Measuring risk‐adjusted customer lifetime value and its impact on relationship marketing strategies and shareholder value

Abstract

Purpose The calculations which underlie efforts to balance marketing spending on customer acquisition and customer retention are usually based on either single‐period customer profitability or forecasts of customer lifetime value (CLTV). This paper argues instead for risk‐adjusted CLTV, which is termed the economic value (EV) of a customer, as the means for marketing to assess both customer profitability and shareholder value gains. Design/methodology/approach Reports on the empirical measurement of EV of customers through a collaborative case study analysis of business‐to‐business relationships in the financial service industry. Findings One direct consequence of measuring this risk and the EV of key account customers was a customer portfolio review which led to changes in their relationship marketing strategies and improvements in shareholder value for the firm. Practical implications Selective customer retention through lifetime value analysis and a risk‐adjustment process may be the means for developing relationship marketing strategies. Originality/value This paper contributes to the field by extending the discussion on customer risk and demonstrating a method that managers can readily adopt to evaluate the risk of their customers.

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