Creating Enduring Customer Values JM2016 2
Creating Enduring Customer Values JM2016 2
Keywords: customer value, perceived value, customer lifetime value, CLV models, customer engagement
1991 BusinessWeek article describes the notion of customers.” Taken together, these high-level observations
Compositional
Multiattribute Gale (1994) Prespecified Overall value Prespecified Typically not Prespecified, Attributes are Explicit
method quality and price assessment considered typically price generated consideration
attributes only through focus of competition
groups or possible
managerial (comparison
intuition; attribute with competitive
ratings and offering)
importance
weights are
collected directly
by customer
survey
Consumer Sweeney and Prespecified Overall value Individual Several Individual Customer survey Does not allow
perceived Soutar (2001) higher-level score as well as prespecified prespecified prespecified for heterogeneity
value (PREVAL scale) dimensions underlying items to measure items allude to items to measure
multiitem (emotional value, dimensions higher-level value benefits of the value for money/
scale social value, dimensions offering price (broader
Auction (WTP)a Wang, Consumers Consumer’s Prespecified by Price only Auction/ Incentive-aligned
Venkatesh, and indicate reservation price given product (no experiment
Chatterjee (2007) maximum WTP range variation) (web-based or
(incentive- and state at which personal
compatible price point they interview)
elicitation of the are indifferent
range in a (incentive-
consumer’s aligned)
reservation
prices;
ICERANGE)
Pay what you Kim, Natter, and Consumers Insight into Prespecified by Price only Consumer survey
want (WTP) a Spann (2009) directly state their individual level of given product (no after transaction
WTP (seller has value perception variation)
to accept any (satisfaction)
amount)
aThese measures approximate value by measuring the consumer’s willingness to pay (WTP). Strictly speaking, they only yield an overall value assessment and do not provide the possibility of
disentangling the value attached to underlying characteristics (except in the case of a very elaborate study design).
Perceived attributes • Deriving underlying choice-relevant attributes • Understand whether and how attributes
and benefits using decompositional approaches simultaneously pay into a given benefit
• Understanding of longitudinal, situational, and • Broaden conceptualization and measurement
cross-sectional heterogeneity. of intangible attributes and benefits
Perceived costs and • Inclusion of price as key (cost-related) variable • Define conceptualization and operationalization
undesired consequences of a broader set of cost-related attributes
• Include new cost-related aspects due to
digitization
Perceived value • Deriving customer perceived value using • Examine value of personal information (context
compositional approaches of digitization)
• Measurement of customer perceived value • Examine influence of value perception by social
through willingness to pay network
• Accommodating for incentive alignment and
heterogeneity across time, customers, and
product categories
• Recognition of systematic violations of value
maximization principle
on their contributions to the company. Amid the backward- to obtain meaningful results. Nevertheless, the point to be
versus-forward-looking distinction, it is also important to noted here is the importance of being able to look into the
note the role of big data. Using big data that contains past future in determining the future value of customers, as op-
information (e.g., sales, revenue, marketing spending), it is posed to relying on insights from past value contributions.
possible to accurately predict future behavior of customers Realizing the need for a forward-looking metric is the
and, thus, compute their value to the firm. The use of big data, most critical step for a firm. Once this has been achieved, the
however, does come with the challenges relating to the quality subsequent steps only strengthen the firm’s position in cultivating
of data, data visualization, computing capabilities, and ability a customer-centric organization. The following sections describe
FIGURE 1
Approach to Deriving Value from the Customer
Introduce CLV
Rust, Kumar, and Use Monte Carlo simulation algorithm to predict Empirical Monte Carlo High-technology The proposed model provides large
Venkatesan customer purchase propensity, profit, and firm simulation services improvements in prediction over the simpler
(2011) marketing actions. models shown in literature.
Pfeifer (2011) Use company-reported data to estimate the total Empirical Autoregressive Netflix The study offers guidance about how to estimate
CLV of a firm’s current customers. (first-order) retention rate and revenue per renewal when the
reporting period spans multiple renewal periods.
Fader and Hardie Develop a model of relationship duration that can Empirical Shifted beta Any industry Failing to account for cohort-level retention-rate
(2010) be used to predict retention rates beyond the geometric dynamics leads to biased estimates of the
observed retention rates. residual value of a customer.
Kumar (2010) Study a multimedia multichannel communication Conceptual — Retailing Maximizing firm’s profitability is critical for
framework based on CLV. understanding drivers of CLV and CRV.
Kumar and Shah Link customer equity (determined by the CLV Empirical Multinomial logit High-technology Marketing strategies targeted at maximizing CLV
(2009) metric) to market capitalization. services, can increase firm value and, thus, ultimately,
retailing stock price.
