Abstract The significance of Customer Lifetime Value (CLTV) is now being increasingly acknowledged among the decision makers around the world. However, only a few actually take the plunge and implement it in their organization. This white paper recommends a framework for practitioners to measure & implement CLTV within an organization. How to become a CLTV aligned organization? 1. Synopsis ……………………………………………………………………………………………………………………… 1 2. Introducing CLTV…………………………………………………………………………………………………………. 2 a) Segmentation framework ………………………………………………………………………………… 2 b) Vintage based framework …………………………………………………………………….…………. 2 c) Survival Analysis ………………………………………………………………………………………………. 2 3. Why does CLTV matter? …………………………………………………………………………………………….. 4 4. Issues faced while implementing CLTV ……………………………………………………………………….. 4 5. Fractal’s MDEM (Measure, Demonstrate, Execute and Monitor) framework …………….. 4 A. Measure ……………………………………………………………………………………………………………….. 5 i. Segmentation of framework ………………………………………………………………………… 5 ii. Vintage based forecast framework ………………………………………………………………. 5 iii. Survival analysis ………………………………………………………………………………………….… 6 B. Demonstrate ………………………………………………………………………………………………………… 6 C. Execute ………………………………………………………………………………………………………………… 6 D. Monitor ………………………………………………………………………………………………………………. 8 6. Summary ………………………………………………………………………………………………………………….… 8 7. About Fractal Analytics …………………………………………………………………………………………………. 9 Copyright © Fractal 2014 - 2015 www.fractalanalytics.com How to become a CLTV aligned organization? Synopsis In spite of the obvious edge it offers, only a few organizations make an enthusiastic attempt to A primary factor instrumental in the success of any firm is its ability to provide better services to implement this process. The possible reasons attributing to this could be, difficulty in tracking idiosyncratic customer purchase behavior for the customers and offer superior value propositions. The fulfillment of expectations of many purchase situations or that there could be variations on highest value people over time etc. customer nurtures their relationship with the organization and its products. The right marketing strategies, backed by the right marketing metrics helps to grow business and profitability. One such This white paper explains CLTV model designed by Fractal Analytics and implementation of the processes required by an organization to get marketing metric is Customer Lifetime Value CLTV-aligned. It also helps to understand the (CLTV). advantages of being a CLTV – aligned organization. The CLTV is the economic value of the customer relation during the complete period of the relation of the customer and the company. The evaluation of CLTV helps to optimize the investment of the limited resources on their different customers and prepare the customer acquisition strategy accordingly. The significance of Customer Lifetime Value (CLTV) is now being increasingly acknowledged by the decision makers around the world. Organizations are consistently collecting more and more information about their clients to study the customer behavior and characteristics which has been playing a crucial role in devising out their customer - centric business strategies. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 1 How to become a CLTV aligned organization? Introducing CLTV Segment (based on Spend and Usage) Customer Lifetime Customer Lifetime Value Segment (spend, usage) F (vintage, recency) CLTV = CLTV History + P(t)*T*[Monthly Potential] Businesses flourishes when there is a healthy customer development and retention process at work. The Customer Life Time Value (CLTV) is a framework that helps businesses, develop b) Vintage based forecast framework strategies to extract incremental value from their The Vintage framework is a more powerful customers. It is measured as the profitability of a segment based approach for predicting the customer during the customer’s lifetime. In other customer’s lifetime. Customers are segmented words, the process aims to understand the true on their transaction behavior and for each value of customer longevity so that an segment customer’s lifetime value curve is organization can ensure that it is spending the obtained. Customer Lifetime Value is the area right amount of money and resources. CLTV is the under the curve . sum of both historic Customer Value and future Measuring CLTV CLTV can be estimated using multiple techniques. In this section we will explore 3 ways in which ∫ CLV (t0 – t1) = f(x) 35.0 Profitability [unit] Customer Value. 40.0 30.0 25.0 20.0 15.0 10.0 5.0 1 3 5 7 9 11 13 15 17 19 21 23 25 2729 Survival model is developed based on Segmentation Framework provides a simple but elegant approach for the calculation of customer’s lifetime value. Total customer base is segregated into segments based on their transaction behavior. For each segment a formula is derived, as a function of customers’ vintage and lifetime. Customer’s profitability is calculated 31 33 35 Months on Book c) Survival Analysis a) Segmentation Framework recency, for the calculation of customer’s t1 t0 0.0 CLV for time T ( t0 to t1 ) CLTV can be measured. f(x) customer’s past behavior and trends, to calculate the probability of a customer’s survival for next “n” years. CLTV is calculated based on historic and predictive Customer Lifetime Value for each customer. CLV = CLV History + CLV Future CLV Future = Survival (t) * T * [Monthly Potential] based on measured historical values and predicted values. