Obsessed with B2B marketing? You should be a PRO member! Join now at 25% off (or 50% off for teams).

Too many marketing managers fail to identify their most valuable customers. They are either spending their marketing dollars on the wrong customers or in the wrong channels of communication.

Here is a framework for measuring customers' lifetime value and a road map of how a customer's lifetime value can guide marketing managers in making three key decisions: Which customers should we contact? What channel should we use to contact them? How much contact should we have with customers?

Typically, customer metrics such as Past Customer Revenue (PCR), and Past Customer Value (PCV) are used to identify profitable customers. But these metrics are backward-looking; they do not provide a future picture of customer profitability.

Instead, measures like Customer Lifetime Value (CLV) provide a forward-looking picture. But less is known about the factors that affect CLV—and about the cost of maximizing CLV.

Using rich customer transaction data from a large multinational firm, we evaluated the usefulness of CLV and now present it as a metric that marketers can use to understand customers and optimize the return on marketing investments.

Significance of the Research

This research is of great significance to the burgeoning practitioner literature on customer relationship management. Many firms tout their capabilities to offer complete "360-degree" coverage of customer behavior, but they fail to effectively utilize that customer information in designing marketing strategies.

While we focus on one of the many possible benefits that can arise from rich customer information, the same modeling approach can be applied to other related domains—such as cross-selling multiple products to a customer, managing customers across channels and acquiring prospects.

Often, marketing managers are faced with this situation: The available marketing budget prohibits them from contacting all their current customers and potential prospects. This has led them to use several heuristics to select the customer to be contacted.

For example, some firms rank-order customers based on their past revenue and select only the top 20% of the customers from this rank-ordered list. This process is termed as customer selection. But there is no clear guidance in the marketing literature on which metric identifies the future stars among customers.

Marketing managers are also faced with resource limitations in contacting their customers through all the available channels. Managers have a need for appropriate resource allocation strategies. The marketing literature provides very little insight into decisions about how to manage individual customers in a way that accounts for dynamic updating of profitability assessment.

We looked at the above challenges faced by marketing managers and compared the capability of the customer metrics in identifying customers who would become future stars. We provide a framework for determining the optimal level of marketing resources for each individual customer that would maximize the overall profits obtained from a firm's customers.

Implications of the Research for Marketing Practice

Subscribe today...it's free!

MarketingProfs provides thousands of marketing resources, entirely free!

Simply subscribe to our newsletter and get instant access to how-to articles, guides, webinars and more for nada, nothing, zip, zilch, on the house...delivered right to your inbox! MarketingProfs is the largest marketing community in the world, and we are here to help you be a better marketer.

Already a member? Sign in now.

Sign in with your preferred account, below.

Did you like this article?
Know someone who would enjoy it too? Share with your friends, free of charge, no sign up required! Simply share this link, and they will get instant access…
  • Copy Link

  • Email

  • Twitter

  • Facebook

  • Pinterest

  • Linkedin


ABOUT THE AUTHOR

Rajkumar Venkatesan and V. Kumar are with the University of Connecticut.