Measuring Customer Lifetime Value: An Application in Credit Card Industry

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ABSTRACT

Finding the most profitable customers and managing profitable relationship are always the critical issues in the field of customer relationship management (CRM). Customer lifetime value (CLV) is one of the popular concepts in CRM to help firms select and target potential and the most profitable customers. However, company may feel it is not practical because of the difficulty in computation. In this paper, the authors illustrate how to measure customer lifetime value by considering individual heterogeneity step by step and offer an application in the credit card industry. Based on strategic segmentation by taking into account both customer lifetime value and current share of wallet, companies can allocate resources, differentiate marketing initiatives, and refine marketing contacts and promotions. In addition, the article presents the framework of the cycle of customer lifetime value and offers managerial insights for implementing the framework outlined in this research.

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Introduction

It is commonly accepted that 80 percent of a company's sales come from 20 percent of its customers (Dubinsky and Hansen, 1982) and as such identifying those customers and creating a win-win relationship with them is critical to firms. Since acquiring new customers is much more expensive than retaining current ones, measuring and maximizing customer lifetime value (CLV) which can help a company identify the most profitable customers has become an increasingly important capability in Customer Relationship Management (CRM) in recent years. The measurement of CLV provides a guideline to answer the following questions: What is the best strategy for providing differentiated marketing efforts to customers? Who should receive preferential treatment? Who should receive the least expensive marketing communications and be directed to the inexpensive channels? How should markets be strategically segmented as customers become more heterogeneous and how best can resources be allocated to customer segments? Not only can CLV help firms prioritize and select customers (Kumar et al., 2004; Reinartz & Kumar, 2003), it also can be used to support merger and acquisition decisions (Blattberg, Malthouse, & Neslin, 2009; Gupta, Lehmann, & Stuart, 2004; Kumar et al., 2004) and is a tool for evaluating a firm's customer equity value by aggregating the CLV of a company's current and potential customers (Gupta et al. 2004).

Any company that keeps complete customer transaction...