In contractual insurance business model, Customer Lifetime Value (CLV) is the single most important metric for understanding our customers. In insurance, the importance of CLV is similar to the credit score in bank and credit card companies. CLV helps us to make important business decisions about sales, marketing, product development, and customer support. For instance:
- Marketing: How much should I spend to acquire a customer?
- Product: How can I offer products and services tailored for my best customers?
- Customer Support: How much should I spend to service and retain a customer?
- Sales: We type of customer should sales reps spend the most effort to target for?
The heart of CLV is the notion of the retention rate, or retention probability. An important managerial task is to take a series of past retention numbers for a given group of customers and project them into the future to make more accurate predictions about customer tenure, lifetime value, and so on. A defining characteristic of contractual business setting is that the departure of a customer is observed, called customer attrition. As we seek to understand the difference of customer behaviors in attrition and retention, we created machine learning models by analyzing data about millions of customers and their past retention / attrition numbers. The data contains information about auto, property and life policies (C360), customer demographics (Acixom), customer segmentation (LifeScape), customer billing process and customer journey map. Once the model is trained and optimized, it is able to predict the retention probability of a customer in any future tenure with the firm, from which we can aggregate and predict the expected tenure of a customer over a period of time.
The expected tenure, predicted by machine learning models trained on billion rows of data, is then used to multiply with the expected customer value to calculate the CLV of our customers. The CLV can be widely used in lots of decision making process, and can have a dramatic impact throughout our business.