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Every customer has his price

To obtain an accurate customer lifetime value measurement, an operator needs to know the costs and behavioural patterns associated with each subscriber.


Until recently, much of the discussion around CRM (customer relationship management) concentrated on how to make customer information available to the business whatever the interaction channel. Current CRM thinking is focussing more on the value of the relationship between the customer and the business, and how businesses can provide products and services to their customers which develop this relationship value.

Value for the business is usually monetary -- revenue and profit -- whilst value to the customer can include convenience, a good deal and even, perhaps, feelings of importance. However, to manage the value relationship to mutual advantage, the business needs to have an excellent understanding of the customer requirements and to be able to quantify the value that the customer is bringing to the business now, and ideally in future years.

This approach may be obvious but it is clearly not easy to achieve as can be seen from the continuing practice of promoting the same offers to prospective customers regardless of the value range of the customer base. Although the analysis of customer behavior and market segmentation has become increasingly sophisticated in recent years, the equivalent level of understanding of customer value has not in general been achieved.

At the simplest level, business value can be quantified as the number of subscribers. This yardstick is currently used as one of the measures of the performance of the UK GSM operators. However, as the mobile market reaches saturation, the evaluation criteria are likely to follow the US trend towards analyzing the value profile of the customer base. The consequence of this increasing emphasis on customer value is the inclusion of the financial dimension to CRM best practice.

The focus of this article is the measurement of customer value -- both the value today in terms of revenue and profit -- but more importantly the customer lifetime value(CLV). The justification for highlighting CLV as the key measure of customer value is that although there is an inherent complexity in the metric, as the following sections show, the CLV metric does pull together both the customer financial dimension and behavioral characteristics into one measure. The benefit is that the management of customer value is then closely associated with customer characteristics rather than being undertaken as a separate activity. This inclusion of CLV as a business performance metric is in line with the 'balanced scorecard' approach of including the customer perspective as a key performance indicator(KPI).

Customer lifetime value (CLV) is often expressed as being simply dependent on the churn rate and a factor which takes into account the value of future revenue discounted to present values. However, this is a very simplistic and one-dimensional view of CLV and does not reflect the usefulness of CLV as a metric that can be used to tune the business.

The importance of the customer attributes of revenue and (especially) profit to the value metric can be seen fromFigure 1. This example from a UK telco shows a graph of cumulative profit against customer bands of decreasing profitability. The resulting curve is known as a Hook curve. The general shape applies to all industries and is relevant to both B2B and B2C contexts. According to Develin & Partners, a business consultancy specializing in customer profitability analysis, 'the management of a business is essentially the management of the Hook curve'.

Obtaining customer revenue is relatively easy. After all, much of the detail is produced in the billing process. Determining the cost information is harder. However, techniques such as activity based costing (ABC), which analyse the costs associated with customer and product activities, are being used increasingly to produce the individual customer level profitability information --this is the starting point for producing CLV profiles. The importance of this activity is that equal spend but unequal cost customers -- for example, direct debit versus non-payers -- can be distinguished and treated differently.

The additional benefits of producing a customer cost profile of the business using ABC is that high cost activities such as customer acquisition can be understood in sufficient detail in order to implement cost reductions by re-engineering the business processes.

The ABC analysis is used to evaluate the customer value today, but this value needs to be projected forward in order to arrive at a realistic lifetime value. The following sections describe some of the factors and trends that influence the CLV.

Market trends

Factors in the evaluation of the lifetime value of the customer are the revenue and cost patterns in the customer markets. For example, a long-term trend in the fixed-line business is falling prices which, to some extent, is countered by increasing volumes. This trend is even more marked in the mobile market as shown inFigure 2 where the revenue/call minute data has been normalised to the same scale.

The response of the telecoms industry to the effect of competitive pressures on charges is the development of products and services that deliver the added value around basic telephony. The technology advances of WAP, GPRS and 3G provide a platform for the delivery of services to match the requirements of the mobile generation. The potential for services delivered via the networks is limited only by the depth of the customers wallets.

Overlaid on industry long-term trends are clearly short-term discontinuities such as those introduced by regulation or, for example, the approaching saturation of the mobile customer base. According to Stuart Glyde, business development manager at Quadstone, "We are already seeing a change in business strategy away from the acquisition of new subscribers to a concentration on developing the value of the customer base."

However, in the view of Alun Roberts, Manager of the ICL CRM Consultancy Practice, there is a need to look beyond evolutionary changes. "Overall we need to be aware that lifetime value really means staying in a relationship where the trading fundamentals of that relationship may profoundly change. A simplistic year-on-year rollup in a spreadsheet model will not do. The planning must allow for potentially dramatic discontinuities.


