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
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
Research Objectives and Topics
The primary objective of this thesis is to examine the impact of unprofitable customers on firm profitability and to investigate effective management strategies, specifically retention and abandonment, linked to customer metrics and Customer Lifetime Value (CLV).
- Measurement and evaluation of Customer Lifetime Value (CLV)
- Identification of behavioral patterns in unprofitable customers
- Analysis of retention strategies versus abandonment strategies
- Interconnections between customer metrics, CLV, and strategic decision-making
Excerpt from the Book
3.4 Deal-proneness
For this research, monetary promotions, e.g. price reductions, coupons and rebates, are more relevant than non-monetary (Yi and Yoo 2011, p. 883). For sales promotion, the firms grant deep discounts for their products therefore increasing the perceived value of the product for the customers and attracting deal-prone clientele (Webster 1965, p. 186). Monetary promotions can have a negative impact on the customer’s reference price and weaken brand quality and image (Yi and Yoo 2011, p. 884). After buying at promotional price, customers are likely to reduce the number of repeat purchases because of the forward buying or general low product valuation (Anderson and Simester 2004, p. 4). Products with a deep discount lure customers, who, otherwise, are not likely to purchase the product at a nonpromotional price (Neslin and Shoemaker 1989, p. 206).
Summary of Chapters
1 Introduction: This chapter highlights the significance of valuing customers and managing unprofitable ones to maintain firm profitability and optimize marketing resource allocation.
2 Customer lifetime value and its measurement models: It provides an overview of various CLV perspectives and measurement models, distinguishing between contractual and noncontractual business contexts.
3 Customer metrics of adverse behavior: This section characterizes specific behaviors such as share of wallet, service demand, churn, and deal-proneness that contribute to customer unprofitability.
4 Analysis of feasible strategies for managing unprofitable customers and their linkage to customer metrics and CLV: It contrasts retention and abandonment strategies, providing frameworks for deciding how to address customers based on their CLV and behavioral metrics.
5 Conclusion: The final chapter summarizes the findings regarding the interconnectedness of CLV models, adverse behavior, and management strategies, emphasizing the importance of informed decision-making.
Keywords
Customer Lifetime Value, CLV, Unprofitable Customers, Retention Strategy, Abandonment Strategy, Share of Wallet, Customer Metrics, Adverse Behavior, Deal-proneness, Partial Churn, Customer Service, Marketing Resources, Pareto/NBD Model, Profitability, Customer Satisfaction
Frequently Asked Questions
What is the core focus of this research?
The research focuses on the management of unprofitable customers, investigating how firms can identify these customers using CLV and behavioral metrics, and whether to employ retention or abandonment strategies.
What are the central thematic areas?
The central themes include Customer Lifetime Value (CLV) measurement, analysis of adverse customer behaviors, and strategic frameworks for either retaining or terminating customer relationships.
What is the primary goal of the thesis?
The primary goal is to provide a comprehensive framework that links CLV measurement models and customer metrics to effective management strategies for unprofitable customers.
Which scientific methods are applied?
The work utilizes a literature-based synthesis of various CLV measurement models (such as Pareto/NBD, RFM, and Markov Chain) and customer behavioral metrics to derive strategic management insights.
What is covered in the main body of the work?
The main body examines various perspectives on CLV, characterizes metrics for adverse behavior like share of wallet and deal-proneness, and contrasts direct and indirect abandonment versus retention strategies.
Which keywords best characterize this work?
Key terms include Customer Lifetime Value (CLV), unprofitable customers, retention strategy, abandonment strategy, share of wallet, and adverse behavior patterns.
Why is the Markov chain model mentioned as a limitation?
The research notes that while the Markov chain model was considered, no significant connections to the other specific customer metrics and strategies could be identified within the scope of this study.
How does "deal-proneness" affect customer profitability?
Deal-prone customers often switch firms to seek the best discounts, contributing little to long-term profitability and potentially causing "adverse selection" for the firm.
What is the difference between direct and indirect abandonment?
Direct abandonment involves explicitly informing the customer that the relationship is being terminated, while indirect abandonment involves subtle changes, such as price increases or reduced service quality, to push the customer away.
- Citation du texte
- Anna Balashova (Auteur), 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
