Customer Lifetime Value

Transcription

1 Customer Lifetime Value Pega Marketing for Financial Services 7.21 May 2016 Introduction This document describes how Pega Marketing for Financial Services delivers a solution to calculate Customer Lifetime Value for current customers. This allows marketers to be more effective by differentiating customers with the potential to grow against customers that should only be serviced. Marketers can design appropriate action plans to achieve business growth and improve customer satisfaction. By calculating Customer Lifetime Value in real-time, the application is able to deliver the right treatments while interacting with a customer. Contents What is Customer Lifetime Value? How is the strategy configured and calculated? Where is the benefit? How is it configured and tested? CustomerLifetimeValue - Strategy Extending the strategy What is customer lifetime value? As market dynamics change, retail banks are looking for new ways to improve how they attract, manage, and retain customers. Customer Lifetime Value is an excellent tool to help your organization reach strategic objectives, such as increasing share of wallet, improving customer retention, and increasing return on marketing investment. By activating customer valuation models in your marketing efforts you can place more emphasis on customer service and long-term retention, rather than on maximizing short-term sales. The Customer Lifetime Value (CLV) is the discounted value of the future profits that will be generated by an individual customer, discounted over a weighted average cost of capital. For example, a customer that will generate $120, $80, $30, $50, and $10 of profits in the next 5 years will have a CLV of $238, if the discounted factor is 10%. As these future profits are uncertain, models have to be developed to estimate the future value of customers. These models are based on data analysis techniques, whereas traditionally, companies have had to focus on analysing historical data. Pega has developed a model for customer valuation based on research by Haenlein, Kaplan & Beeser to deliver a Customer Lifetime Value in a retail banking context. Customer Lifetime Value 1

2 How is the strategy configured and calculated? This chapter describes how CLV strategy has been implemented for retail banking. In the first part of the strategy, the customer is segmented into one of five customer segments. The segment yields: CustomerLifeTimeValue strategy Customer segmentations Markov-Chain model: This model showcases how the transition happens for a customer from one segment to another over their lifetime within an organization. This transition probability is summarised in a Transition Matrix as shown in the following table. Segments / Transactions Typical Saving Client Transition - Yr1 Medium Value Transition- Yr2 High Net Wealth Transition-Yr3 Top Segment Transition - Yr4 Typical Saving Client Medium Value High Net Wealth Top Segment High Churn Inactive Segment mapping decisioning High Churn Inactive Transition -Yr5 Decisioning logic helps in mapping the customer profile with one of the available segment for benchmarking input values for CLV calculation. From the selected Segment, the system gathers the following field values for further calculation: Budget CLV Actual CLV Transition field values for next 5 years Customer Lifetime Value 2

3 CLV calculation formula The Customer Lifetime Value is the discounted value of the future profits that will be generated by an individual customer. The CLV of a Customer is a function of the profit Pi,j,t the customer will generate in the future "t" via the product "j". Pi,j,t is unknown because the prediction model is built to derive this future profit based on Overall segmentations for the next 5 years using Transition values. For the identified segment, use percentage CLV value 100 and calculate change in CLV for the next 5 years using Transition values across each segment. WACC Weighted Average Cost of Capital is the discounted rate of returns expected by bank. Note: For more details about how the CLV used in this application is calculated, please contact Pegasystems. Where is the benefit? There is a significant added value of CLV based segmentation, at various levels. Campaign/Offer: At the Campaign level, CLV can help you capture cross-sell and cannibalization effect. In marketing strategy, cannibalization refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. There are two main reasons companies do this. Firstly, the company wants to increase its market share and is taking a gamble that introducing the new product will harm other competitors more than the company itself. Secondly, the company may believe that the new product will sell better than the first, or will sell to a different sort of buyer. Customer Lifetime Value 3

4 Example A credit card campaign / offer: Campaign or Next- Bob Chris Eliza Fred Best-Action Credit Card $100 $150 $150 $200 Current Account $3000 $5000 $10,000 Savings Account $2000 CLV $150 $155 $200 $250 CLV can increase predictability in terms of value and ranking and can be used in apart from traditional metrics to enhance customer insight. Added value at campaign level Example From a traditional product centric point of view: The return of the campaign is computed taking into account only the return generated by the Credit Card account. From a CLV point of view: The return on the campaign takes into account the effect on the checking and savings accounts. Customer Lifetime Value 4

