Businesses need to know who their customers are, and how much money they should invest in marketing to them. It’s an obvious idea, but it also served as pretty much the sum of my knowledge of Customer Lifetime Value (CLV). That is, until Edward Malthouse came into my life.
Ed’s new book, Segmentation and Lifetime Value Models Using SAS, schooled me in the basics of CLV and made me realize that measuring it is a many splendored thing.
CLV helps you estimate how much profit you can expect to gain based on your organization’s relationship with a customer. Ed’s book shows how to estimate the future value of a customer through segmentation and modeling. Of course you have to know what kind of relationship you’ve got in the first place. Here’s what I learned from a recent conversation with Ed about this:
Your company gets a new customer, provides them with a product or service, and makes a profit on that relationship until it’s over. What if your company is a contractual service provider, such as a health club, or a cell phone or Internet service provider? How do you look at retention in that light?
There are a number of models that are appropriate here:
1) The Customer Annuity Model comes into play when a customer signs a contract for a fixed period and fixed payment amount, and they are not allowed to cancel. Think of a book-of-the-month club, for example.
2) Those models aren’t usually realistic, however. The Simple Retention Model assumes a case in which customers sign a contract for a certain period of time, payments remain the same over that time period, and they have the option to cancel. Here you may have an Internet service provider charging $50 per month, every month, for as long as the relationship lasts.
3) Even that can be limiting, as retention rates don’t always stay the same. For example, many companies offer a discounted rate for the first few months or the first year, and then they increase the service price. Now you need a General Retention Model, which allows retention rates and payment amounts to change, and for payment amounts to depend on the time of cancellation.
Who knew? Ok, well, if you’re a marketing or CRM analyst, or a database manager, you probably did. And you’ll benefit from the concepts and examples Ed offers on these and a number of other models and ways of thinking about customer relationship management.
Take a look at Ed’s book for yourself, and start incorporating these models into your work today.