Question

Topic: Strategy

Life Time Value-isp (b2c)

Posted by Anonymous on 12/15/2005 at 5:32 AM ET 250 Points
Hi all,
The basic concept is that, there is a need to retain valuable customers in order to get ROI and growth. But if customers stay longer and the prices keep coming down year by year, you need to keep them even longer and cross sell. Up sell is not an option, because of technology. I believe that, the only way this strategy will work, if we have high conversion rate of added services with medium/high gross margins.

Another question for segmentation, which technique do you use-Chaid or C&RT? And the base (all base or only active customers)?

What are your thoughts?



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RESPONSES

  • Posted by Candureactor on 12/15/2005 at 8:59 AM Accepted
    In their book, Managing customers as investments, Sunil Gupta and Donald Lehmann suggest that the three drivers of customer loyalty are customer experience, loyalty programs and cross selling. By driving customer loyalty you can increase the tenure of your customers thus increasing the lifetime value derived from your customer base. This notion is based on the assumptions that a) there is a large upfront cost to acquire a customer; b) this cost will be recovered during the life of the customer. You mentioned that the selling price of service is dropping, but hopefully this is offset by efficiencies, lower service delivery costs?

    As to research, I would suggest first looking at RFM analysis (Recency, Frequency, Money) as a way of improving your profitability. We’ve done both Chaid and RFM on our customer and prospect base and while they both have their strengths, RFM can be done in a relatively cost effective way and produce results that can be quickly translated into effective marketing programs to improve loyalty and profitability.

    RFM follows some very easy to understand and universal principles:
    • Customers who have purchased recently are more likely to respond to our next promotion than those whose last purchase was further in the past.
    • Frequent buyers are more likely to respond than less frequent buyers.
    • Big spenders often respond better than low spenders.

    If you have $1 to spend, wouldn’t you rather spend this only at the point of maximum impact? RFM helps answer the question, where is the optimum point of impact.

    I would recommend reading the book Drilling Down by Jim Novo to learn more. Hope this helps.
  • Posted on 12/15/2005 at 10:17 AM Author
    Thanks for the reply. RFM is relative LTV technique and is better applied to develop a RPM (Response Profitability Matrix).As, in a campaign not all responsive customers are profitable and not all profitable customers are responsive.

    I want to focus on the absolute LTV also known as CLV. I am looking for insight on optimization of absolute LTV. By knowing absolute LTV, I can optimize all process, more efficient acquisition, an increase cross sell/up sell and have longer lasting relationship with the customer.

    However, this applies to 70% of all businesses. This is a theoretical question that I think more businesses are asking. Because prices are coming down and technology is advancing. In order, to be profitable you need to increase acquisition by 15% to 25% in order to match previous year’s revenue. Because customers are paying less than previously and in order to bridge the gap you need to recruit extra new customers. But this increase of customers will lead to higher costs.

    The question is how to optimize LTV in an industry that provides a service where the price trend is decreasing instead of increasing?
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