In this article we will be reviewing a research paper titled: Customer segmentation and strategy development based on customer lifetime value; published by Elsevier in the year 2006. The authors have presented an approach for evaluating customer value and segmenting customers into segments on the basis of their value.
Following the segmentation of consumers on the basis of their value, a case study on a wireless telecommunication company is used to demonstrate how to construct approaches based on customer segment.
The research paper was written by Su-Yeon Kim, Tae-Soo Jung, Eui-Ho Suh, and Hyun-Seok Hwang with Hwang being the corresponding author. They belonged to Daegu University, Samsung Economic Research Institute (Department of Management Strategy), POSTECH (Department of Industrial Engineering), and the Department of Business Administration in Hallym University, South Korea, respectively at the time of conducting this research.
The Methods Employed
The goal of this study was to provide a new LifeTime Value (LTV) model and customer segmentation approach that takes customer defection and cross-selling opportunities into account. Following the division of the customer base, the authors also recommended several marketing techniques.
Customer Lifetime Value (CLV) is a marketing measure that estimates a customer’s worth over the course of their engagement with a firm. It is the current market worth of a single buyer’s expected future revenues. It is also known as lifetime customer value or simply lifetime value, and it is shortened as CLV, LCV, or LTV.
CLV-based optimization aims to increase profitability by monitoring customer behavior and economic cycles to determine and target consumers with the highest potential net value over the years (Ramachandran, 2006). A valuable client is one that generates an income stream that surpasses the budget of acquiring, marketing, and maintaining that customer throughout time by an appropriate margin.
Customer satisfaction is the most common statistic used by businesses to identify and manage the possibility of consumers defecting. Although contentment and defection are linked, satisfaction is not a sufficient determinant of consumer defection (Capraro et al., 2003).
Cross-selling has been highlighted as a successful relationship marketing technique with the goal of retaining customers. High-frequency cross-sellers report receiving much more cross-selling benefits from their businesses, and a higher dedication to cross-selling within their working group.
Additionally, a deeper understanding and self-efficacy in respective cross-selling roles is achieved. The findings have ramifications for sales staff who are involved in cross-selling strategies (Jim Zboja, 2012).
The following is a breakdown of the research paper’s structure.
- The second section examines prior research on consumer segmentation based on value.
- A conceptual framework is presented in Section 3.
- In Section 4, a calculation model for calculating customer value is proposed for use by a cellular telecommunications provider. Following that, the authors applied real data from a wireless provider to the model and conducted customer segmentation based on the resulting customer value.
- Section 5 creates marketing techniques derived from the findings of the customer research.
- In section 6, the authors conclude their work with a suggestion for future exploration.
The Need for a Solution
Because customer satisfaction has become more important in modern organizations, many companies are focused on customer loyalty and revenue as a means of growing market share and customer delight.
Customer relationship management (CRM) refers to a collection of procedures that businesses use to keep and grow their client base (Hassan & Bin-Nashwan, 2017).
Customers’ happiness with companies and organizations has increased significantly as a result of CRM’s advantages. Personalized services, attentiveness to client requests, customer segmentation, marketing modification, multichannel integration, time savings, and improved customer understanding are some of the advantages stated — that would boost customer happiness and marketing performance greatly.
Furthermore, all of the advantages discovered, apart from time savings, lead to higher customer satisfaction (Mohammadhossein & Ahmad, 2018).
Several businesses are already attempting to evaluate and apply customer value in their strategy formulation to enhance customer revenue potential.
The proposed solution to the research problem:
To analyze customer defection in their study, the researchers used three dimensions:
- Current value
- Potential value
- Customer loyalty
The current value will become a metric of previous profitability for customers, the potential value will become a measurement of new sales opportunities, and customer loyalty can be a metric of retaining customers. They used the values to conduct customer segmentation after computing these three customer values.
Three steps make up a foundation for designing managerial methods and approaches based on customer value, as depicted by Figure 1.
Figure 1: Framework for customer segmentation based on LifeTime Value (LTV) Model
Phase 1 describes the procedures that must be taken before identifying the consumer value and developing a marketing strategy. The authors assessed client value from three perspectives in phase II, which are current value, potential value, and customer loyalty.
A segmentation testing is carried based on the segmentation data after fragmenting the client base with three perspectives. Phase III examines every segment’s features in terms of current value, potential value, and customer loyalty, and the article explains how to develop strategies related to three customer values.
In this study, they determined the actual value as the average amount of service fee required to pay for a client minus the average charge for a consumer, using a computation period of six months:
Current Value = (Average amount asked to pay for a customer – Cumulative amount in arrears for the customer/total period of use)
Customers’ potential value is defined as the estimated revenues that can be generated from a specific customer when that customer employs a wireless communication company’s additional features.
Customer loyalty can be defined as the percentage of customers that want to stay with the organization (Figure 2).
Customer Loyalty = 1-Churn rate
Figure 2: Calculation of individual Churn Rate
Presentation of Data Acquired:
Calculation of customer value by splitting it into three categories: current value, projected value, and customer loyalty are no doubt very helpful. The results of the findings can be very easily noticed by looking at the dispersion of clients by displaying the whole customer base in three-dimensional geometry.