Kumar et al. Show the implementation of CLV at IBM and its Empirical Seemingly High-technology CLV-based reallocation of marketing resources
(2008) effects on profitability and resource allocation. unrelated services yielded a $20 million revenue increase without
regression any additional resource investment.
Benoit and Van Analyze CLV by means of quantile regression and Empirical Quantile Financial The study provides insights into the effects of the
den Poel compare the effects of the covariates. regression services covariates on the conditional CLV distribution that
(2009) may be missed by traditional least squares.
Donkers, Predict CLV in multiservice industry. Empirical Probit, Insurance Simple models perform well. Focusing on
Verhoef, and parametric services customer retention is not enough; cross-buying
De Jong duration, also needs to be accounted for.
(2007) nonparametric
duration
Fader, Hardie, Demonstrate the use of Pareto/NBD models of Empirical Pareto/NBD Case analysis Different types of economic efficiencies for
and Jerath repeat buying for computing CLV. acquisition strategies and customer segmentation
(2007) can be made through this model.
Fader, Hardie, Propose a new model that links RFM metric with Empirical Pareto/NBD Online music Isovalue curves are highly nonlinear because
and Lee (2005) CLV using isovalue curves. website customers with low recency values but high
frequency present lower CLV than customers who
have lower frequency.
Rust, Lemon, Present a framework that enables competing Empirical Logit Airline The framework enables a “what-if” evaluation of
and Zeithaml marketing strategy options to be traded off on the marketing ROI, given a particular shift in customer
(2004) basis of projected financial returns. perceptions.
Venkatesan and Develop a dynamic framework to maintain/ Empirical Generalized High-technology Marketing contacts over various channels
Kumar (2004) improve customer relationships through optimal gamma services influence CLV nonlinearly. CLV-based customer
allocation of marketing resources and maximize distribution, selection provides higher profits in the future
CLV simultaneously. genetic compared with other metrics.
algorithms
Reinartz and Develop a framework to compute CLV and Empirical NBD/Pareto Catalog retailer, The study demonstrates the superiority of CLV
Kumar (2003) identify factors that explain the variation in high-technology framework by comparing it with other traditional
profitable lifetime duration. services frameworks.
Libai, Introduce a segment-based approach for Conceptual — Retailer The proposed approach retains the actionable
Aggregate • Aids in evaluating overall • Not able to customize marketing • Publicly available firm-level data that • Both brick-and-mortar firms and
approach effectiveness of marketing actions strategies includes information on margin, online firms across all industries that
discount rate, and retention rate are publicly traded
Independent • Easy to use • Requires end-user transaction data • Customer-level data on transactions • High technology
estimation • Aids in customer-level and firm-level • Creates endogeneity and and customer-firm interactions from
strategy development heterogeneity issues firm’s internal records
• Does not include competition
Simultaneous • Accounts for endogeneity and • Model development and estimation • Customer-level data from firm’s • Telecommunications
estimation heterogeneity is more complex internal records that includes • High technology
• More accurate results than information on purchase quantity, • Grocery stores
independent estimation product upgrades, cross-buying,
marketing communication, product
returns, and frequency of contacts
Brand- • Can be used when the firm has • Sample selection can play an • Survey data from a sample of • Airlines
switching cross-sectional and longitudinal important role in the accuracy of the customers that includes data on • Rental cars
approach database metric purchase frequency, contribution • Electronic stores
• Accounts for all types of marketing • Often relies heavily on survey-based margin, and brands purchased • Grocery stores
expenditures data, thus leading to an increase in recently
• Can accommodate competition sampling cost and survey biases
Monte Carlo • Better predictive power over simpler • Cannot be used in a lost-for-good • Individual-level data from firm’s • High technology (can also be used
simulation competing models setting internal records that includes for actual and simulated data)
algorithm • Better understanding of customer • Heavy reliance on long purchase information on purchase propensity,
profitability and firm value histories marketing contacts, and gross profit
Customer • Considers probabilistic nature of • Can be used only in limited business • Data from firm’s internal records that • Catalog mailing
migration customer purchases settings includes purchase propensities and • Direct marketing
model recency of purchase
Deterministic • Higher predictive accuracy • Requires huge amounts of individual • Segment-level data on marketing • Financial services
model • Aids in firm-level strategy customer data costs, acquisition rate, retention • High technology
development • Does not consider the relationship rate, and contribution margin from • Insurance
between model parameters firm’s internal records • Apparel
• Descriptive, but not prescriptive, and • Catalog retailing
therefore less helpful in managerial
decision making
• Does not account for competition
Probabilistic • Can be used when the firm does not • Assumes purchase volume and • Individual-level data from firm’s • Magazines/catalogs
model have a longitudinal database interpurchase time to be exogenous internal records, such as recency of • Entertainment
• Identification of subdrivers aids in • Calls for frequent updating of the purchases, frequency of purchases, • Internet
