A study of customer profitability in automotive retail

Abstract

The main purpose of this study was to explore Recency, Frequency & Monetary Value (RFM) analysis and Customer Lifetime Value (CLV), specifically looking at an automotive retail dealership. Though both these concepts are well known and have been used in many industries around the world, they are not used by automotive retailers. This study attempted to identify the drivers of profitability in the dealership and to see if RFM analysis could be used to segment the customer database by profitability. The study also aimed to determine whether we could model projected CLV value from the RFM profile. In addition to using RFM and CLV analysis, the study used multiple regression, analysis of variance and cluster analysis. The study identified RFM based customer segments and we also used CLV to model projected profitability within brands of vehicles. Several variables, including brand and customer longevity were found to be predictors or customer profitability and CLV. The study shows that there is definitely a link between RFM and CLV. It also illustrates that more research needs to be done in this industry to develop accurate Customer Lifetime Value models, which encompass all the variables that affect profitability in both the sales and service areas of the auto dealership business.