What are the disadvantages of the traditional Customer Lifetime Value Model? Especially concerning telecom business. How should a modern Customer Lifetime Value approach look like?
Answers (3)
Hernan C
Managing Partner - New York Commercial Office, Inc.
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The main disadvantages were related with the quality of the parameters used as input: proper churn/retention adjustment, picking the right discount rate, etc; and the proper consideration of externalities like: risk factors, walking dead, technology changes, product life cycle, etc. Unfortunately, every model remains only a valuable approach and one element of judgment and companies should not take its results as granted. The experience, intuition and wisdom of senior executives is still the key element to weigh (ponderate) results and make decisions -thanks to that, because it means guys like me have a chance to keep working, LOL- Also, measuring CLV requires deep commitment from many areas within a company (because you need input from several different departments) and the larger the company and the more complex its market, the more difficult to keep track of CLV.
The main elements a good CLV model should address are: a) Transaction metrics: average value, periodicity, margin, discount rates, etc.; b) Retention: retention rate, average retention cost per customer/transaction, etc., c) Acquisition costs: cost of reaching, response rate, cost of attracting, discounts, etc.d) Externalities: walk dead rate, product life cycle, seasonal adjustments, obsolescence, etc. Then, the executive will apply his/her own wisdom 80/20, I believe right results should show a long tail. Problem: many companies will find it very expensive to apply. Solution: again, common wisdom and some simple key metrics may help as a compass to manage CLV without measuring CLV.
HBS has a simple but nice calculator: http://hbswk.hbs.edu/archive/1436.html
Below are some links to papers that may help your investigation. Two of them addressing the specifics of your industry:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=985639
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=605501
Links:
Noreen P
Product Manager Social Media and Collaboration at Kaiser Permanente
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The main disadvantage of the traditional Customer Lifetime value model is that it has too many unknowns. For example, you do not know what defines a lifetime. Also there are many unforeseen factors that can impact lifetime value such as a bankruptcy or a debilitating illness. Either of these may impact that customer value to your business.
I see a more valuable measure is current share of customer wallet. In other words of the total spend available to this customer today what share do you own. There are some assumptions to be made in depending on what industry you belong to and what product you offer. The measure would be based upon when that customer goes to make a particular type of purchase or class of purchase that your business falls into how much of that customer do you own? How likely is it that they choose your company’s products or services.
You may equate this to what share of the customer is yours. I believe in the future companies will look more to this type of a measurement than lifetime value. In this instance you keep your eye on the customer and who they are purchasing from. Own enough of the customer then market share becomes a given.
Noreen
www.loyaltybiz.com
David H
Social Media Marketing Consultant at www.HandPrintsOnMyHeart.com
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Good answers already provided above. Let me make a short addition - like most marketing problems, this one starts with segmentation. Are you trying to model individual customers? Or (more likely) market segments? Then it comes back to the problem of identifying your segments accurately and in a meaningful manner.
I think share of wallet is useful too, but I don't see how it helps much in determining what you can spend for cost per acquisition - CLV>CPA = good, CLV<CPA = bad
Clarification added May 5, 2008:
Re-reading my answer and I see the second paragraph isn't very clear.
CLV is useful to help one figure out how much to spend on customer acquisition. SOW is useful for other purposes like baselining/trending and relative to competition, other media etc.
