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MASTER's THESIS Modeling CLV for Financial Service Providers 2009:069 MASTER'S THESIS Modeling CLV for Financial Service Providers - Case of Karafarin Bank Roudabeh Gharaee Luleå University of Technology Master Thesis, Continuation Courses Marketing and e-commerce Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce 2009:069 - ISSN: 1653-0187 - ISRN: LTU-PB-EX--09/069--SE MASTER'S THESIS Modeling CLV for Financial Service Providers: Case of Karafarin Bank Supervisors: Dr. Amir Albadvi Dr. Deon Nel Referee: Dr. Keramati, Dr. Mohammadi, Dr. Kazemzadeh Prepared by: Roudabeh Gharaee Tarbiat Modares University Faculty of Engineering Department of Industrial Engineering Lulea University of Technology Division of Industrial Marketing and E-Commerce MSc PROGRAM IN MARKETING AND ELECTRONIC COMMERCE Joint 2009 1 Abstract Today companies are urged to acquire and retain long-term relationships with customers rather than having discrete transactions with them, and this fact has led managers to wonder how they could measure the long-term value of a customer in a way that would represent both the relationship benefits and accounting profits of a customer. These conceptual developments along with growing competitiveness of Iranian financial services industry, have urged top management of this industry to seek more accurate ways on how to better manage their relationships with customers and prevent losses by distinguishing high value and low value customers. Although there are many value measurement tools developed by researchers in different industry settings, there is no such model specified to financial services which brings into account the risk of relationship. This research has focused on developing a value measurement model by which a bank’s management could better decide whether a business credit facility applicant is worth the resources s/he receives. This model is developed based on “customer lifetime value” concept and is risk-adjusted to overcome this common flaw of such models. The risk is modeled by both Delphi method (qualitative risk) and logistic regression method (quantitative risk) to partially resolve the unreliability issues concerned with financial statements in Iran. The model is then tested through a case study- Karafarin Bank (KB)- and new applications such as loan pricing and collateral setting based on this model are suggested to be worked out by KB’s management. Keywords: Customer lifetime value, Delphi method, Qualitative risk, Case study, Mathematical modeling 2 Acknowledgement: This thesis is dedicated to those who have supported me in different aspects; academically, psychologically, and of course financially!! Among these people, my husband and my mother helped me in all aspects and without them I wouldn’t have been able to accomplish this dissertation. I owe this achievement to them in first place. I would also like to convey my sincere appreciation to my supervisor, Dr. Albadvi, who dedicated enough time to my piece of work so that I could get my desired research quality. Many thanks to Karafarin Bank and all Banking experts on our Delphi panel who devoted great amount of time and expertise for completion of this thesis. Hope the results of this research can improve the marketing performance at Iranian financial services industry. 3 Table of Content Chapter 1 ........................................................................................................................... 10 Introduction ....................................................................................................................... 10 1. Introduction ............................................................................................................... 10 1.1 Problem Definition .................................................................................................. 11 1.2 Importance of CLV Measurement for Organizations ............................................. 12 1.3 Research Motivations .............................................................................................. 13 1.4 Research Objectives ................................................................................................ 15 1.5 Research Design ...................................................................................................... 15 1.6 Model Development Phase ..................................................................................... 18 1.6.1 Qualitative Risk Score Modeling ..................................................................... 19 1.6.1.1 Delphi Method Steps ............................................................................ 23 1.6.2 Quantitative Risk Score Modeling ................................................................... 25 1.7 Model Fine-tuning Phase ........................................................................................ 25 1.7.1 Case Study ....................................................................................................... 25 1.7.1.1 KB’s Background ................................................................................... 28 1.7.1.2 Credit Issuance Process at KB ........................................................... 28 1.7.2 Data Collection Method for the Case Study .................................................... 30 1.7.2.1 Secondary Data ..................................................................................... 30 1.7.2.2 Types of secondary data ..................................................................... 30 1.7.2.3 Evaluating secondary data .................................................................. 32 1.8 Expected Contribution of the Research .................................................................. 33 1.9 Abbreviations and expressions ............................................................................... 34 1.10 Structure of the Report .......................................................................................... 34 1.11 Summary of the Chapter ....................................................................................... 35 Chapter 2 ........................................................................................................................... 36 Literature Review on Customer Lifetime ......................................................................... 36 Value Applications and Models ........................................................................................ 36 2. Customer Lifetime Value .......................................................................................... 36 2.1 Value Measurement Background ............................................................................ 37 2.1.1 Customer Relationship Management ............................................................... 37 2.1.2 Relationship Marketing .................................................................................... 39 2.2 Historic Data Analysis Methods ............................................................................. 39 2.2.1 Top-down Approach ........................................................................................ 39 2.2.2 Bottom-up Approach ....................................................................................... 41 2.2.3 Limitations of Historic Data Analysis Methods .............................................. 42 2.3 CLV Definition ....................................................................................................... 44 2.3.1 Benefits of CLV Measurement ........................................................................ 46 2.3.2 Limitations for CLV measurement .................................................................. 47 2.4 CLV Applications ................................................................................................... 48 2.4.1 Segmentation/ Product Recommendation/ Retention ...................................... 49 2.4.2 Resource Allocation ......................................................................................... 49 2.4.3 Merger and Acquisition ................................................................................... 50 2.4.4 Customer Equity .............................................................................................. 50 2.4.5 Marketing Campaign ....................................................................................... 52 2.5 CLV Calculation Models ........................................................................................ 52 4 2.5.1 Models by Blattberg and Deighton (1996); Berger and Nasr (1998); Gupta, Lehmann (2003); Blattberg, Getz and Thomas (2001); and Rust, Lemon and Zeithaml (2000) ........................................................................................................ 53 2.5.1.1 BD model ................................................................................................ 54 2.5.1.2 BN model ................................................................................................ 55 2.5.1.3 GL Model ................................................................................................ 55 2.5.1.4 BGT Model ............................................................................................. 56 2.5.1.5 RLZ Model .............................................................................................. 58 2.6 Models by Stahl (2003) and Wu (2005) ................................................................. 59 2.6.1 Framework developed by Stahl (2003) ...........................................................
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