Abstract
Purpose: A number of customer metrics allow estimating customer profitability with methods such as the Customer Lifetime Value (CLV). However, investments in customer relationships carry the potential risk to destroy value and reduce profitability when based on incorrect estimates of customer profitability. Therefore, estimating future customer value correctly is essential to allocate marketing expenditures in the most effective way. In this article recent literature about the CLV is reviewed in order to assess its ability as a customer profitability measure. Besides the financial perspective of the CLV, non-financial perspectives such as customer advocacy, (customer or open) innovation and learning have been identified to have an impact on customer profitability. How to properly estimate a customer’s value taking all relevant value creating factors, financial as well as non-financial, into account is the underlying research question. Design/methodology/approach: This research is based on the review of a number of theoretical and empirical articles published between 1990 and 2010. The aggregation of measures, key-drivers and risks of each key-perspective of the customer relationship contributes to the development of a more systematic understanding of the value creation process and provides answers to the research question. Indirect effects of the CLV as a source of value have received increasing attention in previous research but are not sufficiently accounted for by mainstream methods for valuing customers (Ryals, 2008). Therefore, the attempt to structure available knowledge on indirect effects of the CLV in its contextual setting is made. Findings: This research is concluded providing evidence that one-dimensional calculations of the CLV deliver an incomplete picture of the customer relationship and estimate customer profitability incorrectly. This supports the idea of a multidimensional CLV approach that accounts for interrelated key-perspectives and results in superior resource allocation. Originality/value: Seeing customers in a comprehensive way helps to better understand their needs and potential contributions, so that long-term overall profitability can be advanced through the consideration of indirect effects. Indirect effects are usually not reflected in common accounting methods but might result in benefits for the firm. In this research, evidence is provided for the importance of indirect effects offered by customers. This makes the consideration of all relevant dimensions in the value creation process fundamental in order to allocate marketing resources in the most effective way.
Highlights
The ever-present need to justify investments in marketing activities, calls for marketing measures that can be linked to future customer value and firm performance (Peterson et al, 2009)
This research is concluded providing evidence that onedimensional calculations of the Customer Lifetime Value (CLV) deliver an incomplete picture of the customer relationship and estimate customer profitability incorrectly
This supports the idea of a multidimensional CLV approach that accounts for interrelated key-perspectives and results in superior resource allocation
Summary
The ever-present need to justify investments in marketing activities, calls for marketing measures that can be linked to future customer value and firm performance (Peterson et al, 2009). The CLV approach captures customer metrics in order to quantify the potential monetary value of customers over their lifetime. This allows better estimating customers’ financial values, focusing on profitability, grouping customers and analyzing the returns on investments made into customers. The purpose of the CLV is to increases marketing’s accountability within the firm, help managers and retailers to identify the drivers of future customer and firm value and build linkages between marketing strategy and financial outcomes (Peterson et al, 2009). Does the valuation take all relevant value creating factors into account so that the CLV is properly estimated?
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