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This chapter is from the book

Working with Econometrics: IBM and Others

To improve marketing success, companies must consistently make good decisions about which customers to select for targeting, the level of resources to be allocated to the selected customers, and nurturing the selected customers to increase future profitability. One example of a company that has successfully used CLV as an indicator of customer profitability and allocated marketing resources accordingly is IBM. In 2005, the computer and technology company used CLV as a criterion for determining the level of marketing contacts through direct mail, telesales, e-mail, and catalogs. An overview of the CLV management framework is shown in Table 1-2.

Table 1-2 Customer Lifetime Value Management Framework



Measure CLV

Obtain a measure of the potential value of IBM customers

Identify the drivers of CLV

Allow managers to influence CLV

Determine optimal level of contacts for each customer that would maximize his or her respective CLV

Guide managers about the level of investment required for each customer

Develop propensity models to predict which product(s) a customer is likely to purchase

Develop a product message when contacting a customer

Reallocate marketing contacts from low-CLV customers to high-CLV customers

Maximize marketing productivity

Source: Created by case writer and adapted from Kumar et al (2005).4

In a pilot study implemented for approximately 35,000 customers, this approach led to reallocation of resources for about 14% of the customers as compared with allocation based on past spending history, the metric IBM had previously used to target customers and allocate resources (see Figure 1-8). The CLV-based resource reallocation led to a tenfold increase in revenue (amounting to about $20 million) without any changes in the level of marketing investment.

Figure 1-8

Figure 1-8 Benefits from CLV-based resource allocation

Source: Created by case writer.

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