The 2005 ISMS Practice Prize Winner—Customer Equity and Lifetime Management (CELM) Finnair Case Study
Giuliano Tirenni, Abderrahim Labbi, Cesar Berrospi, André Elisseeff, Timir Bhose, Kari Pauro, Seppo Pöyhönen
Marketing Science · 2007 · Volume 26 · Issue 4
Abstract
The Customer Equity and Lifetime Management (CELM) solution is based on a decision-support system that offers marketing managers a scientific framework for the optimal planning and budgeting of targeted marketing campaigns to maximize return on marketing investments. The CELM technology combines advanced models of Markov decision processes (MDPs), Monte Carlo simulation, and portfolio optimization. MDPs are used to model customer dynamics and to find optimal marketing policies that maximize the value generated by a customer over a given time horizon. Lifetime value optimization is achieved through dynamic programming algorithms that identify which marketing actions, such as cross-selling, up-selling, and loyalty marketing campaigns, transition customers to better value and loyalty states. The CELM technology can also be used to simulate the financial impact of a given marketing policy using Monte Carlo simulation. This allows marketing managers to simulate several targeting scenarios to assess budget requirements and the expected impact of a given marketing policy. The benefits of the solution are illustrated with the Finnair case study, where CELM has been used to optimize marketing planning and budgeting for Finnair’s frequent-flyer program (FFP).
Keywords
marketing optimization, loyalty programs, Markov decision processes, portfolio optimization, marketing budget allocation, customer equity, customer lifetime value
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