• How long will the newly acquired customers stay with our of the WOM referral source influence the probability that re-
companies? ceived WOM induces a purchase behavior. In a B2B setting,
• How much profit or value will this acquisition campaign studies have investigated the role of referrals in customer
bring to our companies? acquisition. For instance, Hada, Grewal, and Lilien (2010)
To understand customer acquisition, it is important to pay recognize the types of referrals (customer–to–potential cus-
attention to the business setting: noncontractual or contractual. tomer referrals, horizontal referrals, and supplier-initiated
In a noncontractual setting, customers can and do split their referrals) and have developed the concept of referral equity to
spending across several firms. As a result, observing when a capture the net effect of all referrals for a supplier firm in
customer ceases to be a customer becomes difficult for the firm. the market. These authors further propose a framework for
However, situations wherein customers develop strong rela- managing supplier-initiated referrals that incorporates the
tionships with firms do exist (e.g., strong preference toward supplier and the supplier’s management of the communi-
a particular brand of coffee). In a contractual setting, firms cation between the referrer and the potential customer. Godes
enjoy a relatively continuous future cash flow for a period of (2012) explores the conditions and subsequent impact of
time, and they know when customers terminate the relation- firms launching referral programs. The study demonstrates
ship. Even in such settings, it is possible for customers to defect that launching such programs increases the willingness to pay
without notifying the firm (e.g., failure to renew a magazine of the early adopters in the high-technology B2B market. In
subscription). Studies have developed different models to addition, Kumar, George, and Leone (2013) develop and test
study these two business settings regarding factors such as the an approach to compute business reference value (BRV),
expected duration or time of the relationship with customers, identify the behavioral drivers of BRV, and offer strategies to
the likelihood of a customer continuing the relationship, and target and manage the most promising customers on the basis
indicators of defection at the end of a service period, among of their CLV and BRV scores.
others. Table 5 lists a representative set of studies that have In addition to customer acquisition, the number of newly
considered these issues and accounted for many of the acquired customers and their initial order quantity are also
problems that might occur in the model-building process. important. While Lewis (2006b) identifies that shipping fees
A fundamental research interest in understanding cus- influence the customer acquisition process and the initial
tomer acquisition is in identifying the probability of a cus- order size, Villanueva, Yoo, and Hanssens (2008) show that
tomer being acquired. Several studies have explored this market channels also influence the customer acquisition
question and have uncovered valuable insights (Lix et al. process and the value that newly acquired customers will
1995; Reinartz, Thomas, and Kumar 2005). For instance, bring to the company. The latter study develops two func-
Von Wangenheim and Bayón (2007) find that customer tions: (1) the value-generating function, which links newly
satisfaction influenced the number of WOM referrals, which acquired customers’ contributions to the firm’s equity
had an impact on customer acquisition, and that the recep- growth, and (2) the acquisition response function, which
tion of a WOM referral had an increased marginal effect on expresses the interactions between marketing spending and
the likelihood of a prospect to purchase. This is achieved the number of acquisition. Using a three-variable vector
by studying (1) whether prospects’ purchase likelihood is a autoregression modeling technique for data from an online
function of WOM referrals, and (2) whether the characteristics retailer, the study finds that marketing-induced customers add
Hada, Grewal, and Propose a framework that incorporates the Empirical Triadic Business analytic Influence of the supplier-selected referral on
Lilien (2014) supplier and their management of communication solutions potential customers depends on supplier
communication between the referrer and the uncertainty, and perceived bias significantly
potential customer. reduces potential customers’ supplier
evaluation.
Kumar, George, and Measure, understand, and manage BRV. Empirical Binary choice Telecommunications, The study defines the concept of BRV,
Leone (2013) model financial services determines the drivers of BRV, and illuminates
the role of measures in driving BRV.
Godes (2012) Understand when and why a business should Empirical Game theory High-technology B2B Reference program can serve as a partial
announce a referral program. substitute for an exclusive-use contract.
Villanueva, Yoo, and Propose and test an empirical model that Empirical Vector Web hosting company Marketing-induced customers add more short-
Hanssens (2008) captures long-term effects of customer autoregression term value, but WOM customers add nearly
acquisition on CE growth. model using twice as much long-term value to the firm.
three variables
Von Wangenheim Examine the links between customer Empirical Logistic Energy market The satisfaction–WOM link is nonlinear and is
Borle, Singh, and Estimate purchase-level CLV by jointly modeling Empirical Discrete-hazard, Membership-based Longer interpurchase times are associated with
Jain (2008) purchase timing, purchase amount, and risk of log-normal direct marketing larger purchase amounts and greater risk of
customer defection company leaving the firm.
