Although most published customer lifetime value models focus on strategic-level marketing decisions, managers also need models that enable them to make resource allocation decisions for individual customers. A common misperception among scholars and managers is that it is necessary to use individual-level customer profitability models to make such decisions. This article argues that a segment-based approach to customer profitability analysis can be a reasonable alternative to an individual model. The proposed stochastic segment-based approach retains the actionable information associated with individual-level analysis while also maintaining the simplicity of the more aggregate-level models. In this article, the authors develop such a segment-based assessment of customer profitability and then briefly describe an example of a major European retailer that successfully uses the approach to manage its customer base. Directions for future research in the area of stochastic customer equity modeling are also discussed.
Get full access to this article
View all access options for this article.
References
1.
Bass, Frank M.
, Moshe Givon, Manohar U. Kalwani, David Reibstein, and Gordon P. Wright (1984), “An Investigation into the Order of the Brand Choice Process,”Marketing Science, 3 (Fall), 267-287.
2.
Berger, Paul D.
and Nada I. Nasr (1998), “Customer Lifetime Value: Marketing Models and Applications,”Journal of Interactive Marketing, 12 (Winter), 17-30.
3.
Blattberg, Robert C.
and John Deighton (1996), “Manage Marketing by the Customer Equity Test,”Harvard Business Review, 74 (July-August), 136-144.
4.
Blattberg, Robert C.
, Gary Getz, and Jacquelyn S. Thomas (2001). Customer Equity: Building and Managing Relationships as Valuable Assets. Boston: Harvard Business School Press.
5.
Bolton, Ruth N.
(1998), “A Dynamic Model of the Duration of the Customer’s Relationship with a Continuous Service Provider: The Role of Satisfaction,”Marketing Science, 17 (1), 45-65.
6.
Bowman, Douglas
and Das Narayandas (2001), “Managing Customer-Initiated Contacts with Manufacturers: The Impact on Share of Category Requirements and Word-of-Mouth Behavior,”Journal of Marketing Research, 38 (3), 281-297.
7.
Brady, Diane
(2000), “Why Service Stinks,”Business Week, October 23, 118-128.
8.
Curry, Jay
and Adam Curry (2000), The Customer Marketing Method. New-York: Free Press.
9.
Hauser, John R.
and Kenneth Wisniewski (1982), “Dynamic Analysis of Consumer Response to Marketing Strategies,”Management Science, 28 (5), 455-486.
10.
Helf, Ira
(1998), “Prophesizing Customer Profitability,”Bank Marketing, August, 24-30.
11.
Heskett, James L. W.
, Earl Sasser, and Leonard A. Schlesinger (1997), The Service Profit Chain. New York: Free Press.
12.
Hogan, John E.
, Katherine N. Lemon, and Roland T. Rust (2002), “Customer Equity Management: Charting New Directions for the Future of Marketing,”Journal of Service Research, 5 (1), 4-12.
13.
Javalgi, Raj G.
and Paul Dion (1999), “A Life Cycle Segmentation Approach to Marketing Financial Products and Services,”The Service Industries Journal, 19 (3), 74-96.
14.
Levin, Nissan
and Jacob Zahavi (1998), “Continuous Predictive Modeling—A Comparative Analysis,”Journal of Interactive Marketing, 12 (2), 5-22.
15.
Levin, Nissan
and Jacob Zahavi (2001), “Data Mining Digital Consumers,” in Digital Marketing, Jerry Wind and Vijay Mahajan, eds. New-York: John Wiley, 256-281.
16.
Lilien Gary L.
, Philip Kotler, and K. Sridhar Moorthy (1992), Marketing Models. New-York: Prentice Hall.
17.
Mulhern, Francis J.
(1999), “Customer Profitability Analysis: Measurement, Concentration and Research Directions,”Journal of Interactive Marketing, 13 (1), 25-40.
18.
Murphy, Patrick E.
and William E. Staples (1979), “A Modernized Family Life Cycle,”Journal of Consumer Research, 6, 12-22.
19.
Peppers, Don
and Martha Rogers (1997), Enterprise One to One. New York: Doubleday.
20.
Pfeifer, Phillip
and Robert L. Carraway (2000), “Modeling Customer Relationships as Markov Chains,”Journal of Interactive Marketing, 14 (2), 43-55.
21.
Puterman, Martin L.
(1994), Markov Decision Processes: Discrete Stochastic Dynamic Programming. New York: John Wiley.
22.
Rasmusson, Erika
(1999), “Wanted: Profitable Customers,”Sales and Marketing Management, May, 28-34.
23.
Reichheld, Fredrick
(1996), The Loyalty Effect: The Hidden Force behind Growth, Profits, and Lasting Value. Boston: Harvard Business School Press.
24.
Reichheld, Fredrick
and Earl Sasser (1990), “Zero Defections: Quality Comes to Service,”Harvard Business Review, 68 (September-October), 105-111.
25.
Reinartz, Werner
and V. Kumar (2000), “On the Profitability of Long Lifetime Customers: An Empirical Investigation and Implications for Marketing,”Journal of Marketing, 64 (4), 17-35.
26.
Rigby, Darrell K.
, Frederick F.Reichheld, and Phil Schefter (2002), “Avoid the Four Perils of CRM,”Harvard Business Review, 80 (2), 101-109.
27.
Rust, Roland T.
, Katherine N. Lemon, and Valarie A. Zeithaml (2001), “Driving Customer Equity: Linking Customer Lifetime Value to Strategic Marketing Decisions,” Report No. 01-108, Marketing Science Institute, Cambridge, MA.
28.
Rust, Roland T.
, Valarie A. Zeithaml, and Katherine N. Lemon (2000), Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy. New York: Free Press.
29.
Stoneman, Bill
(1997). “Banking on Customers,”American Demographics, 19 (2), 36-42.
30.
Thomas, Lynn
(1998), “The Customer Life Cycle and How It Influences Your Success,”Rough Notes, May, 78-80.
31.
Vilcassim, Naufel J.
and Dipak C. Jain (1991), “Modeling Purchase-Timing and Brand-Switching Behavior Incorporating Explanatory Variables and Unobserved Heterogeneity,”Journal of Marketing Research, 28 (1), 29-41.
32.
Wells, William D.
and George Gubar (1966), “Life Cycle Concept in Marketing Research,”Journal of Marketing Research, 8, 355-363.
33.
Wheaton, Phillip
(2000), “The Life Cycle View of Customers,”U.S. Banker, June, 77-78.
34.
Zeithaml, Valarie
(2000), “Service Quality, Profitability and the Economic Worth of Customers: What We Know and What We Need to Learn,”Journal of the Academy of Marketing Science, 28 (1), 67-85.
35.
Zeithaml, Valarie
, Roland T. Rust, and Katherine N. Lemon (2001), “The Customer Pyramid: Creating and Serving Profitable Customers,”California Management Review, 43 (4), 118-142.
