Power of Pricing
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Which Customers Are Worth Keeping and Which Ones Aren’t? Managerial Uses of CLV
Roy Cardiff runs a mail-order business that tracks sales to each customer. He recently decided to cut costs by curtailing catalogs to those customers who are least likely to buy from him in the future. His customers break down into three categories: those who made several small purchases throughout the past year; those who made a single purchase but for a much larger amount, and those who have had a long but sporadic relationship with his firm. Which segment of customers should Smith prune from his mailing list? According to several Wharton marketing professors who have studied this issue, there is no easy answer, despite new and increasingly sophisticated efforts to measure what is called “Customer Lifetime Value” (CLV) – the present value of the likely future income stream generated by an individual purchaser. “For many companies, their whole business revolves around trying to understand which customers are worth keeping and which aren’t,” says Wharton marketing professor Peter Fader, who used the mail order example above in a recent co-authored paper entitled, Biases in Managerial Inferences about Customer Value from Purchase Histories: Intuitive Solutions to the Mailing-List Problem. “This has led managers from a broad cross section of industries to seek out more refined measures of CLV, using data-intensive procedures to identify top customers in terms of their likely future purchasing patterns.” The goal is not only to identify customers, but to reach out to them through cross-selling, up-selling, multi-channel marketing and other tactics – all of which are tied to metrics on attrition, retention, churn and a set of statistics known as RFM – recency, frequency and monetary value.
“CLV is a hot area,” notes Wharton marketing professor Xavier Dreze, co-author of a new paper entitled, A Renewable-Resource Approach to Database Valuation. Although CLV is
Which Customers Are Worth Keeping and Which Ones Aren’t? Managerial Uses of CLV
Roy Cardiff runs a mail-order business that tracks sales to each customer. He recently decided to cut costs by curtailing catalogs to those customers who are least likely to buy from him in the future. His customers break down into three categories: those who made several small purchases throughout the past year; those who made a single purchase but for a much larger amount, and those who have had a long but sporadic relationship with his firm. Which segment of customers should Smith prune from his mailing list? According to several Wharton marketing professors who have studied this issue, there is no easy answer, despite new and increasingly sophisticated efforts to measure what is called “Customer Lifetime Value” (CLV) – the present value of the likely future income stream generated by an individual purchaser. “For many companies, their whole business revolves around trying to understand which customers are worth keeping and which aren’t,” says Wharton marketing professor Peter Fader, who used the mail order example above in a recent co-authored paper entitled, Biases in Managerial Inferences about Customer Value from Purchase Histories: Intuitive Solutions to the Mailing-List Problem. “This has led managers from a broad cross section of industries to seek out more refined measures of CLV, using data-intensive procedures to identify top customers in terms of their likely future purchasing patterns.” The goal is not only to identify customers, but to reach out to them through cross-selling, up-selling, multi-channel marketing and other tactics – all of which are tied to metrics on attrition, retention, churn and a set of statistics known as RFM – recency, frequency and monetary value.
“CLV is a hot area,” notes Wharton marketing professor Xavier Dreze, co-author of a new paper entitled, A Renewable-Resource Approach to Database Valuation. Although CLV is