An LTV model and customer segmentation based on customer value: a case study on the wireless telecommunication industry

Since the early 1980s, the concept of relationship management in marketing area has gained its importance. Acquiring and retaining the most profitable customers are serious concerns of a company to perform more targeted marketing campaigns. For effective customer relationship management, it is important to gather information on customer value. Many researches have been performed to calculate customer value based on Customer lifetime value (LTV). It, however, has some limitations. It is difficult to consider the defection of customers. Prediction models have focused mainly on expected future cash flow derived from customers’ past profit contribution. In this paper we suggest an LTV model considering past profit contribution, potential benefit, and defection probability of a customer. We also cover a framework for analyzing customer value and segmenting customers based on their value. Customer value is classified into three categories: current value, potential value, and customer loyalty. Customers are segmented according to three types of customer value. A case study on calculating customer value and segmenting customers of a wireless communication company will be illustrated. q 2003 Elsevier Ltd. All rights reserved.