Predicting Customer Lifetime Value : Understanding its accuracy and drivers from a frequent flyer program perspective

Sammanfattning: Each individual customer relationship represents a valuable asset to the firm. Loyalty programs serve as one of the key activities in managing these relationships and the well-developed frequent flyer programs in the airline industry is a prime example of this. Both marketing scholars and practitioners, though, have shown that the linkage between loyalty and profit is not always clear. In marketing literature, customer lifetime value is proposed as a suitable forward-looking metric that can be used to quantify the monetary value that customers bring back to the firm and can thus serve as a performance metric for loyalty programs. To consider the usefulness of these academic findings, this study has evaluated the predicted airline customer lifetime value as a loyalty program performance metric and evaluated the drivers of customer lifetime value from a frequent flyer program perspective. In this study, the accuracy of the Pareto/NBD Gamma-Gamma customer lifetime value has been evaluated on a large dataset supplied by a full-service carrier belonging to a major airline alliance. By comparing the accuracy to a managerial heuristic used by the studied airline, the suitability as a managerial tool was determined. Furthermore, based on existing literature, the drivers of customer lifetime value from a frequent flyer perspective were identified and analyzed through a regression analysis of behavioral data supplied by the studied airline. The analysis of the results of this study shows that the Pareto/NBD customer lifetime value model outperforms the managerial heuristic in predicting customer lifetime value in regard to almost all error metrics that have been calculated. At an aggregate-level, the errors are considered small in relation to average customer lifetime value, whereas at an individual-level, the errors are large. When evaluating the drivers of customer lifetime value, points-pressure, rewarded-behavior, and cross-buying have a positive association with customer lifetime value. This study concludes that the Pareto/NBD customer lifetime value predictions are only suitable as a managerial tool on an aggregate-level. Furthermore, the loyalty program mechanisms studied have a positive effect on the airline customer lifetime value. The implications of these conclusions are that customer lifetime value can be used as a key performance indicator of behavioral loyalty, but the individual-level predictions should not be used to allocate marketing resources for individual customers. To leverage the drivers of customer lifetime value in frequent flyer programs, cross-buying and the exchange of points for free flights should be facilitated and encouraged.