Customer Lifetime Value:
An automobile manufacturer encountered the Pareto phenomenon: A small number of the customers are responsible for a large part of the earnings. In practice, it is often not easy at all to be able to recognize what a customer possesses in terms of future value. On top of this question arises how to capture this value. To find an answer you need to think through the whole process of marketing and sales to its logical end. This is exactly what the automobile manufacturer did.
Step 1: In the rearview mirror, you don’t see the upcoming curve: a future-oriented calculation of customer value
Customer-value-oriented customer management is only in its rudimentary stages among automobile manufacturers. Sure, there are corporate customers and there are customers who buy the expensive types of cars.
But what will they buy in the future? How loyal are they to the brands and to the authorized dealers? How probable is it that their next car will be a new car? How much business will be a result of personal recommendations? How much business in service and accessories will the customer trigger? These are central questions to which, up until today, there aren’t any satisfactory answers…no: weren’t!
A research panel of customers delivered the basis for the data: customer profile data, personal car purchases, precise quarterly service expenditures. An additional survey among this panel delivered the information necessary to understand the sales triggered by personal recommendations and to also understand sales expectations over the long-term.
Predictive Analytics (here NEUSREL) delivers the mathematical formulas that can calculate, from customer profiles, the diverse, future revenues to be expected. The result: a forward-looking customer value for every customer, which is calculated based on a small set of variables from that customer.
Step 2: What to do with the valuable customers? Derive segment-oriented support concepts from the data.
“What to do?” The customer value tells you how much value can be “gambled away” when you don’t pay attention. It doesn’t tell you what you can do in order to retain the value or increase it. Here is where Predictive Analytics can help too. Because approaches like NEUSREL also deliver the importance of the variables. And these tells you what the driving force of substantial customer value is.
The automobile manufacturer found out, for example, that aficionados of high performance cars not only invest significantly more today and in the future in production, but also most notably in service. A substantial maintenance division that takes care of high performance cars was born.
Furthermore, the company found out that brand loyalty and trust explained almost half of the customer’s value. The segment of the emotionally uncommitted provides a segment that can be excited by measures tailored to individual customers. Their affiliation can be tested with just two “killer questions.”
Step 3: Does the customer respond to my actions? More effective guidance through prognostic Action Scores.
It is a decisive step when realizing which buttons you can push on a target customer. Nevertheless, it can happen that the chosen measures don’t take effect. Perhaps because the person, per se, doesn’t read any emails or advertising letters or maybe isn’t receptive to any discount offers.
What you need is an assessment of whether the call, the letter or, for example, the discount offer will actually evoke a positive reaction. In this way, you can avoid having your marketing and sales investments end up in your customer’s “spam folder” and their effect going up in smoke. You don’t want to run the risk of putting your customers off.
How does that work? The targeting, with the help of Predictive Analytics, is a practice that has already been successfully used in direct mailing for over 20 years. On the basis of customer characteristics and customer reactions from the past, an Action Score can be calculated, which provides a probability of a customer’s reaction to a certain measure. With the help of Action Scores, the automobile manufacturer increased the effect of the measures taken by 84% – with the same investment.
Step 4: Change is the only constant: the necessity of a control process
What about when the planned measures are new and therefore there aren’t any empirical values available? Then you need a pilot phase for these measures. For this, customers will be addressed randomly. After a few weeks, a Predictive Model can be built and the measures can be efficiently guided based on the Action Scores.
The value of a customer will also change over time, just like their needs and the products of your company. That’s why the automobile manufacturer decided to conceive the issue as a control process. The customer value formulas are regularly calculated anew. Different than the conventional segmentation approach, the needs segments are also regularly reexamined and, as necessary, adjusted and brought to life with Action Scores.
p.s. More on NEUSREL and Universal Structural Modeling here.