Schweidel, Model customer retention that accounts for Empirical Proportional Telecommunications Inclusion of promotional effects improves the
Fader, and duration dependence, promotional effects, hazard service forecast accuracy of retention behavior, whereas
Bradlow subscriber heterogeneity, cross-cohort effects, including cross-cohort effects does not
(2008) and seasonality. significantly improve it.
Fader and Provide an alternative approach to survivor Empirical Shifted beta Contractual Proposed model offers useful diagnostic insights
Hardie (2007) analysis for estimating customer tenure. geometric subscription-based and is very easy to implement using Microsoft
business Excel.
Leenheer et al. Develop a model on the relation between loyalty Empirical Type II Tobit Grocery retailing Model accounts for endogeneity of loyalty
(2007) programs and purchase behavior. programs. Predictive validity of the proposed
model is much better than that of the naı̈ve model.
Lemon, White, Examine the influence of customer future-focused Empirical Logit Interactive television Consumers are significantly forward-looking
and Winer considerations, over and above the effects of entertainment when they make the decision to continue (or
(2002) satisfaction, on the customer’s decision to service discontinue) a service relationship.
discontinue a service relationship.
Bolton, Kannan, Investigate the conditions in which a loyalty Empirical Logit Financial services Loyalty program members overlook negative
and Bramlett program will have a positive effect on customer evaluations of the company vis-à-vis competition.
(2000) evaluations, behavior, and repurchase intentions.
Reinartz and Test whether long-life customers are always Empirical NBD/Pareto Catalog retailer Long-life customers know their value to the
Kumar (2000) profitable. company and demand premium service; they
believe they deserve lower prices, and they
spread positive word of mouth only if they feel and
act loyal.
Bolton and Quantify the relationship between customer Empirical Type I Tobit Interactive television Customers’ usage levels can be managed
Lemon (1999) satisfaction and subsequent service usage. entertainment through pricing strategies, communications, and
service and cellular dynamic customer satisfaction management.
service
Bhattacharya Understand how members’ characteristics relate Empirical Hazard Art museum Hazard of lapsing is lowered with longer duration,
(1998) to lapsing behavior in paid membership contexts. enrollment in special interest groups, gift
frequency, and higher interrenewal times.
Bolton (1998) Develop a model of the duration of Empirical Proportional Cellular service Relationship between duration times and
provider–customer relationship and the role of hazard satisfaction is stronger for customers who have
customer satisfaction. more experience with the service organization.
Reinartz, Thomas, Develop a modeling Empirical Probit two-stage B2B high- Firms can manage their
and Kumar (2005) framework for balancing least squares technology customer bases profitably
resources between manufacturer through resource allocation
customer acquisition efforts decisions that involve trade-
and customer retention offs between acquisition and
efforts. retention initiatives.
Thomas (2001) Establish that the customer Empirical Tobit Airplane pilot The proposed methodology
acquisition process affects membership corrects for biases in the
the customer retention customer retention analysis
process. that result from assuming
that customer acquisition
and retention are
independent processes.
Berger and Bechwati Create a framework for the Conceptual Decision calculus — The study discusses
(2001) optimal allocation of decisions about expenditure
promotion budget for allocation between
customer acquisition and acquisition and retention in
retention. different market conditions.
Blattberg and Find the optimal balance Conceptual Decision calculus — The authors recommend
Deighton (1996) between acquisition and that once managers have
retention that maximizes determined the balance
customer equity. between acquisition and
retention, they plan for each
task separately.
could facilitate (or deter) the persistence of adverse customer Table 7 lists a select set of studies that have considered
behavioral traits associated with unprofitable cross-buying. balancing customer acquisition and retention.
Using data from five firms, the study finds that the firm with In modeling independently, Lewis (2006b) investigates
the most liberal product-return policy had the maximum whether shipping fees differentially influence customer
level of unprofitable cross-buying due to excessive product acquisition and retention. In a system of simultaneous
returns. equations, the study examines the effects of shipping fees
Even though several studies have highlighted the and other marketing variables on the number of new
importance of customer retention as a single link in the chain customers acquired, the average order size for new cus-
of CRM, many firms have not yet understood the larger tomers, and the number of daily orders and the average
comprehensive view of the CRM process. For instance, some order size for established customers. Furthermore, to
managers still view customer acquisition and retention as account for the possible correlation between various equations
separate processes. Although most studies assess acquisition and the possibility of endogenously determined explanatory
and retention separately, the literature provides an abundance variables, the author estimates the equations using three-stage
of direction through which firms can link the two together in least squares.
