Customer portfolio management using Z-ranking of customer segments and the LTV perturbation method

Abstract

Customer lifetime value (LTV) models have long been used to focus direct marketing campaigns by allocating resources to those customers who are deemed to offer the most value to the company. Traditionally, customers are rank-ordered by their lifetime value and more marketing resources are targeted towards the customers with the greatest value. In this paper, a framework for visualising customer segments, called Z-ranking, is developed, along with a method for customer portfolio management, called the Life Time Value Perturbation Technique. Rather than viewing a customer's LTV as a quantity that is immutable, this framework adopts the point of view that the LTV can be perturbed, via application of appropriate customer management strategies. Through a series of ‘What-if’ scenario analyses, a firm can focus scarce resources on those investments that lead to the greatest increase in the value provided by a customer portfolio. The LTV perturbation technique is further embedded in a four-phase procedure that forms the basis for customer portfolio management, enabling the strategic marketer to continually identify and improve customer management strategies that lead to the greatest impact on direct marketing performance.