Part I of a two-part series on creating "Customer Lifetime Value" currency.
By John Lee, Merkle
In today's market conditions, insurance sales and marketing executives are often faced with a difficult "Catch-22": How to balance continued short-term policy acquisition growth with long-term profitability, customer retention and loss ratios. While marketing is often seen as the best way to gain the advantage over the competition, the reality is that the customer most responsive to marketing messages - from acquisition - to retention - to cross-sell - is often not the customer most likely to drive the greatest profit for the provider. In fact, often the inverse is true.This fact is forcing many carriers to re-evaluate how they make marketing decisions. They are now focusing on each customer's overall or holistic value to the organization, rather than on partial metrics, such as response rates or retention. To that end, insurance providers are asking themselves how they can establish a company-wide "customer value currency" or valuation standard that takes into account the whole customer. This valuation would also integrate predictions regarding acquisition cost, retention, expected premiums and loss into a meaningful lifetime value metric - a metric that can then be used as a powerful decision-making tool.
While it may sound straightforward, numerous organizational, operational and analytic challenges exist that make executing this simple-sounding premise difficult. Yet, it is possible to determine a clear, enterprise-level customer value metric and establish an approach to driving informed decisions that can, in turn, maximize each customer's value across sales, marketing and product management.
The Transition to a Customer Value Currency For years, the ability to tie customer response rates to a specific marketing campaign provided a powerful tool in managing profitability. The next evolution of accountable marketing incorporates the idea of a customer value currency.
This shift means no longer simply asking, "How do I most efficiently acquire new customers?" It means asking: • "How do I acquire and manage customers who will generate the greatest value over the life of our relationship? • How do I prioritize my marketing resources to focus on the customer segments and programs that will generate the greatest profit? • How do I measure the return I am making on customer investments over time rather than at a single point-in-time?"
Creating a Common Customer Value Currency Many organizations have already developed one or more definitions regarding the value that each customer brings to the organization. For example, most insurance companies have a risk-based policy lifetime value segmentation schema, developed by product management and underwriting, to price policies at the point-of-sale. Within the same organization, marketing has likely developed another model that incorporates persistency and predicted premiums along with corresponding response and conversion rates by segment.
The issue is that to prioritize and manage customer value across the customer lifecycle, a common definition must be utilized across all divisions within the company. This challenge tends to be more organizational than technical in nature. A cross-functional team should develop a common customer lifetime currency metric that will be applied across the organization. This metric need not be perfect and all encompassing to be effective. It is better to start with a manageable definition and let it grow in sophistication over time.
An insurance company could develop its customer value currency definition using easily predictable dimensions, such as average premium for a single product and retention rates. To enhance the effectiveness of the customer currency metric, other factors, such as loss and multi-product premiums, can be added later. In one case, an insurance carrier used the average claim amount of each risk tier as a starting point, rather than predicting future claims at a customer level.
Defining a shared enterprise-wide customer value currency is essential, but it is only the first step to long-term success. Implementation puts this metric into action to achieve measurable results across the organization.
Part two of this article series will describe how an organization's customer value can be integrated and fully used throughout the enterprise.
About the Author: John Lee is vice president and general manager for insurance at customer relationship marketing agency Merkle.An insurance company could develop its customer value currency definition using easily predictable dimensions, such as average premium for a single product and retention rates. To enhance the effectiveness of the customer currency metric, other factors, such as loss and multi-product premiums, can be added later.