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Abstract
The significance of Customer Lifetime Value
(CLTV) is now being increasingly acknowledged
among the decision makers around the world.
However, only a few actually take the plunge
and implement it in their organization. This
white paper recommends a framework for
practitioners to measure & implement CLTV
within an organization.
How to become a CLTV aligned
organization?
1. Synopsis ………………………………………………………………………………………………………………………
1
2. Introducing CLTV………………………………………………………………………………………………………….
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a) Segmentation framework …………………………………………………………………………………
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b) Vintage based framework …………………………………………………………………….………….
2
c) Survival Analysis ……………………………………………………………………………………………….
2
3. Why does CLTV matter? ……………………………………………………………………………………………..
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4. Issues faced while implementing CLTV ………………………………………………………………………..
4
5. Fractal’s MDEM (Measure, Demonstrate, Execute and Monitor) framework ……………..
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A. Measure ………………………………………………………………………………………………………………..
5
i.
Segmentation of framework …………………………………………………………………………
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ii. Vintage based forecast framework ……………………………………………………………….
5
iii. Survival analysis ………………………………………………………………………………………….…
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B. Demonstrate …………………………………………………………………………………………………………
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C. Execute …………………………………………………………………………………………………………………
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D. Monitor ……………………………………………………………………………………………………………….
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6. Summary ………………………………………………………………………………………………………………….…
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7. About Fractal Analytics ………………………………………………………………………………………………….
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Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
How to become a CLTV aligned
organization?
Synopsis
In spite of the obvious edge it offers, only a few
organizations make an enthusiastic attempt to
A primary factor instrumental in the success of
any firm is its ability to provide better services to
implement this process. The possible reasons
attributing to this could be, difficulty in tracking
idiosyncratic customer purchase behavior for
the customers and offer superior value
propositions. The fulfillment of expectations of
many purchase situations or that there could be
variations on highest value people over time etc.
customer nurtures their relationship with the
organization and its products. The right marketing
strategies, backed by the right marketing metrics
helps to grow business and profitability. One such
This white paper explains CLTV model designed by
Fractal Analytics and implementation of the
processes required by an organization to get
marketing metric is Customer Lifetime Value
CLTV-aligned. It also helps to understand the
(CLTV).
advantages of being a CLTV – aligned organization.
The CLTV is the economic value of the customer
relation during the complete period of the
relation of the customer and the company. The
evaluation of CLTV helps to optimize the
investment of the limited resources on their
different customers and prepare the customer
acquisition strategy accordingly.
The significance of Customer Lifetime Value
(CLTV) is now being increasingly acknowledged by
the decision makers around the world.
Organizations are consistently collecting more
and more information about their clients to study
the customer behavior and characteristics which
has been playing a crucial role in devising out
their customer - centric business strategies.
Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
1
How to become a CLTV aligned
organization?
Introducing CLTV
Segment
(based on
Spend and
Usage)
Customer
Lifetime
Customer Lifetime Value
Segment
(spend, usage)
F (vintage,
recency)
CLTV = CLTV History +
P(t)*T*[Monthly Potential]
Businesses flourishes when there is a healthy
customer development and retention process at
work. The Customer Life Time Value (CLTV) is a
framework that helps businesses, develop
b) Vintage based forecast framework
strategies to extract incremental value from their
The Vintage framework is a more powerful
customers. It is measured as the profitability of a
segment based approach for predicting the
customer during the customer’s lifetime. In other
customer’s lifetime. Customers are segmented
words, the process aims to understand the true
on their transaction behavior and for each
value of customer longevity so that an
segment customer’s lifetime value curve is
organization can ensure that it is spending the
obtained. Customer Lifetime Value is the area
right amount of money and resources. CLTV is the
under the curve
.
sum of both historic Customer Value and future
Measuring CLTV
CLTV can be estimated using multiple techniques.
In this section we will explore 3 ways in which
∫
CLV (t0 – t1) = f(x)
35.0
Profitability [unit]
Customer Value.
40.0
30.0
25.0
20.0
15.0
10.0
5.0
1
3
5
7
9
11 13 15 17 19 21 23 25 2729
Survival model is developed based on
Segmentation Framework provides a simple but
elegant approach for the calculation of
customer’s lifetime value. Total customer base is
segregated into segments based on their
transaction behavior. For each segment a formula
is derived, as a function of customers’ vintage and
lifetime. Customer’s profitability is calculated
31 33 35
Months on Book
c) Survival Analysis
a) Segmentation Framework
recency, for the calculation of customer’s
t1
t0
0.0
CLV for time T ( t0 to t1 )
CLTV can be measured.
f(x)
customer’s past behavior and trends, to
calculate the probability of a customer’s survival
for next “n” years. CLTV is calculated based on
historic and predictive Customer Lifetime Value
for each customer.
CLV = CLV History + CLV Future
CLV Future = Survival (t) * T * [Monthly Potential]
based on measured historical values and
predicted values.
Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
2
How to become a CLTV aligned
organization?
CLTV is measured by transforming customer’s past
CLTV assigns a single, financial “score” to each
profitability into a forward-looking “prediction” of
customer allowing for the evaluation of the
customer’s profitability over his future tenure. It is
relative “importance” of each customer as they
the sum of both the historic Customer Value and
contribute to an organization’s profits.
the future Customer Value.
In another way, CLTV represents the net present
value from profits, from a single customer.
It can be represented as,
Where:
r = discount rate
N = customer’s future tenure
i = period (e.g., month i or year i)
Survival rate = survival probability of the
customer
CLTV calculations involve econometric forecasting
methodologies. The calculation of a customer’s
“lifetime”, or the prediction window is limited by
the amount of historic data available.
Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
3
How to become a CLTV aligned
organization?
Why does CLTV matter?
Issues faced while implementing
CLTV
CLTV aims at helping organization identify,
CLTV calculation can be achieved simply by totaling
understand and cater to their most valued
the annual expenditure and multiplying it by the
customers. The aim of the CLTV, a forward-looking
likely tenure of the customer. But, the calculation
metric, is to enable organizations to differentiate
assumes a steady business environment without
between their best and worst customers at a very
fluctuations in the economy, change in the
early stage. This will help them design strategies to
customer preference, or competitors in the
retain and acquire the best customers and drive
market.
revenue growth.
At Fractal, the CLTV, a forward looking metric
facilitates the projections of the below mentioned
business parameters
• Current and Future Revenues
• Current and Future Costs
• Life Expectancy
• Future Cross-selling Potential
The cognizance of the Lifetime Value (LV) of a
prospective customer can help in determining
required time, effort and money to be spent in
acquiring that customer. A customer’s LV can
enable us to evaluate the campaign benefits versus
the costs or investment. The life expectancy of a
customer can help us to take actions proactively in
lengthening the relation and provoke the customer
spend more in order to realize expected CLTV.
Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
4
How to become a CLTV aligned
organization?
Fractal’s MDEM (Measure,
Segment (based on
Spend and Usage)
Demonstrate, Execute and
Segment (spend,
usage)
Monitor) framework
Customer
Lifetime
Customer Lifetime Value
F (vintage,
recency)
CLTV = CLTV History +
P(t)*T*[Monthly Potential]
function of customers’ vintage and recency,
Fractal’s MDEM framework helps in monitoring &
for the calculation of customer’s lifetime.
improving initiatives based on Lifetime Value of the
Customer’s profitability is calculated based on
customer.
measured historical values.
1.
2.
Demonstrate
Build
3.
4.
Execute
Monitor
Objective
ii. Vintage based forecast framework
Create a
Analyze existing
Identify Key
Continue to
model to
customer
business unit
monitor
predict the
through CLTV
to partner on
initiative using
revenue each
framework and
LTV and plan
a Test & Learn
Customer
leverage results
and execute
Framework
generates
to get
CLTV based
over their
management
Strategy.
lifetime
level buy –in for
“Think Big, Act
CLTV driven
Small”
The Vintage framework is a more powerful
segment based approach for predicting the
customer’s lifetime. Customers are
segmented on their transaction behavior and
for each segment customer’s lifetime value
Typical
Timeline
strategy.
6 months
6- 9 months
curve is obtained. Customer Lifetime Value is
9- 12 months
12+ months
the area under the curve.
A. Measure
40.0
can be measured.
i. Segmentation Framework
Profitability [unit]
CLTV can be estimated using multiple techniques.
In this section we will explore 3 ways in which CLTV
f(x)
35.0
30.0
25.0
20.0
15.0
10.0
5.0
Segmentation Framework provides a simple but
elegant approach for the calculation of customer’s
t1
t0
0.0
1
3
5
7
CLV for time T ( t0 to t1 )
9
11
13
15
17
19
21
23
25
27
29
31
33
35
Months on Book
lifetime value. Total customer base is segregated
into segments based on their transaction behavior.
For each segment a formula is derived, as a
function of customers’ vintage and recency, for the
calculation of customer’s lifetime. Customer’s
profitability is calculated based on measured
historical values.
Copyright © Fractal 2014 - 2015
www.fractalanalytics.com
5
How to become a CLTV aligned
organization?
iii. Survival Analysis
Demonstrating value ensures engagement & buy-in
Survival model is developed based on customer’s
from the key stakeholders such as:
past behavior and trends, to calculate the
probability of a customer’s survival for next “n”
years. CLTV is calculated based on historic and
VP Marketing
VP Product
predictive Customer Lifetime Value for each
customer.
VP Sales
VP
Service
CLV = CLV History + CLV Future
Customer


How do I get more high LTV customers?
What do high LTV look for?

What discounts can I offer to high LTV
customers?
Are they price-sensitivity?



Where can I find high LTV customers?
What is their consideration at the
moment of purchase?