Current Value, Potential Value, and Customer Loyalty are represented in each dimension. The outcome of customer segmentation is shown in Figure 3 (Figure 6 in the original research article). Initially, the components of the three axes were dissimilar.
Figure 3: Three-dimensional representation of Customer segmentation
As a result, the grade is converted to a real number between 0 and 1. Many consumers are positioned in the upper portion of the cube, as illustrated in Figure 3, indicating that they have a higher level of customer loyalty.
Almost thirty percent of clients are dispersed throughout the area of the cube, with reduced customer loyalty (<0.5). Depending on client loyalty, it was established that the consumer base can be divided into two kinds.
Customers with a loyalty score greater than 0.5 have extremely strong customer loyalty, while the others are scattered around the cube. It was also agreed upon that in order to study the high customer loyalty sector properly, more advanced data extraction is necessary.
The authors did not select a particular part but evaluated a segment based on each of the three customer-value classifications because it is hard to determine which of the three customer values directly leads to that state where a consumer will have these positive features.
It will show what adjustments in the marketing plan should be implemented to convert individuals in each category into more valued clients after conducting an assessment of each customer that obtains a top score in prospective value, existing value, and poor score in customers ’ loyalty.
Consumers in each section were divided into two subcategories for this assessment: one for customers with a low rating in the field, and another for customers with a high score in the area.
Customer attributes associated with low customer loyalty:
Customers with no membership, a minimum consumption period of fewer than 1.5 years, and a non-loyal payment schedule have a low level of customer loyalty. Customers that do not pay a membership fee, have a minimum usage period of more than 1.5 years, or utilize special phone equipment have poor customer loyalty (Figure 4).
Figure 4: Characteristics attributed to customers in low customer loyalty
Customer attributes in the high current value:
Customers who do not switch charge plans are significantly more likely to have chosen an inappropriate charge plan for particular consumption patterns and to have not taken advantage of cost savings offered by other plans (Figure 5).
Figure 5: Characteristics attributed to the customer in high current value
Customer attributes with a high potential value:
The most crucial parameters in the Potential Value analysis were the age of consumers and the sorts of phone devices. When examining the assumption that potential value is described as the value earned later by giving additional services to clients, this finding appears obvious (Figure 6).
Figure 6: Characteristics attributed to customers in high potential loyalty
The Decision Tree’s results can help a business plan marketing approach, establish a marketing strategy for every sector, as well as offer useful information for understanding the big vision of future marketing techniques (Figure 7).
Figure 7: Decision Tree result
- Consumer loyalty is low when a customer does not pay the membership fee. This implies that paying a membership fee is an excellent approach to encourage clients to stick with their present service provider.
- Offering free additional services and phone bill discounts can entice loyal consumers into believing that it is in their best interests to remain their present service provider.
- To keep clients with high present value and a high likelihood of switching to another provider, a corporation should offer a credit-rebating sale or an upgrade option.
Significance for Future Work
As time is passing and more advanced research is being conducted, it is quite evident that companies are now recognizing the importance of a customer value drive marketing strategy. The need to achieve customer satisfaction is motivating businesses in today’s world to concentrate their efforts towards achieving a loyal customer base and a higher profitability rate.
Creating an effective CRM for a company begins with determining genuine worth and customer loyalty.
The approach mentioned can also be utilized to segment customer bases. With a little more balanced approach, three angles on customer value help marketing professionals in finding consumer segmentation.
It is feasible to design refined plans for every segment by evaluating the features of divided customer groups. It was anticipated that this research will lead to more developments in terms of proving the practicality of the LTV model and the created techniques by evaluating the results of implementing the techniques.
- Capraro, A. J., Broniarczyk, S., & Srivastava, R. K. (2003, April 01). Factors Influencing the Likelihood of Customer Defection: The Role of Consumer Knowledge. Sage Journals.
- Hassan, H., & Bin-Nashwan, S. A. (2017, March). Impact of customer relationship management (CRM) on customer satisfaction and loyalty: A systematic review. ResearchGate. https://www.researchgate.net/publication/318206357_Impact_of_customer_relationship_management_CRM_on_customer_satisfaction_and_loyalty_A_systematic_review
- Kim, S.-Y., Jung, T.-S., Suh, E.-H., & Hwang, H.-S. (2006). Customer segmentation and strategy development based on customer lifetime value: A case study. Science Direct. https://www.sciencedirect.com/science/article/abs/pii/S0957417405001934#!
- Mohammadhossein, N., & Ahmad, M. N. (2018, January). Benefits of Customer Relationship Management on Customer Satisfaction: An Empirical Study. ResearchGate. https://www.researchgate.net/publication/323245869_Benefits_of_Customer_Relationship_Management_on_Customer_Satisfaction_An_Empirical_Study
- Ramachandran, R. (2006, February). Customer Lifetime Value. ResearchGate. https://www.researchgate.net/publication/228302768_Customer_Lifetime_Value