner they respond to marketing. However at the individual level where many PTV studies take place, the level of predictabiliy over an individuals actions has a very high variance. It is often the case that LTV marketing programs suffer because they are risky since too many parts of the campaign get personalised.

Le_Plan said...

Thanks John. I too find it challenging to do PTV at the individual level. One way to tackle this problem is to use LTV/PTV with various other metrics like predictive risk or response scores.

The segment where both are favorable may be given higher value and be targeted for aggressive marketing campaigns and the segment where both metrics score low can be straight away neglected for marketing.

The main issue lies in the segment where one metric scores high and other low. This population has to be targeted for cross-sells, up sells, debt management, special exclusion or inclusion in campaigns etc. It may also be necessary to reprice or redesign the product.

The idea is to keep the profitable customers and make unprofitable customers profitable while keeping the customer engagement level high.

People have so many things to do now. They are lot more busier than the last decade and they want to keep minimum relationships. I have seen many people having relation with only one player in a certain industry, like one bank, one hospital, one insurance company etc. Also a trend is increasing where all friends or member of a family use only one company or brand for a certain service or product. This has made losing a customer a bigger loss than the expected loss from a portfolio.

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