order to improve their CRM process. In another study, Lewis (2006a) investigates the influ-
ence of customer acquisition promotion depth on customer
Balancing acquisition and retention. Apart from iden- retention, including repeat purchasing and duration. In an
tifying the balance in marketing effort between acquisition online retailing setting, the study adopts a logistic regression
and retention in order to maximize profitability, studies have to model whether the customer makes a subsequent pur-
addressed questions such as the following: chase within the next three quarters, using acquisition
• What are the drivers of customer acquisition? discount as an explanatory variable. Using data from the
• After being acquired, how long can the customer be expected newspaper industry, the study adopts accelerated failure
to stay with the firm? time models to model the time as a subscriber, using
• How much investment is required in order to keep the acquisition discount and its quadratic form as an explan-
firm–customer relationship alive? atory variable. The study also examines the effects of
• Given the resource constraints, how much should be spent on acquisition discount on customer asset value.
acquisition efforts versus retention efforts to maximize long- Berger and Bechwati (2001) optimize the allocation of
term profitability? promotion budget between acquisition spending and reten-
In investigating such topics, researchers have modeled tion spending. When companies are considering one market
acquisition and retention both independently and jointly. segment and using one promotion method, such as direct
Glady, Baesens, and Present a framework Empirical Logistic regression, Retail financial Cost-sensitive
Croux (2009) using a profit-sensitive neural network, services approaches achieve
loss function for the decision tree, cost- good results in terms of
selection of the best sensitive classifier the defined profit
classification measure and overall
techniques with classification.
respect to the
estimated profit.
Jamal and Bucklin Study the empirical link Empirical Weibull hazard Satellite television Prediction of customer
(2006) between customer churn is significantly
churn and factors such improved when
as customer service heterogeneity is added
experience, failure to the churn rates and
recovery, and payment to the response
equity. parameters.
Lemmens and Croux Investigate whether Empirical Bagging and boosting Wireless Bagging and boosting
(2006) bagging and classification trees telecommunications techniques
stochastic gradient significantly improve
boosting can improve the classification
churn prediction performance, and
accuracy. balanced calibration
sample reduces the
classification error
rate.
Buckinx and Van den Identify which of the Empirical Logistic regression, CPG retailer RFM variables are the
Poel (2005) currently behaviorally automatic relevance best predictors of
loyal customers are determination, neural partial customer
likely to (partially) network, random defection; variables
churn in the future. forests such as customer
relationship duration,
mode of payment,
cross-buying behavior,
usage of promotions,
and brand purchase
behavior are
moderately useful in
attrition models.
Van den Poel and Develop a Empirical Proportional hazard Financial services Demographic
Lariviere (2004) comprehensive characteristics,
retention model environmental
including time-varying changes, and
covariates related to interactive and
customer behavior. continuous customer
relationships affect
retention.
Capraro, Study repurchase Empirical Hierarchical logistic Health insurance After satisfaction level
Broniarczyk, and decisions that involve regression is accounted for,
Srivastava (2003) an information-based objective and
evaluation of subjective knowledge
alternatives. about alternatives
directly affects
defection likelihood.
Danaher (2002) Derive a revenue- Field Time-series Cellular service Access and usage
maximizing strategy experiment regression prices have different
for subscription relative effects on
services. demand and retention.
Kumar, Bhagwat, Demonstrate how lost Empirical Probit, right-censored Telecommunications The stronger a
and Zhang customers’ first-lifetime Tobit, regression service customer’s first-
(2015) experiences and lifetime relationship
behaviors, the reason with the firm, the more
for defection, and the likely the customer is
nature of the win-back to accept the win-back
offer made to lost offer.
customers are related
to reacquisition
likelihood, their second-
lifetime duration, and
second-lifetime
profitability per month.
Homburg, Hoyer, Test the relationship Empirical Logistic regression Telecommunications Health of the first-
and Stock between customers’ service lifetime relationship is
(2007) first-lifetime satisfaction positively related to
and their reacquisition. reacquisition
likelihood; customer
perceptions of
fairness regarding
win-back offer are
positively related to
reacquisition.
Tokman et al. Identify the factors Quasi- Analysis of variance Auto repair and Price and service
(2007) driving win-back offer experimental maintenance service benefits provided in
effectiveness. design the win-back offer,
social capital, and
service importance
are important in
shaping customer
switch-back
intentions, regardless
of previous
satisfaction, regret, or
delight with the new
service provider.
Thomas, Study the probability of Empirical Split-hazard, Newspaper industry For the win-back offer
Blattberg, and customer reacquisition Bayesian Markov to be effective, it
Fox (2004) and the duration of the chain Monte Carlo should consist of low
second lifetime, with a promotional prices;
focus on the impact of successful
the depth of the price reacquisition should
discount. be followed by price
increases.
