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Digg It - Customer Lifetime Value for Value-Based Servicing, a Realistic Analysis
In order to serve their Customers according to their value (apply value-based-servicing), Businesses try to assess the value of each Customer. One approach to assess Customer value is by estimating the Customer Lifetime Value (hereafter CLV).
A strict approach to the definition of CLV (or LTV) is the ne
A strict approach to the definition of CLV (or LTV) is the ne
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
t present value of future cash inflows and outflows or profits (based on the principles of financial management), related to a specific Customer. An important factor affecting the CLV is the retention rate (or alternatively the Customer lifecycle termination probability).
Theoretically speaking, a compr
Theoretically speaking, a compr
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
hensive assessment of customer value should comprise all different aspects of a customer’s contribution to the Business’s success (e.g. referrals to other Customers, cross selling potential).
A number of different approaches of varying complexity have been proposed for the calculation of the CLV:
A number of different approaches of varying complexity have been proposed for the calculation of the CLV:
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
Some focus on cash inflows and do not integrate the customer survival factor
• Some estimate the cash inflows only: the revenue that this Customer is expected to contribute to the Business in the future.
• Some approaches which are more complicated, attempt to estimate both cash inflows as w
• Some estimate the cash inflows only: the revenue that this Customer is expected to contribute to the Business in the future.
• Some approaches which are more complicated, attempt to estimate both cash inflows as w
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
ll as cash outflows: the revenue that this Customer is expected to produce for the Business in the future, as well as the Customer acquisition, service and marketing expenses.
• Some include also elements relating to the value gained from Customer referrals as well as cross selling & up selling.
A
• Some include also elements relating to the value gained from Customer referrals as well as cross selling & up selling.
A
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
l these approaches may or may not be suitable to the context of a specific Business. Asserting that a model which does not incorporate all CLV factors is invalid or incomplete, may be of academic value, but in the real Business world things are not so simple.
It can be easily understood that the estimat
It can be easily understood that the estimat
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
ion of the CLV, according to the above ‘strict approach’ definition is a very difficult task. This is due to the following reasons:
• The difficulty in the estimation of the duration before Customer lifecycle termination (survival probability). The business needs to implement a so-called survival
• The difficulty in the estimation of the duration before Customer lifecycle termination (survival probability). The business needs to implement a so-called survival
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
unction which is time-dependent, and apply it to each Customer. Moreover a survival function has its limitations since it only gives the probability of a Customer ‘surviving’ beyond a certain point in time.
• It can be difficult to assign costs related to a specific Customer (acquisition, marketin
• It can be difficult to assign costs related to a specific Customer (acquisition, marketin
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
, serving, retaining, terminating). If the Business is not applying cost accounting at the Customer level, cost assignments can only be based on averages (e.g. cost analysed per Customer segment).
• The availability and quality of information related to the factors affecting CLV. Historical informa
• The availability and quality of information related to the factors affecting CLV. Historical informa
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
ion may also be needed.
Each Business should evaluate:
• The readiness of its Organization, vis-a-vis predictive modeling for CLV
• The available data sources, relating to the factors affecting the CLV
• The cost to build and maintain each of the feasible options of a CLV model, in order
Each Business should evaluate:
• The readiness of its Organization, vis-a-vis predictive modeling for CLV
• The available data sources, relating to the factors affecting the CLV
• The cost to build and maintain each of the feasible options of a CLV model, in order
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
to compare them
• The risk of building a complex model which is not successful in estimating accurately CLV, as promised
• The analysis of the additional insight and expected gains by the more sophisticated model vis-?-vis the additional cost incurred (not an easy task)
For the above reasons (
• The risk of building a complex model which is not successful in estimating accurately CLV, as promised
• The analysis of the additional insight and expected gains by the more sophisticated model vis-?-vis the additional cost incurred (not an easy task)
For the above reasons (
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
costs & risks), managers are often reluctant to approve complex CLV modeling projects.
In order to overcome the Customer survival prediction issue, the Business can calculate the retention rates achieved in the past and based on these produce an estimate for the future (alternatively, an average Custome
In order to overcome the Customer survival prediction issue, the Business can calculate the retention rates achieved in the past and based on these produce an estimate for the future (alternatively, an average Custome
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
lifecycle duration per product, can be used to simplify measurements). However, in certain markets, the calculation of the yearly retention rate is not a straight forward task: a Customer termination, cannot be clearly identified before a certain time period.
CLV or an equivalent ranking can be measure
CLV or an equivalent ranking can be measure
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
per Customer segment instead of being measured per individual Customer. This can simplify the process substantially, by applying the segment retention rate and segment average cost per Customer. However, this can only be meaningful, if the segmentation mode is sufficiently aligned to the factors affecti
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
g the CLV.
The efficient application of CLV is not an easy task. A Customer about to churn has a reduced CLV, if the CLV model takes into account a churn probability. Should a business lower the Customer service level, according to a value-based servicing approach, or try to retain this Customer? The Bu
The efficient application of CLV is not an easy task. A Customer about to churn has a reduced CLV, if the CLV model takes into account a churn probability. Should a business lower the Customer service level, according to a value-based servicing approach, or try to retain this Customer? The Bu
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
iness should try to retain a profitable Customer.
Before implementing a value-based servicing strategy, Organizational issues should also be evaluated:
• Organizational readiness should be evaluated: business processes in place, CTP’s structured to handle the value based approach, CRM information
Before implementing a value-based servicing strategy, Organizational issues should also be evaluated:
• Organizational readiness should be evaluated: business processes in place, CTP’s structured to handle the value based approach, CRM information
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
systems supporting the value ranking, trained people adopting the value-based approach
• The value-based servicing capability, related to a sophisticated CLV valuation which entails many different service levels
• How often should the CLV or equivalent value ranking, be updated. Is this reali
• The value-based servicing capability, related to a sophisticated CLV valuation which entails many different service levels
• How often should the CLV or equivalent value ranking, be updated. Is this reali
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
able by the business infrastructure: does the Business have a dedicated infrastructure to calculate analytics like the Customer value rankings, in order to feed the operational CRM without computationally loading it.
A Business with no prior experience on the use of CLV should start with a simple approa
A Business with no prior experience on the use of CLV should start with a simple approa
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
h: a limited complexity Customer value model. An RFM (recency – frequency – monetary) score can be used as a proxy for the CLV. This score can be a cost-effective initial Customer value ranking. In certain cases even a recency score may be a complex start. Frequency and/or monetary scores may be more sui
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
able as a starting point.
The use of a Customer value ranking is only a means to the efficient use of business resources (value-based management). The accurate estimation of the Customer Lifetime value may be not only very difficult but also of limited business value.
Copyright 2006 – Kostis Panayotaki
The use of a Customer value ranking is only a means to the efficient use of business resources (value-based management). The accurate estimation of the Customer Lifetime value may be not only very difficult but also of limited business value.
Copyright 2006 – Kostis Panayotaki
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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