Practice Prize Report—The Power of CLV: Managing Customer Lifetime Value at IBM

Abstract

Customer management activities at firms involve making consistent decisions over time, about: (a) which customers to select for targeting, (b) determining the level of resources to be allocated to the selected customers, and (c) selecting customers to be nurtured to increase future profitability. Measurement of customer profitability and a deep understanding of the link between firm actions and customer profitability are critical for ensuring the success of the above decisions. We present the case study of how IBM used customer lifetime value (CLV) as an indicator of customer profitability and allocated marketing resources based on CLV. CLV was used as a criterion for determining the level of marketing contacts through direct mail, telesales, e-mail, and catalogs for each customer. In a pilot study implemented for about 35,000 customers, this approach led to reallocation of resources for about 14% of the customers as compared to the allocation rules used previously (which were based on past spending history). The CLV-based resource reallocation led to an increase in revenue of about $20 million (a tenfold increase) without any changes in the level of marketing investment. Overall, the successful implementation of the CLV-based approach resulted in increased productivity from marketing investments. We also discuss the organizational and implementation challenges that surrounded the adoption of CLV in this firm.