Customer Life-Time Value (CLV)

Value of a Customer

The 80-20 Rule

• 20% customers in any market yield 80% of the profits
• These are the customers that need to be retained by organizations
• On the other hand, the remaining 80% customers are relatively under-served and therefore represent a huge business opportunity
• Telco companies should therefore build a business strategy around either of these segments, or sometimes both

Also the value of a customer lost is not just a value lost at one time it is

• Customer value lost over the life time of a customer (Quantitative)
• Customer value lost in terms of customer loyalty (Qualitative)
• Future customer value lost due to referral’s and additional products cross sale lost (future predictive)

The worth of a customer is often realized when you lose the customer. But how does the telecom service provider measure the value of a customer and how much the potential benefit they have lost. Is the customer just a one time revenue provider? Is the customer a short term business association or is the customer a long term revenue generation opportunity?

The definition of Customer Life-Time Value (CLV)

“The net value of all revenue generated from a customer from the moment the customer is in an opportunity state including the expenses done towards acquiring that potential customer and until the customer churn occurs and the revenue generation from the association with that customer”

Theoretically the calculation of customer lifetime value depends on

• The cost of acquiring the customer
• Stream of revenues from the customer
• Computations of the recurring costs of delivering service to that customer
• Profitability of the customer even if the revenue is low generate
• Referrals from the customer

CLV thus can be calculated for potential customers, existing customers and past customers that have been lost due to churn. Lifetime value is a key method of determining the value of a telecom subscriber, and of evaluating the strategies used to market to these subscribers. To understand and better position the marketing strategies of the telecom service providers the empirical formula has been devised which is based on various factors and assumptions that include

The CLV formulation is generally based on 5 components

1. Customer value over time (average revenue generated monthly and annually)
2. Customer time of association TOA (number of months with the service provider)
3. The amount spent in the acquisition of the customer
4. The maintenance and operational costs associated with the customer
5. The monthly discount factor

One needs to understand that the CLV is a generic formula and does not catch exactly the consumer behavior but is an indicative of the customer segment and a projection of the revenue that could be generated from the customer over a projected over an assumer period of time of association.

1. A customer’s past and present value( monthly and annually) is known and is already present as meta-data in the telecom service provider’s database but the future value of the customer is predicted based on the current data, usage pattern and business knowledge using predictive analytical tools.
2. The time of association (TOA) is the customer probability to churn (1- the probability of customer to be retained)
3. The amount spend in acquisition of the customer like (campaign cost, marketing cost, administrative expenses all these cumulatively found per customer by amount spend in acquiring the segment of customers in total)
4. The monthly cost is the cost associated in fixing any tickets or complains raised by the customer and any additional network and service related monthly costs associated with the customer
5. The monthly discount given to the customer as part of association with the particular scheme or segment of customers

Importance of understanding of CLV

• Targeting of a correct customer segment that is more profitable and provides sustainable relationship in a long run
• Acquisition of new customers in a particular segment and increase the number of relationships
• Calculation of ROI for a particular segment vs the effort spend in campaign and marketing
• Ability to calculate and increase the profitability of customer relationship
• Increase the duration of profitable relationships
• Decrease the one time cost to acquire customers
• Decrease the operational and maintenance cost of the customers

Thus one can easily say that CLV is a decision making tool for the marketing gurus of telecom service providers that helps them to Redefine their focus and revise their Strategy based on the value that gets quantified and associated with a customer or a customer segment