Customer Value Analysis

DSA's Approach To Customer Value Analysis

The most commonly used approach is to measure and model the Lifetime Value of each customer. Typically, this involves building three models – one to predict the expected life of each customer, a second to predict the expected revenues over these lifetimes (or at least the next 2/3 years), and a third to assign the costs associated with serving the customer over this period. But, we find the need to augment this standard approach in two ways.

Using Customer Segments

First, we often find that assigning costs to products and especially each customer is complicated and fraught with errors in many cases. The resulting errors typically lead to large errors in estimating the future value of customers. So, we start with creating segments of customers with very similar purchasing and service usage patterns. Often, it is easier and more reliable to assign costs to such segments than to individuals.

Using Customer Value

Second, we find that focusing on lifetime value alone when making future strategic decisions tends to be incomplete. For example, companies in highly seasonal businesses find that having a group of customers available to buy overstocked items in the off-season is very valuable. Investing in building an e-mail list of customers who would show up on the Web site to find out about and buy overstocked items at the store closest to them, can be very valuable. However, because such sales usually involve reduced prices, the lifetime value of such customers is not very high.

Obviously, we do not want too many customers waiting to buy mark-down products in the off-season. So, we build customer portfolios and provide recommendations about the appropriate balance that ought to be struck for future profitable growth. For an online broker we found that having a few customers who pushed the limits on trading sophistication, even though they traded only a portion of their portfolio with our client, was very valuable. While their presence added little to the bottom-line, it added greatly to the “at-the-leading-edge” image of our client. This, in turn, helped retain the larger investors who felt heartened to know that such sophisticated capabilities would be available when they needed them “next week”!