Modeling Customer Lifetime Value in the Telecom Industry

Abstract: Background The fierce competition in the telecom industry makes operators heavily invest in acquiring new customers. This is most often done with marketing campaigns and subsidies of handsets. But to be truly profitable, it is crucial not only to attract new customers, but also to make sure they retain with the company for as long time as possible. This turns the mobile operators’ attention to customer lifetime value (CLV). Knowing what drives CLV give ideas of what is best to invest in, and this information can be very valuable for Ericsson in their sales and relationship to the operators. Purpose The purpose is to develop a model to analyze what drives customer lifetime value of smartphone users. Furthermore, it will also be investigated how changing these parameters affects the total CLV, in order to show how different investments increases or decreases the customer lifetime value. Theoretical Framework The theoretical framework builds on present CLV theory. Markov chain modeling is used to model the CLV, and ordered probit regression is applied to analyze the survey data. Methodology This thesis takes a quantitative approach to model the customer lifetime value. The data used to derive the drivers of CLV is compiled from smartphone user survey questionnaires completed by Ericsson’s Consumer Lab. The calculations are performed by simulating a large number of fictitious company-customer relationship processes in MATLAB. 5 Results The main result is a model that describes the dynamic relationship between a customer’s preferences and the profit it generates during its lifetime. The model is then applied on six different markets across a number of segments to produce valuable information on how the CLV changes when customer satisfaction in different areas increase.