StrategicMarketin

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Valuing Customers

SUNIL GUPTA, DONALD R. LEHMANN, and JENNIFER AMES STUART (2004)

Journal of Marketing Research 7 Vol. XLI (February 2004), 7–18

Modeling Customer Lifetime Value

GUPTA, SUNIL, BOMINIQUE M. HANSSENS, BRUCE HARDIE, WILLIAM KAHN, V. KUMAR, NATHANIEL LIN (2006)

Journal of Service Research, Volume 9, No. 2, November 2006 139-155

The Diffusion of Services

BARAK LIBAI, EITAN MULLER, and RENANA PERES (2009)

Journal of Marketing Research Vol. XLVI (April 2009), 163–175

Expanding the Role of Marketing: From Customer Equity to Market Capitalization

V. Kumar & Denish Shah (2009)

Journal of Marketing Vol. 73 (November 2009), 119–136

Linking Customer and Financial Metrics to Shareholder Value: The Leverage Effect in Customer- Based Valuation

Christian Schulze, Bernd Skiera, & Thorsten Wiesel

Journal of Marketing Volume 76 17 (March 2012), 17–32

List of Articles

Purpose

Understanding the CLV conceptCustomer value & Firm value

Expanding the role of marketing and the marketer

Aligning the CMO’ s objectives with the CFO’s Agenda

Managing customers’ profit and cash flow risks

Sustainability of stock price gains

Applicability of framework

Efficient market theory

Investing in customers versus investing in brands

Purpose:Conceptual frame workTheoretical frame work

Drivers of shareholder valueResults of CBV's

Managerial implicationsResearch implications

Mostly Used Terms

Margin (product’s selling price - cost of production)

Acquisition Cost (to convincing)Retention Cost (to keep)Cross selling/Expansion (Offer)Customers Dis-adoption/ Churn (Customer

leave )

Financial Value ------- Intangible AssetsCritical aspect of firm (Customer)Value of Customers = ∑ Discounted Future

Earnings

Better method for forecasting the future stream of income when it is not possible to make opinion about Negative earnings

Provide insights about marketing RetentionCustomer related expenses are Investments

Data:Capital One ----- Traditional FirmAmazon.com---- Internet CompaniesAmeritrade ----- Internet CompanieseBay ------------- Internet CompaniesE*Trade --------- Internet Companies

Quarterly data ( Annual Reports, 10K, 10Q)1996-97 to March 2002

Standard Financial Models (N/A) Negative Earnings

Customer Cohorts at time 0Model

ATTRITION -------- Growth of Service Market

Attrition ------ Terminate Relationship

Lost of Good Migration Approach

Not expected to return May be return(Berger &Nasr 1998) (Rust, Lemon and Zeithaml

2004)

7 Firms from 4Services Areas;

Mobile Phone ------------------ SK Telecom Mobi Star

Online Brokerage -------------- E*TradeOnline Book Retailer ----------

Barnsamdnoble.com Amazon.com

Satellite Radio Provider ------- XM Satellite Radio

Sirus Satellite Radio

Finding:New adopter ---------- Outward streamCategory Level -------- Evolution of new services

Regaining customers

Competitive Level ---- Churn & disadoption Disaggregate data ---- CE Firm based data ------ CE

6 firms ------- CE ------ Stock market values (difference 18%)

Attrition ---------------- RoleAmazon ---------------- Overvalued(not fit)

2-Day discussions Thought Leadership ConferenceOrganized by: University of ConnecticutDiscussion Group: Mix of Academics &

Practitioners

FIRM VALUE

CLV / CE

CUSTOMER

RETENTION

CUSTOMER

EXPANSION

CUSTOMER ACQUISITIO

N

MARKETING PROGRAMS

Present value of all future profitsIndividual/Segment of CustomersHigh/Low Profitable CustomersPossibilities to defect a Competitor

Reinartz and Kumar 2003

RFM Models Direct Marketing programs To improve the response rate Past purchase behavior of customers Recency-------Frequency-------Monetary value

Probability Models Observed Behavior------Latent Behavioral

Characteristics(unobserved) To compute CLV---------Alive or Inactive YES------Non-Contractual setting----Passion Purchase-----Any

Time(Amazon) NO------ Non-Contractual setting----Fixed Transaction Time

(Conferences) NO------Contractual setting

Econometric Models Philosophy of Probability Model Customer Acquisition, Retention, Expansion (Cross Selling)Customer Acquisition First Time Purchase by NEW Customers Focus on the factors that INFLUENCE Logit/Probit Model

(Gensch 1984: Thomas 2004: Thomas, Blattberg and Fox 2004 Low Price ----------- INC. Acquisition (Thomas, Blattberg, Fox

2004) Price Discounts: (Anderson and Semester 2004) Promotions -------- INC. Acquisition ------ Long Term (Levis 2003) +ve impact --------- Long term Profitability ---- First time Buyer -ve impact --------- Long term Profitability ----- Established BuyersCustomer Retention Alive or Inactive (eBay) Hazard Model ------- Lost for Good Markov Model ------- Always a share 5% INC. in retention ----- INC. Profitability by 25% to 85%

(Reichheld and Sasser 1990)

Persistence Models Focus modeling behavior b/w Acquisition, retention, cross

selling Dynamic system

Computer Science ModelsBased Models Projection-Pursuit Model Neural Network Model Decision Tree Model Spline-Based Models: Generalized Additive Model (GAM) Multivariate Adaptive Regression Model (MARS) Clasification and regression Tree (CART) Support Vector Machines (SVM) Not known in marketing literature

Diffusion/Growth Models Used ------- Customer selection, Campaign Management,

Segmentation & Targeting Model ----- Disaggregated data Word of Mouth

1. Moving Beyond the Limits of Transaction Data2. Moving from a Customer to a Portfolio of Customers3. Reconciling Top-Down VS Bottom-up Measurements4. Cost Allocations5. Developing Incentive Scheme that encourage Globally

Optimal Behavior6. Understanding the Limits of CLV and CE7. Understanding the Scope of Application8. Appreciating the Limits of our Theory-Based Models9. Understanding How to Model Rare Events10. Recognizing the Danger of Endogeneity11. Accounting for Network Effects

What is Value the Customer/Customer Lifetime Value?Present value of all future profitHolistic approachCustomers different by their SegmentsHigh/Low Profitable customersCheck the Acquisition of the customersCalculate the value of Current & Future Customers

(CE)Monitor the Impact of Marketing StrategiesBusiness Sectors

Banking Sector Insurance CompaniesTelecommunication Online BusinessServices SectorFinancial Companies (Shareholders)

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