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 2 How to become a CLTV aligned organization? CLTV is measured by transforming customer’s past CLTV assigns a single, financial “score” to each profitability into a forward-looking “prediction” of customer allowing for the evaluation of the customer’s profitability over his future tenure. It is relative “importance” of each customer as they the sum of both the historic Customer Value and contribute to an organization’s profits. the future Customer Value. In another way, CLTV represents the net present value from profits, from a single customer. It can be represented as, Where: r = discount rate N = customer’s future tenure i = period (e.g., month i or year i) Survival rate = survival probability of the customer CLTV calculations involve econometric forecasting methodologies. The calculation of a customer’s “lifetime”, or the prediction window is limited by the amount of historic data available. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 3 How to become a CLTV aligned organization? Why does CLTV matter? Issues faced while implementing CLTV CLTV aims at helping organization identify, CLTV calculation can be achieved simply by totaling understand and cater to their most valued the annual expenditure and multiplying it by the customers. The aim of the CLTV, a forward-looking likely tenure of the customer. But, the calculation metric, is to enable organizations to differentiate assumes a steady business environment without between their best and worst customers at a very fluctuations in the economy, change in the early stage. This will help them design strategies to customer preference, or competitors in the retain and acquire the best customers and drive market. revenue growth. At Fractal, the CLTV, a forward looking metric facilitates the projections of the below mentioned business parameters • Current and Future Revenues • Current and Future Costs • Life Expectancy • Future Cross-selling Potential The cognizance of the Lifetime Value (LV) of a prospective customer can help in determining required time, effort and money to be spent in acquiring that customer. A customer’s LV can enable us to evaluate the campaign benefits versus the costs or investment. The life expectancy of a customer can help us to take actions proactively in lengthening the relation and provoke the customer spend more in order to realize expected CLTV. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 4 How to become a CLTV aligned organization? Fractal’s MDEM (Measure, Segment (based on Spend and Usage) Demonstrate, Execute and Segment (spend, usage) Monitor) framework Customer Lifetime Customer Lifetime Value F (vintage, recency) CLTV = CLTV History + P(t)*T*[Monthly Potential] function of customers’ vintage and recency, Fractal’s MDEM framework helps in monitoring & for the calculation of customer’s lifetime. improving initiatives based on Lifetime Value of the Customer’s profitability is calculated based on customer. measured historical values. 1. 2. Demonstrate Build 3. 4. Execute Monitor Objective ii. Vintage based forecast framework Create a Analyze existing Identify Key Continue to model to customer business unit monitor predict the through CLTV to partner on initiative using revenue each framework and LTV and plan a Test & Learn Customer leverage results and execute Framework generates to get CLTV based over their management Strategy. lifetime level buy –in for “Think Big, Act CLTV driven Small” The Vintage framework is a more powerful segment based approach for predicting the customer’s lifetime. Customers are segmented on their transaction behavior and for each segment customer’s lifetime value Typical Timeline strategy. 6 months 6- 9 months curve is obtained. Customer Lifetime Value is 9- 12 months 12+ months the area under the curve. A. Measure 40.0 can be measured. i. Segmentation Framework Profitability [unit] CLTV can be estimated using multiple techniques. In this section we will explore 3 ways in which CLTV f(x) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 Segmentation Framework provides a simple but elegant approach for the calculation of customer’s t1 t0 0.0 1 3 5 7 CLV for time T ( t0 to t1 ) 9 11 13 15 17 19 21 23 25 27 29 31 33 35 Months on Book lifetime value. Total customer base is segregated into segments based on their transaction behavior. For each segment a formula is derived, as a function of customers’ vintage and recency, for the calculation of customer’s lifetime. Customer’s profitability is calculated based on measured historical values. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 5 How to become a CLTV aligned organization? iii. Survival Analysis Demonstrating value ensures engagement & buy-in Survival model is developed based on customer’s from the key stakeholders such as: past behavior and trends, to calculate the probability of a customer’s survival for next “n” years. CLTV is calculated based on historic and VP Marketing VP Product predictive Customer Lifetime Value for each customer. VP Sales VP Service CLV = CLV History + CLV Future Customer How do I get more high LTV customers? What do high LTV look for? What discounts can I offer to high LTV customers? Are they price-sensitivity? Where can I find high LTV customers? What is their consideration at the moment of purchase? What aspect of customer service matters to high LTV customer? CLV Future = Survival (t) * T * [Monthly