Marketing: Marketing and Customer Loyalty Essay

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Expert Systems with Applications 31 (2006) 101–107 www.elsevier.com/locate/eswa Customer segmentation and strategy development based on customer lifetime value: A case study
Su-Yeon Kim a, Tae-Soo Jung b, Eui-Ho Suh c, Hyun-Seok Hwang d,* b a
School of Computer and Information Technology, Daegu University, 15 Naeri, Jinryang, Gyeongsan, Gyeongbuk 712-714, South Korea
Department of Management Strategy, Samsung Economic Research Institute, 191 Hangangro 2-ga, Youngsan-gu, Seoul 140-722, South Korea c Department of Industrial Engineering, POSTECH, San 31, Hyoja-dong, Namgu, Pohang, Gyeongbuk 790-784, South Korea d Department of Business Administration, Hallym University, 39 Hallymdaehak-gil, chuncheon, Gangwon-do 200-702, South Korea

Abstract
The more a marketing paradigm evolves, the more long-term relationship with customers gains its importance. CRM, a recent marketing paradigm, pursues long-term relationship with profitable customers. It can be a starting point of relationship management to understand and measure the true value of customers since marketing management as a whole is to be deployed toward the targeted customers and profitable customers, to foster customers’ full profit potential. Corporate success depends on an organization’s ability to build and maintain loyal and valued customer relationships. Therefore, it is essential to build refined strategies for customers based on their value.
In this paper, we propose a framework for analyzing customer value and segmenting customers based on their value. After segmenting customers based on their value, strategies building according to customer segment will be illustrated through a case study on a wireless telecommunication company. q 2005 Elsevier Ltd. All rights reserved.
Keywords: Customer lifetime value; Customer segmentation; Data mining

1. Introduction
Customer Relationship Management (CRM) has become a leading business strategy in highly competitive business environment. CRM can be viewed as ‘Managerial efforts to manage business interactions with customers by combining business processes and technologies that seek to understand a company’s customers’ (Kim, Suh, & Hwang, 2003). Companies are becoming increasingly aware of the many potential benefits provided by CRM. Some potential benefits of CRM are as follows: (1) Increased customer retention and loyalty, (2)
Higher customer profitability, (3) Creation value for the customer, (4) Customization of products and services, (5)
Lower process, higher quality products and services (Jutla,
Craig, & Bodorik, 2001; Stone, Woodcock, & Wilson, 1996).
When evaluating customer profitability, marketers are often reminded of the 80/20 rule (80% of the profits are produced by

* Corresponding author. Address: Department of Business Administration,
Hallym University, 39 Hallymdaehak-gil, chuncheon, Gangwon-do 200-702,
South Korea. Tel.: C82 33 248 1835; fax: C82 33 256 3424.
E-mail address: hshwang@hallym.ac.kr (H.-S. Hwang).

0957-4174/$ - see front matter q 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.eswa.2005.09.004 top 20% of profitable customers and 80% of the costs are produced by top 20% of unprofitable customers) (Duboff,
1992; Gloy, Akridge, & Preckel, 1997).
The core parts of CRM activities are understanding customers’ profitability and retain profitable customers
(Hawkes, 2000). To cultivate the full profit potentials of customers, many companies already try to measure and use customer value in their management activities (Gloy, Akridge,
& Preckel, 1997; Rosset, Neumann, Eick, Vatnik, & Idan,
2002; Verhoef, & Donkers, 2001). Therefore, many firms are needed to assess their customers’ value and build strategies to retain profitable customers.
This paper aims at suggesting a new LifeTime Value (LTV) model and customer segmentation considering customer defection and cross-selling opportunity. We will also propose marketing strategies after segmenting
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