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CLTV Problem-RBC

The document discusses customer profitability and lifetime value for RBC Financial Group. It provides tables of average annual profitability by age segment and percentile. It also provides probabilities of customers acquiring new products, retaining current products, or dropping products each year to calculate expected future profits over multiple years for a specific customer profile.

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Laxmikanta Nayak
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53 views

CLTV Problem-RBC

The document discusses customer profitability and lifetime value for RBC Financial Group. It provides tables of average annual profitability by age segment and percentile. It also provides probabilities of customers acquiring new products, retaining current products, or dropping products each year to calculate expected future profits over multiple years for a specific customer profile.

Uploaded by

Laxmikanta Nayak
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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RBC Financial Group

Q1. Assume RBC has only three 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 average annual customer profitability in dollars
for each of the three segments is given in Table below. What is the profit potential or lifetime value of the
niece if the bank estimates that she is in the 30th percentile for current profitability? Recall that the niece is
currently aged 23. Use a discount rate of 8% and assume that there is a 5% chance of customer attrition
each year.

Table - Average annual customer profitability distribution

Percentile 20-35 years old 36-60 years old 61-75 years old
10 -300 -100 100
20 -250 0 300
30 -100 500 900
40 -50 700 1,300
50 0 900 1,700
60 50 1,100 2,000
70 100 1,300 2,300
80 200 1,500 2,500
90 300 1,700 2,700
100 450 1,900 2,900

Q2. Assume that RBC has only two products – Car Loan (CL) and Credit Card (CC). The annual
profitability for the two products for the niece is likely to be ($100) and $1000 respectively given her
profile. Thus the profitability if the niece took both products would be $900. RBC has made the following
observations for customers in the aged 20-35 years segment: 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 even this one product is 20%. The probability that the customer retains the same product for the
subsequent year is 20% and there is a 10% chance that the customer swaps products. A customer who buys
both products in a given year has a 70% probability of buying both products in the subsequent year and a
10% probability 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 of probabilities in Table below. If the niece had
only the car loan in year 1, what are the expected profits from her in year 2? What would the expected
profits from her be in year 3? What is the present value of the profits during the three years using an 8%
discount rate?

Table - Probabilities for 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 .2 .1 .5 .2
Product mix
in year t CC .1 .5 .2 .2
CL + CC .1 .1 .7 .1
None ~0 ~0 ~0 ~1

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