Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity

Fader, Peter S.; Hardie, Bruce G. S.
January 2010
Marketing Science;Jan/Feb2010, Vol. 29 Issue 1, p85
Academic Journal
The past few years have seen increasing interest in taking the notion of customer lifetime value (CLV) and extending it to value a customer base (with subsequent links to corporate valuation). The application of standard textbook discussions of CLV leads to calculations based on a single retention rate. However, at the cohort level, retention rates typically increase over time. It has been suggested that these observed dynamics are due, in large part, to a sorting effect in a heterogeneous population. We show that failing to recognize these dynamics yields a downward-biased estimate of the residual value of the customer base (compared to an aggregate analysis that ignores these dynamics). We also explore the implications of failing to account for retention dynamics when computing retention elasticities and find that the frequently reported values underestimate the true effect of increases in underlying retention rates in a heterogeneous world.


Related Articles

  • Customer Lifetime Value: The best measure of loyalty? Clark, Peter // European Retail Digest;Winter2006/2007, Issue 52, p14 

    The article discusses customer lifetime value (CLV) which is defined as the worth of the customer to the business over his or her lifetime as a customer. According to theory, constructing customer loyalty increases corporate profits. It says that economics of the customer throughout the entire...

  • Brand Loyalty Measurement: A Framework. Roy, Sancharan // SCMS Journal of Indian Management;Apr2011, Vol. 8 Issue 2, p112 

    Brand loyalty audit framework is proposed in this research paper. This model uses a tri-dimensional approach to brand loyalty, which includes behavioural loyalty and the two components of attitudinal loyalty: the emotional and the cognitive. In allowing different levels and intensity of brand...

  • Building Member Loyalty Goes Beyond What's Fuzzy and Feel-Good. Bloedorn, Michelle // Credit Union Times;1/20/2010, Vol. 21 Issue 3, p20 

    The article offers the author's opinion on the significance of building member loyalty between an organization and its customers. The author believes that strong loyalty results in valuable customer behavior and longtime business. She states that credit unions reflect an average of 56 percent in...

  • Receiver responses to rewarded referrals: the motive inferences framework. Verlegh, Peeter; Ryu, Gangseog; Tuk, Mirjam; Feick, Lawrence // Journal of the Academy of Marketing Science;Nov2013, Vol. 41 Issue 6, p669 

    Referral reward programs have been shown in past research to stimulate referrals and also to contribute positively to customer lifetime value and firms' profitability. In this paper we examine whether, how, and under what conditions providing a reward for a referral affects receivers' responses...

  • Four steps up profits using customer equity. Powaga, Ken // Marketing News;10/15/2006, Vol. 40 Issue 17, p48 

    This article reports on the key factors to using customer satisfaction to improve marketing. Companies need to create a strategy to measure the customer's satisfaction with the product or service. Looking at what the customer has done to promote the brand to friends and family can help. ...

  • Factors Influencing The Extent of Brand Loyalty of Toilet Soap Users in Bangladesh: A Case Study on Dhaka City. Mahmud, Khaled; Gope, Khonika // Global Journal of Management & Business Research;2012, Vol. 12 Issue 15, p25 

    Brand loyalty is determined by several distinct psychological processes of the consumers and entails multivariate measurements. Product features (Fragrance / Skin care / Germ fight features / Colour) is one of the most important factors that affect brand loyalty. The relationship between the...

  • Will the Target's Customers Be Loyal to You? Paison, Allen // Mergers & Acquisitions: The Dealermaker's Journal;Aug2007, Vol. 42 Issue 8, p14 

    The article offers suggestions on how buyers could measure the risks associated with a potentially weak customer base. It states that a well designed customer loyalty audit can be used by the company to determine the mix of long-term versus transitory customers, the percentage of profitable...

  • Managing retailer profitability - one customer at a time! Kumar, V.; Shah, Denish; Venkatesan, Rajkumar // Journal of Retailing;2006, Vol. 82 Issue 4, p277 

    This study examines how customer lifetime value (CLV) can be computed at individual customer level in a retail setting to maximize profitability. The study finds that maximum positive impact to CLV occurs when the customer cross-purchases, shows multi-channel shopping behavior, stays longer with...

  • RECENT TRENDS IN RESEARCH AND PRACTICE OF CUSTOMER LOYALTY AND LOYALTY PROGRAMS. Melnyk, Valentyna // Actual Problems of Economics / Aktual'ni Problemi Ekonomìki;Nov2011, Vol. 125 Issue 11, p415 

    Despite many companies across the globe are spending heavily on loyalty programs, many of them still fail to achieve the desired level customer of loyalty. This is often attributed to the fact that a lot of loyalty programs rely, almost exclusively, on monetary benefits, which are costly to a...


Read the Article


Sign out of this library

Other Topics