Customer Lifetime Value and Profitable Duration Strategies

Introduction

In the article The Impact of Customer Relationship Characteristics on Profitable Lifetime Duration (Reinartz & Kumar, 2003), the authors take on a series of challenging research objectives in an attempt to quantify the factors and strategies that contribute to lifetime customer loyalty in non-contractual buying scenarios across B2B and B2C settings. These four objectives include the following. First, quantifying the customer lifetime value duration and its effects on lifetime profitability in a non-contractual setting were evaluated. Second, the authors' RFM framework — predicated on their previous studies of customer loyalty — is presented with greater emphasis on the causality of consumer data. Third, the authors attempt to quantify and define the systematic differences in profitable customer lifetime duration in both B2B and B2C settings. Fourth, the authors summarize their findings for marketing practitioners. All four of these objectives are managed against a series of independent variable constraints that are demographic and economic in scope, and from a transactional and relationship exchange standpoint as well.

The authors contend that there is no single linear series of strategies that leads to long-term customer value, and they also demonstrate through several examples that traditional marketing approaches — advertising and promotion — are not consistently effective. The authors further point out that relying purely on price or service elasticity does not deliver exceptional value either, and that cost reductions in marketing strategies can be a very effective way to drive away customers who have high lifetime values (Reinartz & Kumar, 2003). From this perspective, their findings are clearly contrarian to the views held by many marketing departments and their leaders in industries where customer churn dominates over the maximization of customer lifetime value (Reinartz & Kumar, 2003).

Authors' Findings

The authors have also defined, in their Conceptual Model of Profitable Customer Lifetime (Figure 1 in the article), how the interaction of exchange characteristics, observed heterogeneity, and non-contractual settings all contribute to profitable lifetime duration in both B2B and B2C settings. This model expands on their 2000 theory while integrating it at the customer profitability level. The observed heterogeneity factor can be understood as segmentation of markets, while exchange characteristics refer to the channels through which customers choose to purchase. The variables in the Profitable Lifetime Model — including purchase amount, cross-buying, focus on buying, average inter-purchase time (AIT, measured as number of days), proportion of returns, loyalty instruments, mailings, product category, population density, age, and income — are all incorporated into the model. All of these factors are taken into account in developing the research findings and in validating or refuting the hypotheses that form the basis of the methodology.

The authors' ambitious research agenda seeks to define how companies can attain greater share of wallet through more effective profitable lifetime duration strategies. Implicit in this analysis is the need to invest in customer relationships — to nurture, defend, and retain them over time — and to create reward programs that accelerate customer loyalty (Reinartz & Kumar, 2003). The authors also point to cost reductions in marketing expenditure, divestment strategies, and customer outsourcing as indicators of a company generating low share of wallet and low profits per customer over time (Reinartz & Kumar, 2003).

As a result of these insights, the article puts forth a significantly different view of lifetime customer value than previous studies, which tended to support a more comprehensive spending approach rather than a targeted one (Campbell & Frei, 2010). This study focuses more on how customer loyalty in non-contractual markets can be earned over time by paying close attention to demographic and income variables, rather than relying on marketing and promotion spending alone. This represents useful guidance for practitioners who believe they must spend more to generate more sales leads and activity.

Major Points of Analysis

The explosive growth of Web 2.0 technologies (Bernoff & Li, 2008) has since changed the dynamics the authors describe in this article and its accompanying research, in effect accelerating them. Social networks are revolutionizing how trust is created and how communication flows — a key point the authors emphasize (Reinartz & Kumar, 2003). Finally, the article defines the critical issues of customer loyalty not merely from the standpoint of marketing spend, but from the perspective of providing customers with what they need to continually do business and purchase through the channels they prefer (Campbell & Frei, 2010). The analysis underscores how critically important it is to stay attuned to customers' changing preferences in how they want to buy, if long-term customer lifetime value is to be achieved.

Bernoff, J., & Li, C. (2008). Harnessing the power of the oh-so-social web. MIT Sloan Management Review, 49(3), 36–42.

Conclusion and Application of Theories

Campbell, D., & Frei, F. (2010). Cost structure, customer profitability, and retention implications of self-service distribution channels: Evidence from customer behavior in an online banking channel. Management Science, 56(1), 4–24.

Reinartz, W. J., & Kumar, V. (2003, January). The impact of customer relationship characteristics on profitable lifetime duration. Journal of Marketing, 67(1), 77–99.