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“Show Me the Money” – Discussing the VALUE Component of Lifetime Value

As claimed in a previous Predicting the Future of Predictive Analytics as an Enterprise Suite Product, LTV can be a metric for a step-by-step decision support in selecting the more cost effective campaign or retention offer (I am still waiting for your comments on that!…).
Today I would like to talk on the first component of the simplified mind-boggling formula introduced on my The Money or Your Life – Some Reflections About Lifetime Value (LTV) on the lifetime value theme, v(t) – the customer value at time t .
“Customer value” is a coined term used by many of us in our daily CRM preaching but when one tries to bring an organization to agree on such metric – things can go wild! The reason behind it is double folded – one needs to agree about who is a “customer” and about the use of such metric. For example, for customer retention one may prioritize customers that have provided the organization with important revenues during the last 2 years. For collection purposes one may prioritize addressing first customers that have canceled their contract and still carry a big debt. This gives us a hint that organizations should create several proxies for the customer value metric.
Let’s look at value of an existing customer. A simplistic approach to customer value associates value to a financial metric such as accumulated margin during certain time period. For example, communications service provider typically use an average income from a subscriber over several months (e.g. average bill amounts + average revenues from incoming communications) minus the direct costs of this revenue generation (e.g. interconnection costs) minus other direct and indirect costs (e.g. the cost of customer acquisition or equipment subsidizing and even related costs of infrastructure, costs of serving the customer, etc.). Some special treatment should be given to specific points and transitions in the customer lifecycle. For example a new customer may not be judged by such calculation during the first months of service (= the so-called “incubation period”) when his consumption is still not stable. On the other side of the lifecycle, a lost customer may retain its “before attrition” value score for the sake of evaluating an investment in its win-back.
Whatever the value metric(s) is (are), in order to become a strategic metric, by which functional areas are communicating and prioritizing actions it should be categorized into several levels. For example, a common practice among communications service providers is to sort and classify their customers segments into 5-6 value tiers, where the A segment are the cream customers and the F customers are those you would like to gift the competition with.
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