CADA CLIENTE TIENE SU PRECIO   
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.
Subhead
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
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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