In this paper, I analyze how customer metrics like Customer lifetime value (CLV) are linked to strategies for managing unprofitable customers. Valuing customers or their behavior, respectively, has become an indispensable issue for any commercial activity. When determining causes and reasons of the customers’ contribution to firm value or performance, the customer base usually is analyzed and evaluated, whereas profitable and unprofitable customers are identified. Especially the subject of unprofitable customers, the methods to single them out and their input on the firm’s financial performance have been thoroughly discussed in the literature.
Because regular financial metrics have restricted diagnostic potential, relying on customer metrics appears more suitable for determining customer’s profitability. There are diverse methods for evaluating customers, such as previous period customer revenue, past customer value, customer lifetime duration and customer lifetime value (CLV). CLV examines customer profitability from a prospective perspective, foreseeing future customer behavior and discounting future cash flows. CLV and its measurement models, depending on the kind of customers and products obtained by the company, provide a basis for strategic and tactical decisions.
Customer’s persistent adverse behavior can lead to unprofitable outcome and should be considered by determining profitability on the base of CLV. There are several strategies for handling unprofitable customers. Before applying one of these, it is necessary to measure potential benefits and losses, as the chosen strategy can have a longrun effect on the firm’s clientele. There are some interconnections between various CLV measurement models, other customer metrics and strategies applied to unprofitable customers.
Table of Contents
List of Figures
List of Abbreviations
1 Introduction
2 Customer lifetime value and its measurement models
2.1 Different perspectives on CLV
2.2 Measurements models of CLV in contractual context
2.2.1 Basic structural model
2.2.2 Recency, frequency and monetary model
2.3 Measurement models of CLV in noncontractual context
2.3.1 Pareto/NBD model and its variations
2.3.2 Markov chain model
3 Customer metrics of adverse behavior
3.1 Share of wallet
3.2 Demand for customer service.
3.3 Partial churn
3.4 Deal-proneness
4 Analysis of feasible strategies for managing unprofitable customers and their linkage to customer metrics and CLV
4.1 Retention strategies
4.2 Explanatory framework for retaining unprofitable customers
4.3 Abandonment strategies
4.4 Explanatory framework for abandoning unprofitable customer
5 Conclusion.
References
- Quote paper
- Anna Balashova (Author), 2016, What to do with Unprofitable Customers? Customer Lifetime Value, Customer Metrics of Adverse Behavior, and Feasible Strategies for Managing Unprofitable Customers, Munich, GRIN Verlag, https://www.grin.com/document/366485
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