Churn is a highly complex metric but its impact on CLV is too significant not to be analysed in some detail. The single measure of churn included in the annual accounts is generally regarded as a performance indicator with a 30 percent churn rate viewed as bad news. On the other hand, a five per cent churn rate would be regarded as excellent and representing the establishment of a loyal and profitable customer base. These conclusions may well be true but the single churn number masks an underlying complexity. For example, the churn of unprofitable customers can lead to increased profits whilst defection of high value customers can erode the business profits disproportionately to their revenue contribution.

Churn rates are highly dependent on the characteristics of the customer segment and in particular on the length of the relationship. The highest churn risk period for mobile customers is around the time of the annual contract renewal but these risk peaks are superimposed on a more general trend that the longer the relationship the reduced probability of defection. Data on retention rates against time presented by Manchester University Business School illustrate that an average lifetime churn of around 20 per cent is based on a first-year defection rate of 40 per cent.

Churn rates clearly vary across customer segments. Obvious examples are the differing churn rates of the fixed and mobile segments with variations even within the contract and pre-pay mobile segments.

The key is to be in control of churn with both the knowledge of the customer and the impact, either beneficial or otherwise, of a defection.

Lifestage and propensity

That the CLV is dependent on lifestyle and lifestage is self-evident. What is harder to quantify is the value of a customer or customer segment as they move through the various styles and stages of their lives. A useful approach which is being practiced by a UK Telco is to research the level of disposable income throughout the lifetime.

Analyzing the propensities of customers to buy particular products and services is a well established practice in financial services. The techniques apply equally well to the telecoms market. The ability to predict revenue and profit from the customer base is clearly related to the sophistication of the segmentation capability. This kind of behavioral analysis will become increasingly important as service providers provide broader product portfolios and need to target those offerings in an increasingly competitive environment.

The previous sections have described a number of factors that to a greater or lesser extent have an influence on CLV. The challenge is to integrate these factors into a model which enables the business to use the CLV metric throughout the business cycle from the strategic planning activity, monitoring CLV as a KPI, to forecasting future business value.

The aiming point is a software model of CLV with the capability to accept customer revenue and cost data and key parameters, such as churn factors and market trends, and providing a simulation capability. However, given the complexity of the CLV model, a pragmatic start is to simplify the model to focus on customer segments rather than individual customers and a limited number of the most significant CLV parameters.

A simulation capability is particularly important in a customer-centric world. The CLV model can be used to investigate the business impact of managing the quality of the customer base (for example, by increasing the population of the high-value segments or of reducing the cost of servicing the unprofitable segments). A schematic of the key elements of a model are shown in Figure 3.

Present and future trends

The view from vendors of products and services which specialize in assisting service providers to understand their customer base is that the level of this activity in the telecoms market ranges from 'scratching the surface' to a developing sophistication. The more advanced practitioners are being driven by the vision of detailed customer understanding providing the platform for real competitive advantage.

Most service providers have data warehouses that capture the customer revenue and behavioral information. There are a number of sophisticated analytical products that have been developed to analyze customer data in order to produce segmentation models and to predict behavior. These products often include specific capabilities. For example, Quadstone has a particular ability to process large data stores to provide dynamic segmentation support for the marketing department, while SPSS has a broad range of analytical applications to derive current customer characteristics and predict future behavior.

The application of ABC to complement the customer behavioral understanding with the profit attribute has been embryonic and so currently revenue is largely taken as synonymous with value. There is clearly a need to balance the customer behavioral understanding with a similar level of knowledge about profitability.

There are many issues to be addressed to realize the vision of value management of the customer base. Not least is the problem described by Berni Simmons, UK Country Manager for SPSS: "Our clients do have some difficulty in the quantification of the cost benefit equation. Our recommended approach is to subset the overall programme and cost justify each stage in the context of the improving customer knowledge."

The traditional measures of the performance of a business tend to focus on the financial performance metrics such as ROCE, profit and so on. The balanced scorecard approach advocates taking a broader view of performance to incorporate such aspects as 'the customer perspective' in order to factor in a longer term view of business performance. CLV is a prime candidate as a business performance metric as it contains the elements of value and customer knowledge. Inclusion of CLV as a business KPI automatically broadens the scope of CRM towards customer value management, that is the development of customer and business value for mutual advantage. *

Dr Peter Cockburn, associate consultant for the CRM consulting and implementationspecialist, Kainos
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El retorno de la inversión en entrenamiento ejecutivo de equipos gerenciales es exponencial y en minutos. Norman Vincent Peale.
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