Potential] C. Execute B. Demonstrate Once the value has been demonstrated, the next CLTV based strategy has major implications across step is to develop and execute a CLTV based various business units; for the strategy to be strategy. Key to the execution strategy is: successful it is important to generate demand from Select a business unit which has bought in to the the business. This can be achieved by concept of customer lifetime value demonstrating the value of CLTV. Identify a business problem based on the An example of how value can be demonstrated is company’s need & economic or competitive by showing the spread in revenue and profitability landscape between high & low value customers. There are many application of Customer Lifetime Value. A few of them are highlighted below. I. Customer Acquisition II. Customer Portfolio Management III. Customer Retention IV. CLTV led Advertisement Spend V. CLTV driven Marketing Mix Spend Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 6 How to become a CLTV aligned organization? I. Customer Acquisition High CLTV can be effectively used in acquiring new Achieve customer satisfaction by Achieve customer satisfaction by service instead of running loyalty service and loyalty programs programs customers with strategies such as: • Product design and modifications to serve all Maintain good relationships, nurture Run proactive retention campaign to these customers, defend and retain retain these profitable customers them Derive maximum revenue as long customer segments profitably as customer is active • Targeting acquisition campaigns at high CLTV Know when to stop spending on promotional campaigns customer segments • Channel mix optimization based on CLTV LTV Cost = LTV High Risk Low Value Derive maximum revenue Find a balance in terms of size and as long as customer is active share of wallet Make no investment in Take appropriate action to developing relationships develop these customers High Value Low Customer Lifetime Credit Score Low High III. Retention Decisions Acquisition Zone Low Risk CLTV analysis can help in retention decisions by aiding in: • Knowing the true value of losing a customer • Designing retention strategies and offers This solution helped clients in acquisition of customers whose LTV is less than the cost of Use customer lifetime value acquisition and servicing. It also helped in saving costs on application processing, acquisition and servicing of loss making customers. Use attrition score Customers How profitable is the customer? Low II. Customer Portfolio Management Customers’ true potential can be realized using targeted marketing by: Likely Choose to lose – do nothing • Designing campaigns (e.g. fee waivers) • Budgeting offers for campaigns Copyright © Fractal 2014 - 2015 High How likely is the customer to close the account? www.fractalanalytics.com Not Likely Strengthen Relationship - Increase credit line - Balance Transfer - Incentivise to increase spend Likely Not Likely Build the Relationship - Increase credit line - Offer add-on card - Offer convenience checks 7 How to become a CLTV aligned organization? IV. CLTV led Advertisement Spend Summary With a strong CLTV based strategy, the As elaborated by this white paper, the key to CLTV organization can: • Perform ad and copy testing with high-CLTV customers to improve ad effectiveness • Increase brand resonance based on specific CLTV based segments success lies not only in measuring it but also in successful implementation. Fractal’s MDEM framework achieves this in a predictable and systematic manner enabling organizations to make better customer decisions. • Increase advertisement ROI V. CLTV driven Marketing Mix Spend • Identify the most effective marketing channels for high- CLTV customer segments and allocate funds accordingly • Reduce cost and increase ROI through better targeting • Achieve up to 70% of increase in acquisition ROI D. Monitor We recommend using a ‘Test and Learn Framework’ that ensures ongoing maintenance and improvement of CLTV implementation. A simple ‘Test & Learn’ framework can be developed as shown in the diagram below. Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 8 How to become a CLTV aligned organization? About Fractal Analytics Fractal Analytics is a global analytics firm that serves Fortune 500 companies gain a competitive advantage by providing them a deep understanding of consumers and tools to improve business efficiency. Producing accelerated analytics that generate data-driven decisions, Fractal Analytics delivers insight, innovation and impact through predictive analytics and visual story-telling. Fractal Analytics was in founded in 2000 and has 700 people in 12 offices around the world serving clients in over 100 countries. Fractal Analytics is backed by TA Associates, a global growth private equity firm, and recently partnered with Aimia, a global loyalty and consumer insights firm. The company has earned recognition by industry analysts and has been named one of the top five “Cool Vendors in Analytics” by research advisor Gartner. Fractal Analytics has also been recognized for its rapid growth, being ranked on the exclusive Inc. 5000 list for the past three years and also being named among the USPAACC’s Fast 50 AsianAmerican owned businesses for the past two years. For more information, contact us at: +1 650 378 1284 [email protected] Copyright © Fractal 2014 - 2015 www.fractalanalytics.com 9
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