“Customer Equity and Lifetime Management (CELM) at Finnair” by Abdel Labbi, Cesar Berrospi, Andre Elisseff, Giuliano Tirenni.
The Customer Equity & Lifetime Management (CELM) solution is a decision support system that offers marketing managers a scientific framework for optimal planning and budgeting of targeted marketing actions (e.g., campaigns) to maximize the return on marketing investments. The CELM technology uses Markov decision processes to model customer dynamics and find the optimal marketing policy maximizing the value generated by a customer during a given time horizon. Markov decision processes are estimated using nonparametric estimation algorithms. Lifetime value optimization is achieved through dynamic programming algorithms that identify the marketing actions causing customers to transition to better value/loyalty states. These marketing actions can have the form of cross-selling, up selling, and loyalty marketing campaigns. Modeling customer dynamics allows us to consider lifetime value as an endogenous variable that both depends on and influences the optimal marketing policy. Heterogeneity across customers and across marketing actions is addressed by the model by tailoring the marketing action to the individual customer. The CELM technology can also be used to simulate the financial impact of a given marketing policy via Monte Carlo simulation; in this way marketing managers are able to simulate several scenarios and plan the monthly budget requirements to finance the chosen marketing policy. Monte Carlo simulation allows us to estimate the lifetime value distributions (i.e., the financial profile) of customers if a given marketing policy is applied. Thus, portfolio optimization techniques can be used to build a portfolio of customers optimizing the value/risk trade-off of the return on customer equity. The work, implemented at Finnair, shows a dramatic financial return as well as having a major impact on the way Finnair deals with cutomer loyalty programs.