Stauss and Conceptual basis for Conceptual — — Retention policy in
Friege (1999) “regain management” service companies
aimed at winning back needs to be
customers who either complemented by
give notice to terminate regain management.
the business
relationship or whose
relationship has already
ended.
reason for defection, and (3) the nature of the win-back offer Customer win-back is a critical component within the overall
made to lost customers are all related to the likelihood of the CRM strategy, but it has received relatively less research
customers’ reacquisition, their second-lifetime duration, and attention than customer acquisition, retention, and churn. Firms
their second-lifetime profitability per month. must first be able to understand the drivers of customer
Kumar, George, and Leone Understand the role and value of Empirical Logit B2B Telecommunications Firms can effectively use business
(2013) client references in a business service, financial references to pull in new customers.
context. services Rich media and similar companies
are the key drivers of success.
Schmitt, Skiera, and Van den Determine the extent of profitability Empirical Regression, B2C Banking services Referred customers (1) have a
Bulte (2011) and loyalty of referred customers. proportional higher contribution margin initially,
hazard (2) have a sustained higher retention
rate, and (3) are more valuable in the
short and long run.
Kumar, George, and Leone Determine the optimal customer Empirical, field Bayesian Tobit B2C Financial services, Firms can effectively select
(2010) targeting for referral marketing study retailing customers within segments of high
campaigns. and low CLV/CRV for referral
marketing campaigns using the
drivers of CRV (dynamic targeting).
Villanueva, Yoo, and Hanssens Establish a value-generating Empirical Vector B2B Web-hosting Marketing-induced customers add
(2008) process by modeling the interactions autoregression company more short-term value, but WOM
between new customer acquisition customers add nearly twice as much
and the growth of firm value. long-term value to the firm.
Kumar, George, and Leone Compare customer segmentation Conceptual — B2C Telecommunications Customers with high CLV are not the
(2007) according to CLV and CRV. service, financial same as customers with high CRV.
services
Ryu and Feick (2007) Determine the effectiveness of Field study Analysis of B2C MP3 players Offering a reward does increase
rewards for referral marketing. covariance referral likelihood, but the size of the
reward is not significant.
Hogan, Lemon, and Libai Quantify the advertising ripple effect. Conceptual — — Hairstyling services The WOM generated after an
(2004) advertising-motivated purchase can
be significant.
Hogan, Lemon, and Libai Devise a method to account for Empirical Nonlinear least B2C Internet banking The value of a lost customer
(2003) social effects in the management of squares changes as a function of the time in
customers. regression the product life cycle.
• Impact of products’ intangible aspects on perceived value • CLV for a basket of goods
• Value of privacy • Effect of customer attitudes on CLV
• Source of perceived value • Impact of macroeconomic trends on CLV
• Nature of relationship on value creation
• Customer engagement and privacy
• Level of engagement and successive generation of products
the value component, to include the costs given up for the For instance, consider the case of a professional sports
benefits that are being sought. Following this definition, this team. Sports fans would like to get to the sporting ven-
study has identified three tasks for measuring customer ues in time for the game and the other attractions offered.
perceptions of value: measuring overall perceived value, However, a game day brings with it the problems of traffic
measuring the associated underlying attributes and benefits, and changing weather conditions, which create challenges
and determining the relative weights of the attributes/benefits in finding the fastest route to the venue. With a key goal of
linked to overall perceived value. With respect to value from ensuring fan satisfaction, a sports team could consider
the customers, this study has identified that a forward-looking providing a wearable device to fans that would inform them
metric such as CLV is ideal in metricizing customer value of traffic conditions, road closures, and weather updates,
contributions. Furthermore, this study has observed that to in addition to team-related and game-related information.
create net value for the firm, the perceived value that cus- Such a device from the team management, apart from being a
tomers receive must be aligned with the resources spent on piece of fan merchandise, would also keep fans engaged with
the customers, through the adoption of forward-looking metrics. the team. The technology to create such a device is available
To this end, CLV is identified as the metric (among through IoT, but how can firms create value from such an
the popularly used metrics) that most accurately com- offering? To begin with, what value-based metric can be used
putes the net present value of a customer according to his or to identify the fans who would receive such a device? Can
her future transactions with the firm, after accounting for such a device capture fan satisfaction effectively? How would
revenue, expense, and customer behavior. Various CLV- the team view fan satisfaction at the venue and fan sat-
based strategies have been proposed that firms can use to isfaction getting to and coming from the venue? In other
maximize value from customers after computing CLV. words, would an unpleasant experience away from the venue
Table 11 lists the key insights from this study. adversely influence a fan’s satisfaction at the game and
Looking ahead, we would like to offer three key areas that subsequently lead to a decline in loyalty? Furthermore, what
could spur future research. First, we believe the Internet will insights could the team gain regarding fan experience on
attain even more dynamism in terms of the uses, abilities, and game day and the ways to mitigate any loss in following?
