The Strategic Impact of Customer Lifetime Value: The Harrah’s Story

As a follow-up to Doug’s post about customer lifetime value yesterday, and the advent of our online customer lifetime value calculator, I wanted to revisit the most famous use of customer lifetime value in recent business strategy and practice: Gary Loveman and Harrah’s. Harrah’s developed sophisticated customer lifetime value models to predict the ultimate value Harrah’s could aspire to for each individual customer. Then Harrah’s used its well-known customer loyalty program to try to reach that value.

The real story behind customer lifetime value analysis at Harrah’s isn’t just reaching an aspirational value (though the ability to eek $372 million additional dollars out of its “Platinum” and “Diamond” customers tells you just how good Harrah’s is at understanding that they can stretch their existing customers and still make them very happy). No, the real value behind performing the customer lifetime value calculation in Harrah’s case is stumbling over the golden nugget that no one else thought to pan for. Non-metaphorically, Harrah’s found a highly profitable segment that they might never have valued simply by going through the quantitative exercise of assigning customer lifetime value.

Harrah’s found that high rollers are important to their business but that the bread and butter is the “grazer”, the steady casino player who accounts for 40% of their total revenue. Not to mention that these so called grazers (also called retail gamblers) account for a steady stream of income year-round. The question was how much the grazer spent at other casinos while satisfying their avidity for gambling. Then Harrah’s set out to take that wallet share from the other casinos by instituting new perks for the grazer to have them graze more often - and for longer times - at Harrah’s than before.

The victory came about for Harrah’s simply because, in assigning customer lifetime value, it had to ask three, simple questions: how frequently does this person come, how much do they spend on average, and how much do I need to spend to keep them? Turns out Harrah’s doesn’t need to spend all that much to keep the grazers.

Ultimately, this exercise also allowed Harrah’s to put an implicit value on its entire customer base - the so-called customer equity of the company. Further, it allowed Harrah’s to more fully understand what its company was worth. The ability to quantify the value of its customers was likely important when it negotiated a deal for $90 a share in its 2006 buyout deal with the Texas Pacific Group and the Apollo Management Group. How much of that $17.1 billion that the Texas Pacific Group and Apollo Management Group paid do you think was based purely on the value of Harrah’s customers?

If customers are the lifeblood of your business, it does well to know how much they’re worth to you. We make the starting point easy for your with the Istobe Customer Lifetime Value Calculator.

It’s kind of addicting, too.

Tags: clv, Customer Lifetime Value (CLV), customer segmentation, segmentation

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This entry was posted on Thursday, August 14th, 2008 at 8:43 pm and is filed under Customer Lifetime Value (CLV), Customer Segmentation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.