The dynamic effect of customer equity across firm growth: The case of small and medium-sized online retailers

Abstract

Although several causal studies investigate the relationships between customer equity and firm performance, some debate about whether their positive relationship is valid over long time horizons and across firm/industry environments does exist. This study investigates the dynamic effect of customer equity on firm performance. Using individual-level purchase data for an online retailer, the results show a weak relationship between customer equity and firm profitability, which is not consistent with previous assumptions and beliefs. Additional analysis to resolve this gap shows that in the early stage when a firm's growth rate is relatively high the firm is required to manage many newly enrolled customers. In contrast, in the mature stage when a firm's growth rate is stable and low the firm should retain its customers. Thus, marketing managers need to leverage the drivers of acquisition and retention to continue to grow overall customer equity and firm performance.