Monday, July 09, 2007

APQC Provides 3 LTV Case Studies

One of the common criticisms of lifetime value is that it has no practical applications. You and I know this is false, but some people still need convincing. The APQC formerly American Productivity and Quality Council) recently published “Insights into Using Customer Valuation Strategies to Drive Growth and Increase Profits from Aon Risk Services, Sprint Nextel, and a Leading Brokerage Services Firm,” which provides three mini-case histories that may help.

Aon created profitability scorecards for 10,000 insurance customers. The key findings were variations in customer service costs, which had a major impact on profitability. The cost estimates were based on surveys of customer-facing personnel. Results were used for planning, pricing, and to change how clients were serviced, and have yielded substantial financial gains.

Sprint Nextel developed a lifetime value model for 45 million wireless customers, classified by segments and services and using “a combination of historical costs, costing assumptions, cost tracing techniques, and activity-based allocations”. The model is used to assess the financial impact of proposed marketing programs and for strategic planning.

The brokerage firm also built a lifetime value model for customer segments, which were defined by trading behaviors, asset levels, portfolio mix and demographics. Value is determined by the products and services used by each segment, and in particular by the costs associated with different service channels. The LTV model is used to evaluate the three-year impact of marketing decisions such as pricing and advertising.

The paper also identifies critical success factors at each company: senior management support, organizational buy-in and profitability analysis technology at Aon; model buy-in at Sprint Nextel; and the model, profitability analysis and customer data at the brokerage firm.

My own take is that this paper reinforces the point that lifetime value is useful only when looking at individual customers or customer segments: a single lifetime value figure for all customers is of little utility. It also reinforces the need to model that incremental impact of different marketing programs, or of any change in the customer experience. Although the Aon and brokerage models are not described in detail, it appears they take expected customer behaviors as inputs and then calculate the financial impact. This is less demanding than having a model forecast the behavior changes themselves. Since it clearly delivers considerable value on its own, it’s a good first step in a larger project towards a comprehensive lifetime value-based management approach.


Landon Ray said...

I wonder if Sprint's research might have had something to do with this:

thanks for a great blog...

David Raab said...

I wondered that myself. Probably not directly, insofar as their model deals with segments rather than individuals. But certainly an attitude of looking at customer profitability would lead to dropping unprofitable customers when they can be identified.

What's interesting to me is the media's reaction, implying that there is something wrong with what Sprint did. But why should they be required to serve customers who complain constantly? It's not the same as discriminating based on things people can't control, like race, gender, or income. According to the article, Sprint let them out of their contracts without a termination fee, so it seems this should be a mutually agreeable resolution for what are obviously unhappy customers. Even if you argue that people have some sort of "right" to mobile phone service, customers would still have a related responsibility to behave reasonably. How is this different from banning an unruly customer from a store?

Thanks for reading.