Global CRM software spending was $7.8 billion in 2007 and is projected to reach $8.9 billion in 2008. Further, CRM software sales will touch $13.3 billion by 2012. These software and processes have made it possible for companies to gather and analyze large amounts of data on their existing and prospective customers. This article shows how customer-level data can lead to increased customer profitability through (a) selection of the right customers by using the Customer Lifetime Value (CLV) metric, (b) the nurturing of those right customers and, (c) reallocation of resources to the profitable customers. Due to this approach profitable management of individual customers is the basis for growth in firm profitability. A case study will show how IBM used CLV as an indicator of customer profitability and allocated marketing resources based on CLV.

Loyal customers cost less to serve, pay more than other customers, and attract more customers through word of mouth. If you agree with these three claims, it is time to revisit them and find out why they may not be true. Our research has shown that loyal customers know their value to the company and demand premium service, believe they deserve lower prices, and spread positive word of mouth only if they feel and act loyal. Then why do companies pursue the claims listed above, and what is their logic in doing so? The answer lies in the premise that loyalty equals profitability. With this premise as the base, companies maximize backwardlooking metrics such as RFM (Recency of purchases, Frequency of purchases, and Monetary value of purchases), PCV (Past Customer Value), and SOW (Share of Wallet). Managing customers for loyalty, however, does not amount to managing them for profitability. On the contrary, the loyalty-profitability link must be managed simultaneously. How is this achieved? We propose that measuring and maximizing Customer Lifetime Value (CLV) will help companies address this issue. When using the CLV paradigm, companies can make consistent decisions over time about which customers and prospects to acquire and retain, as well as those not to acquire and retain, and also determine the level of resources to be spent on the various micro-segments. Further, we have found that selecting and nurturing customers based on the CLV approach increases future profitability of the customers.