CLTV: RBC Bank

The case talks of two methods of calculation of CLTV. To deepen our understanding of
the same, let us work this out based on the following assumptions.

1. Assume RBC has only 3 segments of customers based on age: (1) 20 to 35 years
old, (2) 36 to 60 years old, and (3) 61 to 75 years old. The distribution of the
average annual customer profitability in dollars for each of the segment is given
in the table 1. What is the CLTV of the niece if the bank estimates that she is in
the 30th percentile for current profitability? The case says that she is 23 years old.
Use a discount rate of 8% and use the method described on page 12 of the case.
Assume that there is an attrition rate of 5% each year.

Table 1: Average Annual customer profitability distribution (USD).

20-35 Years 36-60 years 61-75 years

Percentile old old old
10 -300 -100 100
20 -250 0 300
30 -100 500 900
40 -50 700 1300
50 0 900 1700
60 50 1100 2000
70 100 1300 2300
80 200 1500 2500
90 300 1700 2700
100 400 1900 2900
 2. To understand the second method, we will consider the following. Assume that
RBC has only 2 products—Car Loan (CL) and Credit Card (CC). The annual
profitability for the two products for the niece is likely to by – 100 USD and +
1000 respectively given her profile. Thus, the profitability if the niece took both
the products would be 900 USD. RBC has made the following observations for
customers in the age group 20-35: if they have only a car loan at the end of a
given year, the probability of acquiring a credit card during the following year is
50%. The probability of losing the even this one product is 20%. The probability
that the customer retains the same product for subsequent years is 20% and there
is a 10% chance that the customer swaps the products. A customer who buys both
the products in a given year, has a 70% probability of buying both products in the
subsequent year and a 10% chance each of dropping either or both products. A
customer or ex-customer who buys no products from the bank has a negligible
probability of buying any product from the bank in the subsequent year. These
observations are summarized in the matrix in table 2. If the niece had only the car
loan in year 1, what would be the expected profits from her in year 2? What
would be the expected profits from her in year 3? What will be the CLTV for a
life of 3 years using a discount rate of 8%?

Table 2: Probabilities for the year t+1 product mix for all possible combinations of
product mixes for year t.

Product Mix in Year t+1

CL CC CL+CC NONE
CL 0.2 0.1 0.5 0.2
Product CC 0.1 0.5 0.2 0.2
mix in CL+CC 0.1 0.1 0.7 0.1
year t NONE 0 0 0 1