Customer Lifetime Value

Topics: Marketing, Consumer behaviour, Customer lifetime value Pages: 30 (7678 words) Published: October 18, 2010

Paul D. Berger Nada I. Nasr

ABSTRACT Customer lifetime value has been a mainstay concept in direct response marketing for many years, and has been increasingly considered in the field of general marketing. However, the vast majority of literature on the topic (a) has been dedicated to extolling its use as a decisionmaking criterion; (b) has presented isolated numerical examples of its calculation/determination; and (c) has considered it as part of the general discussions of profitability and discussed its role in customer acquisition decisions and customer acquisition/retention trade-offs. There has been a dearth of general modeling of the topic. This paper presents a series of mathematical models for determination of customer lifetime value. The choice of the models is based on a systematic theoretical taxonomy and on assumptions grounded in customer behavior. In addition, selected managerial applications of these general models of customer lifetime value are offered.

PAUL D. BERGER is Professor and Chairman of the Marketing Department at the School of Management, Boston University.

NADA I. NASR is a doctoral student in Marketing at the School of Management, Boston University.

1998 John Wiley & Sons, Inc. and Direct Marketing Educational Foundation, Inc. CCC 1094-9968/98/010017-14 s JOURNAL OF INTERACTIVE MARKETING VOLUME 12 / NUMBER 1 / WINTER 1998


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Since the early eighties, the field of marketing has undergone a major directional change in both its theory and practice: a turn toward relationship marketing (Morgan & Hunt, 1994). At the core of relationship marketing is the development and maintenance of long-term relationships with customers, rather than simply a series of discrete transactions, achieved by creating superior customer value and satisfaction. Ideally, a loyalty that benefits both parties is fostered. One pitfall of this growing concern to maintain strong and long-lasting relationships, however, is to do it at the expense of profitability. Overly enthusiastic with the concept, many practitioners have gotten involved in losing relationships. Relationship marketing is costly. It might not pay to maintain long-term relationships, at least not all the time and not with all customers. Customers with low switching costs and short time-horizons might not be financially attractive to the firm (Jackson, 1985). Ultimately, marketing is the art of attracting and keeping profitable customers (Kotler & Armstrong, 1996). A company should not try to pursue and satisfy every customer. What makes a customer profitable? Kotler and Armstrong (1996) define a profitable customer as ‘‘a person, household, or company whose revenues over time exceed, by an acceptable amount, the company costs of attracting, selling, and servicing that customer.’’ This excess is called customer lifetime value (CLV). Customer lifetime value should be an important construct in designing and budgeting a number of marketing decisions such as customer acquisition programs (Dwyer, 1989). Recognizing its importance, many researchers in direct marketing have studied CLV and its managerial applications (Dwyer, 1989; Hughes & Wang, 1995; Keane & Wang, 1995; Wang & Splegel, 1994). A growing interest in CLV is expected in other marketing areas for two reasons. First, at a time when marketing methods are becoming more interactive, from frequent-userclub services to web pages, it is not surprising that marketing talk begins to sound like directmarketing talk (Blattberg & Deighton, 1996).

Second, changes in technology make it feasible to understand and track customer behaviors in ways that were impractical, or even impossible, in the past (Jackson, 1995). Previous research in CLV has extolled the virtue of its use in a variety of marketing decision problems, primarily focusing on...
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