To determine the right course of action for customers and segments, the bank must understand their customers’ current value and future value.
|Current value||Future value||Strategy|
|Customer A||High||Low||Improve understanding of customer and their life cycle and needs to identify opportunities to keep their value.|
|Customer B||Medium||High||Active strategy to convert a potential value into actual value through interactions and offers that realise the opportunity.|
The following overview of both customer value and customer lifetime value is taken from the book In search of Relevance: A new model for a new reality’, co-written by Stuart Harle.
“There are several measures of customer value: historic value; current value; future value and lifetime value.
Historic value is easy to determine. It is the difference between revenue generated and servicing costs in the past.
Current value is the difference between revenue being generated now and current servicing costs and is often calculated on a twelve-month rolling basis. The current value for each product is calculated monthly and combined into a customer-level score. It does not have to agree with the bank’s profit-and-loss account, but its quality must be actionable, meaning that it must be possible to use this information as a basis for actions.
Arguably, the inclusion of penalty charges (for example excess overdraft fees, returned cheque fees) should be avoided as the bank may find that its highest value customers may also be its most risky, which may not be a sensible business model in the long term. Penalty rate interest should be included as it reflects the cost of using the bank’s capital.
Future value requires banks to assess customers’ future revenue and servicing costs and buying behaviour. Future value is often calculated using a medium-term (3 to 5 year) view of the customer value projection. A longer-term view may be taken for customer segments such as students. Future value is only a prediction, and banks must develop the customer relationship to achieve optimum future value. It rarely happens on its own.
Future value will be similar to or higher than current value. This shows that the bank needs to decide upon a retention or customer development strategy with that customer.
However, there may be situations where future value is estimated to be lower than current value. This may be because a large loan or mortgage is due to be repaid during the calculation period (stopping a significant proportion of revenue flow). This would be a clear sign to the bank that it needs to develop the customer relationship to replace the lost income (maybe another loan or investing the spare cash, depending upon the customer’s needs).
‘Propensity to buy’ modelling plays an important part in calculating future value to project what products a customer might buy if the bank develops the relationship, and nominal values can be assigned to these products to calculate an overall future value.”
Source: © In search of Relevance: A new model for a new reality, Intelligence Delivered (Asia) Limited (Amended) 2012