Friday, April 11, 2008

LTV at LTC: Difficult Allies

A particularly long and difficult set of meetings that we had was with the LTC Finance Group (FG).
These meetings were, of course, difficult. LTV projects by their nature are focused on customers and their value and that makes LTV projects in the Marketing Department's area; but LTV also involves financial impact and financial data and that makes it part of the Finance Department's area. I suspect that if there is an LTV project where Marketing and Finance are not arguing about the details then the project isn't being taken seriously by either department.

The FG was currently managing an LTV-like project and had been for a number of years. What FG did was to look at revenue and cost data and then give profitability data by rate plan. Profitability by rate plan really wasn't that useful to LTC. It gave no understanding of the 'why' behind customer value or how to treat individual customers.

We needed the FG for was to understand the cost metrics associated with customer activity. In particular, our executive sponsor insisted that we have FG's approval for out LTV project. We went to the FG with the question “What is the right formula to calculate customer related costs?” -- and they refused.

Well, they didn't refuse, exactly. What happened after that was a long series of meetings with various financial people, getting one small piece of data from each. Then came time to put all the pieces together and life started getting difficult.

The FG refused to either accept or reject our meeting requests, meaning we could never be sure if a meeting was actually on or not until we made the call. They would also invite themselves to other meetings, so we had to be ready to talk about LTV issues at any time. Our questions got answered obliquely. For instance, when we asked about the best way to handle network minutes the reply was “What would happen if all of our customers leave?”

As it developed, the FG and our group did develop a substantial difference of opinion in how to value customers. It revolved around how to handle capital expenses. The FG was adamant that any customer valuation include capital expense; I felt strongly that the customer LTV should not. I had two reasons. First, no future customer activity could effect capital projects that had already been purchased. LTV should be about customer impacts to LTC, not things that individual customers had little impact on. Second, including capital expenses would mean that 25% of the customers would have negative value; without capital expenses 7% of the customers would be have negative value.

Let me digress here on negative LTV. By and large, in any company there will be some customers that cost more in company resources than they bring in in revenue. One of the best goals of any LTV project is correctly identifying customers of negative value so they can be understood, targeted, addressed, and if necessary 'fired'. It is absolutely natural to take customers with negative LTV and take them out of customer retention programs.

Cutting 7% of the base out of marketing programs at LTC designed to increase retention would have minimal impact on the overall attrition results. Taking 25% of the customer base out of retention marketing programs would have a definite impact on the corporate retention efforts.
LTC lived and died by retention and attrition. If LTV hurt retention then LTV would be quickly and quietly abandoned.

We spent months in rounds of inconclusive meetings with FG, asking again and again about the correct formulation. Suddenly, they agreed with us and we could go forwards. As we found out later, their agreement was by accident. The FG simply misread the formula we were laying out and thought it included capital expenses. By the time the FG realized they had made a mistake the LTV system was already in production and going forwards.

There is a bit of an irony here. If the FG had simply worked with us and given us their cost formula we would have taken it uncritically and not done the research to discover the issues around capital expenses.

Despite our differences the two groups did come to an understanding and became allies on many issues. Both groups wanted to move LTC from gross revenue to sustainable profit. We both realized that two areas that LTC had ignored, off-net expenses1 and bad debt expenses, were critical to profitability.

1 comment:

Zaheen said...

Using a updated LTV analytics framework, business mangers can design and develop strategies that increase the customer life time value, design and develop specific programs to target highly profitable customers.

Good Article Mr. Freeman...

Zaheen Bagasrawala.

Here is a good article about deriving insight from data for analytics of customer's life time values.