opportunities it presents. In this regard, the Internet of Things How could the team capture these fan sentiments and use the
(IoT) is bound to offer several avenues for researchers and device to offer a valuable proposition that both engages the
practitioners to identify and maximize ways to create value for fan with the team and ensures value to the team through
firms and customers. With its origins in the supply chain consistent ticket sales?
context (Ashton 2009), the IoT now encompasses uses in Second, health and fitness consciousness has been on the
virtually all areas, including health care, urban planning rise, with fitness studios offering varied programs to suit
and management, emergency services, construction, envi- every customer need. These paid options provide several
ronment monitoring, lifestyle, and sports management. The customization options for users to design their visit and
ready applicability to a wide range of industries is largely due structure their fitness regimen. These options include
to the connectivity to media and transportation channels the scheduling visit times (some studios are even open 24 hours
IoT provides to firms. a day), personal training, designing meal plans, and studio
• Customer perceived value is different from quality, perceived • Firms need to align the perceived value customers receive with
benefits, and satisfaction. This article defines perceived value the resources spent on them through the adoption of forward-
as the customer’s net valuation of the perceived benefits looking metrics, to create net value for the firm.
accrued from an offering that is based on the costs they are • Unlike backward-looking metrics, forward-looking metrics
willing to give up for the needs they are seeking to satisfy. focus on the customer, rather than the product, and can be
• Benefits and undesired consequences are the results of buying used to understand current clients as well as prospects.
and consuming the offering (i.e., the attributes of the offering), • CLV calculates the net present value of a customer according
and these may accrue directly or indirectly and may be to his or her future transactions with the firm, after accounting
immediate or delayed. for revenue, expense, and customer behavior.
• Perceived value is measured according to attributes, which • CLV can be modeled at the aggregate level or the individual
may be objective attributes (i.e., produced attributes) or customer level.
perceived attributes (i.e., experienced attributes). • CLV-based strategies can be used not only to maximize
• Approaches to modeling consumer preferences have adopted revenue, minimize costs, or both, but also help with customer
two types of methods: compositional and decompositional. acquisition and retention, balancing acquisition and retention,
While the former is a set of explicitly chosen attributes/benefits customer churn, and customer win-back.
that are used as the basis for determining overall value • The customer contribution to firm profitability occurs directly,
evaluations, the latter attempts to infer underlying utilities from through customer purchases, and also indirectly, through
observed choice. actions that might include referrals or influencing others via
• Firms can create perceived value for customers through (1) social networks, customer reviews, and feedback to the firm.
leveraging their own capabilities, (2) aligning with customers’ • The concept of customer engagement value helps in the
perception of what is valuable for them, and (3) claiming a identification and evaluation of the right customer, who is
differential advantage (e.g., premium or margin) over successfully engaged with the firm, who generates value, and
competitive offerings. who positively contributes to the profits of the firm.
• Customers form a judgment of value as a function of perceived,
not actual, benefits and costs.
• Measuring customer perceptions of value involves three key
tasks: (1) measuring overall perceived value, (2) measuring the
associated underlying attributes and benefits, and (3)
determining the relative weights of the attributes/benefits linked
to overall perceived value.
