A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation

Abstract

Customer value refers to the economic value of the customer's relationship with the firm. This study approaches the topic of customer value for measuring, managing, and maximizing customer contributions by proposing a customer valuation theory (CVT) based on economic principles that conceptualizes the generation of value from customers to firms. The author reviews the established economic theories for valuing investor assets (e.g., stocks) and draws a comparison to valuing customer contributions. Furthermore, the author recognizes the differences in the guiding principles between valuing stocks and valuing customers in proposing CVT. Using CVT, the author discusses the concept of customer lifetime value (CLV) as the metric that can provide a reliable, forward-looking estimate of direct customer value. In addition, economic models to estimate CLV, ways to manage CLV using portfolio management principles, and strategies to maximize CLV are discussed in detail. The author extends the customer value concept by discussing ways that a customer can add value to the firm indirectly through incentivized referrals, social media influence, and feedback. Finally, the benefits of CVT to multiple constituencies are offered.

Do customer profitability analyses pay? A survey of large Norwegian companies

“…Customers may add value to a business in ways other than the financial value they bring through their CLV (Foster and Gupta, 1994;Guilding and McManus, 2002;Kumar, 2018). "Valuation of customers or customer groups as assets refers to the calculation of the value of customers to the company" [Guilding and McManus, (2002), p.48].…”

“…Various externalities (or indirect value drivers) have been addressed such as attraction, learning, influence and volume (van Raaij, 2005;Kumar, 2018). Attraction may be split into references and referrals (Ryals, 2008).…”

“…Thus, learning and innovation may increase revenues and/or reduce costs for the company. Kumar asserts that some customers may 'influence on prospects' and other customers' purchases' [Kumar, (2018), p.6]. According to van Raaij (2005, p.380), some customers can, owing to volume, "absorb large amounts of fixed costs, thus enabling the company to engage in profitable activities with other customers.…”

Critical success factors for customer portfolio management

“…In view of what has been discussed so far, it may be supposed that the marketing toolkit should not be matched only to the financial objectives of the organisation (e.g., a higher level of ROI), but it should pursue a higher multiplier effect. Companies should focus on the metrics that matter, balancing hard and soft indicators (including customer loyalty, satisfaction, long-term orientation and flexibility), because customers have multiple ways to contribute value and all avenues have to be explored in order to maximise their contributions (Kumar, 2017). It is considered that such 'tuning' of marketing tools in the field of customer portfolios management and modelling can be achieved by developing some adequate mathematical instruments for the various possible aims of organisations.…”

Predictive Performance of Customer Lifetime Value Models in E-Commerce and the Use of Non-Financial Data

“…There are a number of review articles covering theoretical aspects of CLV modelling approaches, e.g. Kumar (2018), Estrella-Ramón et al (2013), Chang et al (2012), Fader and Hardie (2009), Damm and Monroy (2011). However, there are still not enough empirical analyses (Donkers et al, 2007;Batislam et al, 2007;Platzer & Reutterer, 2016;Chamberlain et al, 2017) and very few of them are focused on online shopping.…”