MEASURING CUSTOMER LIFETIME VALUE: APPLICATION OF ANALYTIC HIERARCHY PROCESS IN DETERMINING RELATIVE WEIGHTS OF ‘LRFM’

Abstract

ABSTRACT The limited availability of resources drives retailers to tailor their resources to identified profitable customers. In the present scenario, when the ROI of marketing is being questioned, the satisfaction of the profitable customers is of utmost importance as it drives their loyalty towards the retailer and the retailer’s brand. This research has considered Length of association with customers (L), apart from variables like Recency (R), Frequency (F) and Monetary-value of the purchase (M) in measuring customers’ relative-worth based on the calculation of Customer Lifetime-value (CLV). The contribution of this article lies in calculating weights of these variables – L, R, F, and M and demonstrating the calculation of CLV using weighted LRFM based on data collected from a leading apparel retailer in India. The obtained results for the customer base using the proposed approach is more reliable when compared with traditional non-weighted approaches of RFM based CLV. This methodology will provide a new and better option to retailers for measuring CLV of their customers, thus aiding their decision making about customer-friendly profitable marketing strategies and attaining optimum returns on their investments.