amenities, among others. In addition, fitness studios now Finally, household purchase decisions have received
have a strong online presence through blogs and social substantial research attention (e.g., Epp and Price 2008;
networking sites. They now interact with customers and Gupta, Hagerty, and Myers 1983). The decision-making roles
fitness enthusiasts by exchanging fitness-related information. typically include influencers, gatekeepers, deciders, buyers,
Consumers also have access to unpaid options such as fitness users, and disposers. In situations in which the head of the
videos and predesigned fitness routines available on the household is the decider and buys a good, the product is
Internet. While this option lacks customization, being intended either for personal use or common use. Household
available for free compensates for this dearth. Perhaps the consumption is also known to be affected by scale econo-
major attraction of the unpaid option is the availability even mies, wherein the utilization rate of a good can be raised by
during travel. However, some fitness studios also now have increases in family size (Lazear and Michael 1980). In such
dedicated members’ websites that offer health tips, along conditions, for the purposes of identifying value and designing
with tools to manage workout schedules through videos and customer strategies, firms would benefit if they had answers to
instruction manuals, in addition to regular studio admission. questions such as the following: (1) Is the good being pur-
From the perspective of a fitness studio, the challenge of chased for personal use or common use? (2) Who will be
such a site is twofold. First, how does the firm present its paying for the good—the individual or the family? (3) Will a
value proposition vis-à-vis other competing studios (e.g., trade-off be necessary to buy the good, either by the individual
www.my360gym.com)? Second, how does it fight the com- or the family? (4) In the case of a common good, will the
petition from the unpaid fitness options? In such cases, good hold the same value to all members of the household,
what other novel and innovative programs can be offered by and if not, how can the disparity be alleviated? (5) In the case
fitness studios to attract customers? Furthermore, how can of a common good, will there be any design changes necessary
studios design, price, and offer online fitness material (text, to satisfy all the users? (6) How should the media mix be de-
audio, and video) that can effectively compete with the existing signed such that the influencers of the household are reached
unpaid options? In addition, can studios exist only in the online with the right message, in the right format, and at the right
format (e.g., www.booyafitness.com) without any physical time? (7) Given these questions regarding the decision-making
presence, and if so, how would the value then be determined roles, the usage of the good, and the awareness of the good,
for a fitness customer? should firms compute the value as a comprehensive amount
• The effect of customer costs and consumer needs on • While Sunder, Kumar, and Zhao (2016) have bridged the gap in
perceived value has been studied largely from the viewpoint of literature by proposing a structural approach to measuring CLV
a product’s tangible features. Intangible aspects, such as, for that incorporates the choice, timing, and quantity decisions of
instance, the network effect on perceived value, have not been consumers to assess CLV in the CPG setting, future studies in
explored. Network effects have been addressed in the “value this area can look into expanding the analysis for a basket of
from customers” perspective (e.g., Kumar et al. 2013; Robins goods, and including stochastic shocks to the system that
et al. 2007) to strengthen profitable customer–firm might influence the consumption.
relationships. Future research could explore individuals’ • Literature has shown that customer behavior influences CLV
perception of value and its constituents in a network setting (Reinartz and Kumar 2003) and that customer attitudes
that exhibits influences across customers. influence customer behavior (e.g., Anderson 1998; Hogan,
• Studies of undesired consequences have explored the realm Lemon, and Libai 2003), which in turn influences CLV. But do
of privacy concerns primarily in an online business setting. customer attitudes directly influence CLV? Answering this
However, a more comprehensive treatment of the value of question is bound to provide insights into the reasoning behind
privacy is required to better our understanding in terms of (1) customer behavior and how they affect customer profitability.
quantifying the overall value of privacy, (2) determining the • While most CLV implementation studies account for marketing
value of personal information that customers will be willing to and financial variables, the macroeconomic trends remain
give up for products with lower prices, and (3) establishing the unaccounted for. What approaches can we adopt to account
offline product categories that privacy costs apply to for macroeconomic factors such as GDP growth rate, rate of
customers. unemployment, and so on, in the CLV implementation to make
• In identifying the source of perceived value, while usage, costs, it more accurate and reflective of market realities?
and profits involved have been considered, the nature of • Although the benefits of implementing customer engagement
product has not been considered. Future studies could focus have been demonstrated, we need to know the nature of the
on the source of perceived value—simple product design or relationship between level of engagement and value creation
sophisticated product design. (e.g., linear or inverted U shaped).
• Furthermore, what is the role of customer engagement in
customer privacy issues? That is, if customers are engaged
more, will they be less sensitive to sharing private information?
• In realizing value through customer engagement, is it possible
to identify which form of engagement will work with a certain
type of customer? That is, can a customer provide value in all
forms of engagement?
• Research has identified other forms of engagement, such as
gifting behavior. Bhagwat and Kumar (2015) propose that
encouraging customers to take part in gifting behavior is one
way to effectively engage them with the firm and to
consequently see profitable outcomes. In this regard, are there
any other forms of engagement that can lead to profits for the
firm?
• When firms launch products, the performance of the previous
generation of products and the overall firm performance are
challenged. For instance, whenever Apple launches a product
(e.g., iPhones), the prices of the previous-generation products
are lowered, prompting many consumers to wait for such a
price drop to buy the earlier version. In this regard, does the
level of engagement facilitate the adoption of successive
generation of products, and if so, how?
• CLV maximization can also be viewed from an optimization
standpoint. Firms often plan and change their resource inputs.
When the elasticities of factors such as customer acquisition,
retention, and win-back are considered, the resulting
optimization may lead to better-informed resource planning.
• Despite the prevalence of coalition loyalty programs, they have
received little attention in academic research. Future studies
could investigate the profitability drivers of such loyalty
programs.
• The identification of the lifetime value for dealers (e.g., dealer
lifetime value) would help firms such as car dealerships to find
a reliable method of (re)allocating scarce marketing resources
to the “best”-performing dealerships.