Implementing A Customer Lifetime Value Approach to Sales and Marketing Strategies


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A three-page excerpt from a guidebook profiling Farmers and Implementing a Customer Lifetime Value Approach to Sales and Marketing Strategies.

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Implementing A Customer Lifetime Value Approach to Sales and Marketing Strategies

  1. 1. growth team m e m b e r s h i p™A three-page excerpt from our 11-page Best Practice Guidebook:Implementing a Customer Lifetime ValueApproach to Sales and Marketing StrategiesThe contents of these pages are copyright © 2009 Frost & Sullivan. All rights reserved.
  2. 2. growth team m e m b e r s h i p™ 1Best Practice GuidebookImplementing a Customer Lifetime Value Approach to Salesand Marketing Strategies guidebook summary Firm: Farmers Group, Inc. Industry: Multi-line, multi-company insurer and financial services provider Headquarters: Los Angeles, California, USA Geographic Footprint: United States Ownership: Wholly owned subsidiary of Zurich Financial Services Revenue (2008): $6.4 billion USD Problem: Resources Required: Farmers’ traditional business metric, policies in force, lacked customer • Building and testing the CLTV model took six to eight months focus and resulted in sales and marketing strategies focused on the • The CLTV initiative involved a ten-member team composed of quantity, rather than the quality, of customer relationships. analysts and managers within Market Analytics, as outlined below: - Analysts: SAS programmers to perform statistical modeling Solution: The Market Analytics team creates a customer lifetime value (CLTV) - Analysts: Staff familiar with the firm’s internal data infrastructure model to predict the dollar revenue a customer will generate over his/her - Managers: MBAs with a strong technical and business background lifetime with the company. This allows Farmers to: • Building, testing, and rolling out the CLTV model cost approximately • Identify the CLTV of each individual customer $1 million • Measure the effectiveness of their marketing spend • Senior Leadership Executive—a champion for CLTV initiatives within leadership ranks, e.g., Chief Marketing Officer, Chief Operating Officer • Attract and retain higher CLTV customers • Embed CLTV-based strategies within the sales function Applicability of Best Practice to Executive Functions: Function Applicability Business Results: • 20% improvement in overall marketing ROI Corporate Strategy • Incremental increase in Farmers average customer profitability Marketing through an improvement in their market share of higher-value Market Research customers CEO • 100% improvement in direct mail ROI Corporate Development Sales ManagementThe contents of these pages are copyright © 2009 Frost & Sullivan. All rights reserved.
  3. 3. growth team m e m b e r s h i p™ best practice guidebook 2 key takeaway: Create a model to calculate customer lifetime value (CLTV)—the monetary revenue each customer generates over their lifetime with the firm—and establish the foundation for a data‑driven marketing strategy Farmers’ model calculates CLTV using three variables: total relationship revenue, predicted customer tenure, and predicted future purchase revenue Farmers’ Customer Lifetime Value Model 1.Total Relationship 2. Predicted 3. Predicted Future Revenue Customer Tenure Purchase Revenue This is the total revenue an individual This is defined as the entire time This is the expected future purchases Future cross-sell models are customer generates from the total period an individual customer has customers will make based on their built on five years of data number of relationships they have with a relationship with the company. current relationship with the company, from a sample of 100,000 Model the company. This can be calculated Farmers uses survival analysis because historical data, and demographic customers and validated on Variables daily, weekly, monthly or annually. it allows them to predict how long a profiles. Farmers uses logistic the balance of the customer Farmers looks at the total number customer will remain a policyholder regression to calculate the probability base over the same five of policies and the monthly premium and differentiate between customer that a customer will make additional years. Market Analytics revenues associated with each. groups. purchases. develops product-specific future cross-sell models to Jane Doe is 44 years old, married, living The full-coverage automobile Based on the customer’s data, calculate the probability of in Nevada and needs full-coverage insurance policy is estimated to last 48 Farmers’ future cross-sell model