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Using the Customer Valuation Model for Customer Centricity

Originally published May 29, 2013

A customer lifetime valuation model does not just provide a means of quantifying the value of the relationship with the customer. It also enables a number of ways of implementing customer centricity, both at the different engagement points along the customer engagement lifecycle and at touch points within specific business processes. Operationally, this means embedding decision processes within business processes that are driven by the integration of customer profiling and customer lifetime value models. The objective is to positively influence customer behavior in ways that optimize the outcomes across the collection of value metrics.

Here is a simple example: leveraging offers to increase airline loyalty, revenue and customer experience. Frequent travelers may opt to allocate their airline travel “spend” across multiple carriers. At the same time, airlines offer an effective “future rebate” in the form of airline miles that can be accumulated and exchanged for free travel, as well as premier statuses that provide specific benefits such as greater flexibility in booking frequent flyer trips, premier-level customer service, more comfortable seating or upgrades to higher level of travel accommodations.

A specific airline may analyze their customer profiles to assess the airline’s “wallet share,” or the percentage of the individual’s total travel spend that has been allocated to the airline. An airline’s determination that there is an opportunity to capture a greater share of wallet creates a scenario for influencing customer behavior to decide to purchase from that airline instead of any other alternative. Theoretically, influencing purchase decisions has cumulative impacts to customer lifetime value:

  • Improved loyalty benefits improve the customer experience

  • Improved customer experience strengthens the customer relationship

  • A strong customer relationship leads to increased purchases

  • Increased purchases continues to contribute to increased loyalty benefits for the customer

  • Increased loyalty leads to an elongated customer lifetime
In other words, triggering an improvement in the customer’s loyalty benefits leads to improved customer experience, increased revenues, increased wallet share and longer lifetime relationships. To that end, when it becomes apparent that a target customer is a candidate for this type of influence, the airline might trigger the cycle by offering incentives for accumulating the airline miles that ratchet the traveler into a premier status level.

Customer-centric relationship management processes can blend information from customer profiles with the lifetime value model to influence behaviors in a number of ways:
Migration into premier status levels: We can generalize the example above to any scenario in which loyalty benefits are used as leverage for extending the customer relationship. The decision point is influenced by offers that ease the process of increased benefits.
Other examples include:
Pumping the customer’s relationship network: Providing incentives to a customer to encourage recommending your company’s products or services to his/her friends.

VIP service: Using the customer’s lifetime value and profile to assign level of effort applied to customer touch point activities. For example, best customers have minimal call center wait times, while undesirable customers are pushed further back on the wait queue.

“Leveling-up” in profile: Identifying “good” customers who have the potential to be turned into “great” customers and providing incentives for the behaviors that would ratchet the customer into a more profitable segment from a lifetime value perspective.

Proactive retention management: Identifying scenarios to provide incentives for continuous reengagement of good customers as a way of elongating the relationship, as well as reducing the benefits provided to undesirable customer to encourage their attrition.
Each of these opportunities for influencing customer behavior must be weighed in terms of the overall improvement in all relevant aspects of value over the anticipated customer lifetime. That means recognizing that sometimes what appears to be optimal for one performance measure in the short term may not necessarily be the best decision for other performance measures for the long term. For example, lowering the price of one product to increase overall number of products sold may reduce the risk of attrition, lead to a reduction in customer credit risk or even increase product profitability by clearing out the inventory more quickly. Providing a full refund for a returned item may reduce revenue as well as incur an immediate cost of processing; but the goodwill generated may increase positive word-of-mouth, thereby increasing the network value of the customer.

In all of these cases, decisions that may seem to decrease immediate value may lead to increased lifetime values for a broad range of customers. Managing the decision processes with this perspective should increase overall profitability over the long term.

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