Question

Cross selling is a major activity at financial institutions.  One regional bank classifies its 100,000 individual customers into 4 groups: a) Basic services (checking, savings accounts), b) Lending (mortgages, loans), c) Investment (mutual funds, bonds), and d) Financial planning (retirement, trusts, comprehensive financial planning).

Customers in each of the four categories generate net (of servicing costs) revenue of $100, $200, $300, and $1,000 per year respectively.  Currently the mix of customers is 70%, 10%, 15%, and 5% in the four types.  Retention rates are 90% across the board.  Retention costs (note: these are different from servicing costs) per account are $80, $120, $150, and $200 respectively per year.  In order to improve performance, three major strategies are under consideration:

Increase net revenue per customer by 10% across the board

Change the customer mix to 60%, 15%, 18%, and 7%

Increase retention in Financial planning group to 95%

1.What is the CLV in each of the current customer categories? (Assume a 10% discount rate)

2.What would be the increase in the bank’s average CLV if each of the three suggested strategies were implemented separately? (assuming servicing costs are constant and same discount rate)

Use the formula for computing CLV

Answer 1

Particulars	I	II	III	IV
Revenue per year	100	200	300	1000
Less:Retention Cost	80	120	150	200
Net Revenue	20	80	150	800
Retention %	0.9	0.9	0.9	0.9
Revenue after Retention	18	72	135	720
Discount Rate	0.10	0.10	0.10	0.10
CLV	180	720	1350	7200
Ratio	70	10	15	5
Revised CLV	126	72	202.5	360

Average CLV= 760.5

If strategy no I is adopted:

Particulars	I	II	III	IV
Revenue per year	110	220	330	1100
Less:Retention Cost	80	120	150	200
Net Revenue	30	100	180	900
Retention %	0.9	0.9	0.9	0.9
Revenue after Retention	27	90	162	810
Discount Rate	0.10	0.10	0.10	0.10
CLV	270	900	1620	8100
Ratio	70	10	15	5
Revised CLV	189	90	243	405

Average CLV= 927

If strategy no 2 is adopted:

Particulars	I	II	III	IV
Revenue per year	100	200	300	1000
Less:Retention Cost	80	120	150	200
Net Revenue	20	80	150	800
Retention %	0.9	0.9	0.9	0.9
Revenue after Retention	18	72	135	720
Discount Rate	0.10	0.10	0.10	0.10
CLV	180	720	1350	7200
Ratio of each category	60	15	18	7
Revised CLV	108	108	243	504

Average CLV= 963

If strategy no 3 is adopted:

Particulars	I	II	III	IV
Revenue per year	100	200	300	1000
Less:Retention Cost	80	120	150	200
Net Revenue	20	80	150	800
Retention %	0.95	0.95	0.95	0.95
Revenue after Retention	19	76	142.5	760
Discount Rate	0.10	0.10	0.10	0.10
CLV	190	760	1425	7600
Ratio	70	10	15	5
Revised CLV	133	76	213.75	380

Average CLV= 802.75