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 strategyWhat 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,
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 High Churn Inactive Transition -Yr5 Typical Saving Client 0 100 0 0 0 Medium Value 10 85 5 0 0
High Net Wealth 0 10 80 10 0
Top Segment 5 5 5 60 25
High Churn Inactive 0 5 0 10 85
Segment mapping decisioning
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 CLVCLV 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.
Example
A credit card campaign / offer:
Campaign or Next-Best-Action
Bob Chris Eliza Fred
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.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
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.
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
IterationCLV 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.
Each segment includes following properties:
Property Usage
Actual CLV Associated actual CLV value in a segment Budgeted CLV Associated budget CLV value in a segment CLV Segment Description Description of segment
CLV Segment Name Segment name
PercentageinCLVSegment Percentage CLV in segment
Transition to 1 Percentage of customers moving to 1st segment Transition to 2 Percentage of customers moving to 2nd segment Transition to 3 Percentage of customers moving to 3rd segment Transition to 4 Percentage of customers moving to 4th segment Transition to 5 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.
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.
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.
CustomerLifetimeValue - strategy
Set property – set WACCWeighted Average Cost of Capital: Amount discounted for 5 years at 10%
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.
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.
Set property – CLV results
The outcomes from this shape are:
Current CLV
Target CLV
Maximum CLV
DeltaInteraction – CUSTOMERLIFETIMEVALUE
This interaction calls the Strategy and stores the result it in the [.Target CLV] Clipboard.
Extending the strategy
your business needs. In most cases, the customer is expected to replace the existing CLV calculation with their own.
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Pega Marketing for Financial Services
Document: Customer Lifetime Value Software Version: 7.21