5 CLV captures cross-sell and cannibalization effects Client Level: CLV can rank our segments in terms of profitability. More generally, a CLV approach can help you optimize marketing campaigns and customer service. Added value at client level Example From a product centric point of view: Segment A = Segment B = Segment C Accounts Segment A Segment B Segment C Auto Loan $400 /yr $400 /yr $400 /yr Checking Account $1000 /yr [cross-sell] $1000 /yr New Savings Account -$1000 /yr [cannibalization] From a CLV point of view: Segment A < Segment B < Segment C CLV ranks segments in terms of profitability. Customer Lifetime Value 5

6 Added value for marketing campaigns Example The CLV change allows for optimizing the company s profits by targeting the segment A for campaign 2 and the segment B and C for campaign 1 in priority. With the current tools, we won t be able to determine which campaign is most appropriate for the segment B and C. CLV Segment A CLV Segment B CLV Segment C Campaign 1 $0 $250 $200 Campaign 2 $25 $50 $55 CLV allows for optimizing marketing campaigns by making more profitable decisions. How is it configured and tested? The use of CLV in marketing provides more emphasis on customer service and long-term retention, rather than on maximizing short-term sales. Customer Lifetime Value 6

7 The CustomerLifetimeValue strategy is defined in PegaFS-Data-Party-Marketing, which is the Customer Class used in Pega Marketing for Financial Services for defining CustomerLifetimeValue Strategy. Note: Your implementation can have a different Customer Class. The strategy is configured with five shapes. Together they define the Customer Lifetime Value associated with an existing customer through massaging the customer data. Set property Decision Tree Switch Result Iteration Customer Lifetime Value 7

8 CLV input segments - strategy This strategy is used for Customer segmentation mapping. Set property The Set property shape is used to define property values associated with a predefined segment in this strategy rule. Customer Lifetime Value 8

9 Each segment includes following properties: Property Actual CLV Budgeted CLV CLV Segment Description CLV Segment Name PercentageinCLVSegment Transition to 1 Transition to 2 Transition to 3 Transition to 4 Transition to 5 Usage Associated actual CLV value in a segment Associated budget CLV value in a segment Description of segment Segment name Percentage CLV in segment Percentage of customers moving to 1st segment Percentage of customers moving to 2nd segment Percentage of customers moving to 3rd segment Percentage of customers moving to 4th segment Percentage of customers moving to 5th segment Decision tree The decision tree shape is used to call CLVSegmentationTree, which includes decisioning logic for customer segmentation. Customer Lifetime Value 9

10 The CLVSegmentation tree includes following criteria s for segmentation mapping. Customer Lifetime Value 10

11 Switch shape Switch shapes are used to select between competing options using defined business rules. This is known as arbitration. The CLVSegmentNr is passed from the Decision tree to evaluate an appropriate segment profile. If the CLVSegmentNr is zero then the No segment found for this customer is selected and passed to the next component. Customer Lifetime Value 11

12 Data transform: calculate CLV input values The CustomerLifetimeValue Strategy needs inputs which are calculated by a Data Transform name CalculateCLVInputValues. The extension activity SetCustomerDimensionsValue is called from LoadCustomerMarketingProfile base activity to include the extra customer information and CLV calculation. SetCustomerDimensionsValue activity calls CalculateCLVInputValues as shown in the following screen shot. SetCustomerDimensionsValue activity is used to set the following required customer details: customer image age, and CLV value. Both the activity and the data transform can be extended by the user as per their requirements.. Customer Lifetime Value 12

13 CustomerLifetimeValue - strategy Set property set WACC Weighted Average Cost of Capital: Amount discounted for 5 years at 10% Note: Using WACC) Customer Lifetime Value 13

14 Iteration CLV segment iteration This shape is used to perform iterative calculations for calculating the CLV value. This shape iterates the calculations five times and sets the Actual CLV value for the given customer. Customer Lifetime Value 14

15 Set property calculate target CLV This shape imports Budgeted CLV value from the identified Customer Segment and calculates Target CLV value using the formula shown below. Set property calculate maximum CLV This shape uses the Targeted CLV value from the previous shape to calculate the Maximum CLV value using the formula shown below. Customer Lifetime Value 15

16 Set property CLV results The outcomes from this shape are: Current CLV Target CLV Maximum CLV Delta Interaction CUSTOMERLIFETIMEVALUE This interaction calls the Strategy and stores the result it in the [.Target CLV] Clipboard. Extending the strategy Extend the CustomerlifetimeValue strategy by saving the rule to your implementation layer or branch. The rule should apply to your customer class. Then update the saved instance to meet Customer Lifetime Value 16

17 your business needs. In most cases, the customer is expected to replace the existing CLV calculation with their own. Customer Lifetime Value 17

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