Transaction Attributes and Customer Valuation
39 Pages Posted: 28 Aug 2013 Last revised: 17 Jun 2015
Date Written: April 9, 2015
Dynamic customer targeting is a common task for marketers actively managing customer relationships. Such efforts can be guided by insight into the return on investment from marketing interventions, which can be derived as the increase in the present value of a customer’s expected future transactions. Using the popular latent attrition framework, one could estimate this value by manipulating the levels of a set of nonstationary covariates. We propose such a model that incorporates transaction-specific attributes and maintains standard assumptions of unobserved heterogeneity. We demonstrate how firms can approximate an upper bound on the appropriate amount to invest in retaining a customer and demonstrate that this amount depends on customers’ past purchase activity, namely the recency and frequency of past customer purchases. Using data from a B2B service provider as our empirical application, we apply our model to estimate the revenue lost by the service provider when it fails to deliver a customer’s requested level of service. We also show that the lost revenue is larger than the corresponding expected gain from exceeding a customer’s requested level of service. We discuss the implications of our findings for marketers in terms of managing customer relationships.
Keywords: customer base analysis, customer lifetime value, retention models, marketing ROI, service quality
JEL Classification: M31,C11
Suggested Citation: Suggested Citation