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REVISITING THE CUSTOMER LIFETIME VALUE CONCEPT
by Sudhir Kale



Dyed-in-the-wool marketing executives are in the habit of saying that all their customers are important. All customers are never equally important in any business and the gaming business is no exception. Casino management, by default, deals with customers on the basis of their perceived value to the casino. But how does one objectively prioritize the importance of a particular customer or a customer group? The answer is simple: Look at the lifetime value of a customer. A recent Deloitte Consulting study shows that companies who understand customer value are 60 percent more profitable than those that do not.

Customer Lifetime Value (LTV) is at the heart of customer relationship management (CRM), the catchphrase in management literature over the last decade or so. It is estimated that over $6.8 billion dollars were spent last year on CRM software alone. This huge investment is quite understandable in the contemporary business environment of unparalleled uncertainty and turbulence. Environmental turmoil is no less drastic in the gaming industry, and the LTV concept can prove invaluable in assessing the attractiveness of casino patrons.

I would go one step further and assert that LTV should form the core of every casino executive’s management philosophy. Every manager, regardless of position, needs to be initiated in the LTV concept.

What is LTV?

Simply put, the notion of LTV is based on customer profitability to the organization over the course of a relationship. Here are some hard facts:

• Most companies find that between 20% and 40% of their customers are not profitable.

• Often, most profitable customers are not the largest customers but mid-size customers.

• The smallest customers pay full-price and receive less service but the costs of transacting with them reduce their profitability.

• 20% of a firm’s customers usually contribute over 80% to its profitability.

On March 18, 2001, Andrew MacDonald, one of the most respected names in the world of contemporary gaming, posted an article on the Urbino website called Dealing with High Rollers. This article underscores the risks assumed by casino operators when they cater to a select few (predominantly Asian) customers playing high-limit Baccarat. Andrew writes that 14,981,640 hands of Baccarat need to be dealt before the casino can obtain a certain win rate between 1.25% and 1.35%. This high win-rate volatility, combined with the customer credit risk and the excessive incentives high rollers demand, often makes the so-called high rollers a less than attractive proposition. In LTV terms, a Baccarat junket may not be as desirable as most casino executives would have us believe.

Be it a particular customer segment or an individual customer, LTV analysis is indispensable for the marketing strategy of a casino. It provides invaluable insights in terms of who to target and what kinds of relationships to form with each targeted group.

How is LTV Calculated?

Customer lifetime value is the amount by which revenues from a customer over time will exceed the company’s costs of attracting, selling, and servicing that customer. Tom Peters of In Search of Excellence fame provides a simple example to illustrate this concept. Peters estimated that his 20-person office had approximately $1,500 per month in business with Federal Express, the courier company. Assuming a 10-year average lifetime for a customer in the express mail industry, the value of his firm to Federal express becomes:

$1,500/month X 12 months/year X 10 years = $180,000.

Going even further, he estimated that in this industry, a happy customer would create at least one new customer of equal value via positive word-of-mouth:

$1,80,000 X 2 customers = $360,000.

Thus, the value of Peters’ business for Federal Express was about $360,000.

Following this example, casinos can factor in the costs and expenses associated with the various market segments, look at each segment’s current and projected revenues, and arrive at lifetime value estimates for each segment (junket players, local high rollers, interstate players, machine players, etc.) Based on the their core competencies, risk tolerance, and growth objectives, casino operators can then decide which segments they want to attract and in what order of priority. To be realistic, a LTV calculation should estimate the dollar value of all benefits associated with a loyal customer, not just the short- and long-term revenue stream. The values associated with loyalty such as positive word-of-mouth communication, employee retention, and low account maintenance costs will all figure into the calculations.

Customer lifetime value analysis tells us not only which customers to aggressively pursue but also hints at the ones to let go. A casino cannot possibly target its services to all potential customers; some segments will be more appropriate than others.

Qualitative and quantitative considerations impact the overall profitability of a market segment. Numbers aside, a company may want to terminate its relationship with customers when:

• Conditions specified in the contract (either implicit or explicit) are no longer being met.

• Customers are abusive to the point that it lowers employee morale.

• Customer demands are beyond reasonable, and fulfilling those demands would result in poor service for the other customers.

• The customer’s reputation is so poor that associating with that customer tarnishes the image of the provider.

Every gaming executive will, without difficulty, recall examples in each of the above four categories. Quantitative lifetime value analysis combined with a qualitative customer base assessment will result in a win-win situation for both you and your customers.

Implications

Table 1, adapted from the work of Greg Elliott and William Glynn, summarizes the implications of LTV-based management. This 2 x 2 matrix conceptually represents the value of individual segments and customers. Casino management should first analyze in which quadrant(s) the bulk of their customers lie. Then a decision should be made as to what the ideal composition of the customer base should be. This decision will be a function of the overall business strategy, company goals and objectives, corporate culture, risk tolerance, and levels of current and anticipated market rivalry for each market segment. Marketing and operational decisions will naturally follow from this analysis, reflecting a strategy based on the LTV concept.

Table 1

Relationship Value
High
Low

High
Date Posted: 28-Jan-2002

*Sudhir Kalé is Associate Professor of Marketing at Bond University in Australia. He is also a marketing trainer and consultant for several types of companies including gaming. Sudhir’s research on marketing, social psychology, and cross-cultural communication has been published in leading international journals. Top companies the world over have benefited from his holistic approach to issues in marketing and management. Sudhir’s e-mail address is Sudhir_Kale@Bigfoot.com. Address for correspondence: School of Business, Bond University, QLD 4220, Australia.

 
 
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