Traditional retail banking products are making banks lose money due to many regulations and the continuing high cost value. Acquiring new customers through a variety of channels and retaining the “profitable” customers is also more challenging than ever in today’s competitive financial service markets. Advancements in technology are reducing time to market, thereby eroding product differentiation and customer loyalty.
Customer demographics, buying behaviour, and needs are also changing and evolving. Banks need a comprehensive view of each customer to target the right products, cross-sell and up-sell, and adapt to customers’ changing needs. Marketing is the art of attracting and keeping profitable customers (Kotler & Armstrong, 1996) and a company should not try to satisfy every customer. But what is a profitable customer? Kotler & Armstrong (1996) define a profitable customer as “a person, a household, or company whose revenues over time exceed, by an acceptable amount, the company costs of attracting, selling, and servicing that customer.” This excess is the basis for calculating the Customer Lifetime Value (CLV).
Customer Lifetime Value helps determine the business viability of marketing activities such as promotions and discounts and, in addition, provides a basis for estimating the maximum amount of discounts that may be justified for a specific type of customer.
CLV is a crucial metric; however it is only a tool to better manage a business. Different customers have vastly different CLVs depending on the “cohort” they belong to - some customers generate a lot more value than others. The sum of the CLVs of all customers equals the company’s Customer Equity. Realising differences in CLVs and focusing resources on increasing the CLV and hence the company’s Customer Equity is essential to healthy businesses (Dave Key, Cloud Strategies, 2013).