What aspect of customer service
matters to high LTV customer?
CLV Future = Survival (t) * T * [Monthly Potential]
C. Execute
B. Demonstrate
Once the value has been demonstrated, the next
CLTV based strategy has major implications across
step is to develop and execute a CLTV based
various business units; for the strategy to be
strategy. Key to the execution strategy is:
successful it is important to generate demand from
Select a business unit which has bought in to the
the business. This can be achieved by
concept of customer lifetime value
demonstrating the value of CLTV.
Identify a business problem based on the
An example of how value can be demonstrated is
company’s need & economic or competitive
by showing the spread in revenue and profitability
landscape
between high & low value customers.
There are many application of Customer Lifetime
Value. A few of them are highlighted below.
I. Customer Acquisition
II. Customer Portfolio Management
III. Customer Retention
IV. CLTV led Advertisement Spend
V. CLTV driven Marketing Mix Spend
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www.fractalanalytics.com
6
How to become a CLTV aligned
organization?
I. Customer Acquisition
High
CLTV can be effectively used in acquiring new
Achieve customer satisfaction by
Achieve customer satisfaction by
service instead of running loyalty
service and loyalty programs
programs
customers with strategies such as:
• Product design and modifications to serve all
Maintain good relationships, nurture
Run proactive retention campaign to
these customers, defend and retain
retain these profitable customers
them
Derive maximum revenue as long
customer segments profitably
as customer is active
• Targeting acquisition campaigns at high CLTV
Know when to stop spending on
promotional campaigns
customer segments
• Channel mix optimization based on CLTV
LTV
Cost = LTV
High Risk
Low Value
Derive maximum revenue
Find a balance in terms of size and
as long as customer is active
share of wallet
Make no investment in
Take appropriate action to
developing relationships
develop these customers
High Value
Low
Customer Lifetime
Credit Score
Low
High
III. Retention Decisions
Acquisition Zone
Low Risk
CLTV analysis can help in retention decisions by
aiding in:
• Knowing the true value of losing a customer
• Designing retention strategies and offers
This solution helped clients in acquisition of
customers whose LTV is less than the cost of
Use
customer
lifetime
value
acquisition and servicing. It also helped in saving
costs on application processing, acquisition and
servicing of loss making customers.
Use
attrition
score
Customers
How profitable is the
customer?
Low
II. Customer Portfolio Management
Customers’ true potential can be realized using
targeted marketing by:
Likely
Choose to
lose – do
nothing
• Designing campaigns (e.g. fee waivers)
• Budgeting offers for campaigns
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High
How likely is the customer to close
the account?
www.fractalanalytics.com
Not Likely
Strengthen
Relationship
- Increase credit
line
- Balance
Transfer
- Incentivise to
increase spend
Likely
Not Likely
Build the
Relationship
- Increase
credit line
- Offer add-on
card
- Offer
convenience
checks
7
How to become a CLTV aligned
organization?
IV. CLTV led Advertisement Spend
Summary
With a strong CLTV based strategy, the
As elaborated by this white paper, the key to CLTV
organization can:
• Perform ad and copy testing with high-CLTV
customers to improve ad effectiveness
• Increase brand resonance based on specific
CLTV based segments
success lies not only in measuring it but also in
successful implementation. Fractal’s MDEM
framework achieves this in a predictable and
systematic manner enabling organizations to make
better customer decisions.
• Increase advertisement ROI
V. CLTV driven Marketing Mix Spend
• Identify the most effective marketing channels
for high- CLTV customer segments and allocate
funds accordingly
• Reduce cost and increase ROI through better
targeting
• Achieve up to 70% of increase in acquisition
ROI
D. Monitor
We recommend using a ‘Test and Learn
Framework’ that ensures ongoing maintenance
and improvement of CLTV implementation. A
simple ‘Test & Learn’ framework can be developed
as shown in the diagram below.
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8
How to become a CLTV aligned
organization?
About Fractal Analytics
Fractal Analytics is a global analytics firm that serves Fortune 500 companies gain a competitive
advantage by providing them a deep understanding of consumers and tools to improve business
efficiency. Producing accelerated analytics that generate data-driven decisions, Fractal Analytics delivers
insight, innovation and impact through predictive analytics and visual story-telling.
Fractal Analytics was in founded in 2000 and has 700 people in 12 offices around the world serving
clients in over 100 countries.
Fractal Analytics is backed by TA Associates, a global growth private equity firm, and recently partnered
with Aimia, a global loyalty and consumer insights firm. The company has earned recognition by industry
analysts and has been named one of the top five “Cool Vendors in Analytics” by research advisor
Gartner. Fractal Analytics has also been recognized for its rapid growth, being ranked on the exclusive
Inc. 5000 list for the past three years and also being named among the USPAACC’s Fast 50 AsianAmerican owned businesses for the past two years.
For more information, contact us at:
+1 650 378 1284
info@fractalanalytics.com
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www.fractalanalytics.com
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