adding a home policy, an automobile insurance for her new months. The liability-only automobile predicts a 60% probability that automobile policy, etc. CLTV domestic sedan and liability-only insurance policy is estimated to last 30 Jane will purchase a homeowner’s Example insurance for her 10-year old family months. insurance policy. The average home car. The monthly premium for the full- policy’s life span is 120 months and coverage policy is $50. The monthly premiums are $100 per month. premium for liability policy is $25. New Sedan Policy: $50 × 48 months + [(.60 × $100) × 120 months] = $10,350 CLTV Family Car Policy: $25 × 30 months critical data inputs for the cltv model 1. Four to five years of historical customer data to analyze the initial and subsequent purchase relationship with the company; 2. transaction‑based data that is aggregated at the customer (household) level; 3. customer information such as age, marital status, credit history, and number and type of policies held Note: Of the six to eight months it took to build and test the model, 80% of the time was spent cleaning and understanding the data and 20% was spent modeling and determining the strategic implications of its output.The contents of these pages are copyright © 2009 Frost & Sullivan. All rights reserved. Source: Farmers Group, Inc.; Growth Team Membership™ research.
  4. 4. growth team m e m b e r s h i p™ best practice guidebook 3 key takeaway: Analyze existing customers through CLTV and leverage results to secure buy‑in for a CLTV‑based segmentation study Market Analytics segments existing customers into three …and utilizes the results to demonstrate CLTV’s impact lifetime value segments and evaluates their profitability… and secure sponsorship for additional segmentation work CLTV-based Segmentation Analyses* Stakeholder Engagement Meeting Director, Market 12.5 AnalyticsCustomers with thehighest CLTV bring in Customer Lifetime Value VP Sales VP Marketing25 times more revenue ($000)than the lowest valuecustomer. 0.5 0 Director, High Middle Low Customer Insights CLTV CLTV CLTV CLTV Segments stakeholder engagement strategyProfitability calculations 1. Highlight sense of urgency through CLTV’s financial implications:for each segment requires High-CLTV Middle-CLTV Low-CLTV • Emphasize the major differences between revenues from differentallocating the elements of Customer Customer Customer customer types—the best customers bring in 25 times more revenuecost of goods sold (cost of than lower value customers.coverage, i.e., losses, claims • Stress that current sales and marketing expenditures do notsupport, etc.) to each differentiate between high‑ and low‑value customers—acquiringcustomer. customers whose acquisition costs exceed their revenue. 2. Establish trust in accuracy of the CLTV model: Customer Lifetime Revenue (CLTV) $6,000 $3,000 $1,050 • Demonstrate model’s strength by applying it to historical customer data—2000 customers from three years prior—and showing the Cost of Goods Sold (over lifetime) $3,500 $1,500 $1,000 high correlation between its predictions and actual customer loyalty. Acquisition/Marketing Costs $125 $125 $125 3. Issue call to action on new segmentation: Lifetime Margin/Profit $3,875 $375 ($75) • Establish that current segmentation scheme has resulted in over one % of Existing Customer Base 15% 50% 35% third of current customers generating losses. • Emphasize the need to develop a new CLTV‑based segmentation * Numbers are illustrative only. model to enable targeted customer acquisition strategies. The analysis highlights a major opportunity to grow the high-CLTV customer base and the need to change marketing strategies that are acquiring unprofitable low-CLTV customers. Further segmentation work is necessary to be able to target high-CLTV prospects and maximize profitability. The contents of these pages are copyright © 2009 Frost & Sullivan. All rights reserved. Source: Farmers Group, Inc.; Growth Team Membership™ research.
  5. 5. growth team m e m b e r s h i p™View GTM’s webinar with Shiv Gupta (Farmers) Please contact us to learn how to access the full Best Practice Please contact us to learn how to access Guidebook or for information on Growth Team Membership.™ the full Best Practice Guidebook or for information on Growth Team Membership.™ Email us Register for the Webinar Visit us online Implementing a Customer Lifetime Value Email us Approach to Sales and Marketing Visit us online GTM and Shiv Gupta, Director of Insight and Innovations at Farmers, will present this best practice where Shiv shared his key lessons learned and participated in a Q&A.The contents of these pages are copyright © 2009 Frost & Sullivan. All rights reserved.