Creating Enduring Customer Value

Author(s): V. Kumar and Werner Reinartz

Source: Journal of Marketing, Vol. 80, No. 6, AMA and MSI Special Issue of "Journal of
Marketing" | Mapping the Boundaries of Marketing: What Needs to Be Known (November
2016), pp. 36-68
Published by: Sage Publications, Inc. on behalf of American Marketing Association
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 V. Kumar & Werner Reinartz

Creating Enduring Customer Value

One of the most important tasks in marketing is to create and communicate value to customers to drive their
satisfaction, loyalty, and profitability. In this study, the authors assume that customer value is a dual concept. First, in
order to be successful, firms (and the marketing function) have to create perceived value for customers. Toward that
end, marketers have to measure customer perceived value and have to provide customer perceptions of value through
marketing-mix elements. Second, customers in return give value through multiple forms of engagement (customer
lifetime value, in the widest sense) for the organization. Therefore, marketers need to measure and manage this value
of the customer(s) to the firm and have to incorporate this aspect into real-time marketing decisions. The authors
integrate and synthesize existing findings, show the best practices of implementation, and highlight future research
avenues.

Keywords : customer value, perceived value, customer lifetime value, CLV models, cus

customers." Taken together, these high-level observations

"perceived value" as "the new marketing mania" and serve to underline the importance that the customer value
A "perceived "the 1991
"the way BusinessWeek
to sell in the 'to90s"value"
(Powersell1991).
in as Morris
the "the article '90s" new describes marketing (Power 1991). the mania" notion Morris and of aspect has had in the past and is continuing to have.
Holbrook (1994, p. 22) wrote, "despite this obvious importance Clearly, business is about creating value. The purpose of a
of customer value to the study of marketing in general and buyer sustainable business is, first, to create value for customers1
behavior in particular, consumer researchers have thus far and, second, to extract some of that customer value in the
devoted surprisingly little attention to central questions form of profit, thereby creating value for the firm. Thus, the
concerning the nature of value." Moving forward to 2014, the key underlying premise of this article is that customer value
Marketing Science Institute (MSI) specifies in its biannual is a dual concept. First, in order to be successful, firms (and
Research Priorities (among its top priorities), "One of the most the marketing function) have to create perceived value for
important tasks in marketing is to create and communicate value customers. In that sense, value is defined as overall assess-
to customers to drive their satisfaction, loyalty, and profitability. ment of the utility of an offering2 according to perceptions of
Any insights in this area have significant implications for the what is received and what is given (Zeithaml 1988). Second,
long-term financial health of an organization. It truly is at the customers provide value (customer lifetime value [CLV], in
heart of what marketing is all about." Out of the 30 Dow Jones the widest sense) for the organization. For the firms/decision
(United States) and 30 DAX (Germany) companies, 50% of the makers who allocate resources to markets, customers, and
products, the challenge is to dynamically align resources
companies' vision or mission statements explicitly mention the
notion of value creation for customers and/or stakeholders.
spent on customers and products in order to simultaneously
For example, American Express's mission statement includes generate value both to and from customers.
the sentence, "We provide outstanding products and un- We believe that aligning the customer-perceived value
surpassed service that, together, deliver premium value to our with customer-generated value vis-à-vis resource allocation is a
research challenge that needs careful and comprehensive atten-
tion. In this article, we focus on this alignment by examining the
V. Kumar (VK) is Regents Professor, Richard and Susan Lenny Dis-
specifics of this resource allocation challenge. More specifically,
tinguished Chair, Professor in Marketing, Executive Director of the Center
for Excellence in Brand and Customer Management, and Director of the our goal is to answer the following concrete research questions:
PhD Program in Marketing, J. Mack Robinson College of Business, Georgia 1. What is value to the customer? What do we know?
State University; V. Kumar is also honored as the Chang Jiang Scholar,
2. How should (customer perceptions of) product and service
Huazhong University of Science and Technology, China; TIAS Fellow,
value be measured? How can key drivers of customer value be
Texas A&M University, College Station, TX; and ISB Senior Fellow, Indian identified and calibrated?
School of Business, (e-mail: vk@gsu.edu). Werner Reinartz is Professor of
Marketing and Director of the Center of Research in Retailing, University
3. How should the value from the customer be measured and
of Cologne (e-mail: werner.reinartz@uni-koeln.de). The authors thank the
managed?
Marketing Science Institute and Kevin Keller for providing them the opportunity 4. What are the drivers of customer value? How can they be
to contribute to this topic. They thank the guest editors of this special issue, as incorporated in real-time marketing decisions?
well as Sarang Sunder, Maren Becker, Manual Berkmann, Mark Eisner,
Vanessa June, Monika Käuferle, Annette Ptok, Julian Wichmann, and
three anonymous reviewers for their valuable suggestions on an earlier
!We use the term "customer" to denote a consumer as well as a
version of this manuscript. They thank Bharath Rajan for his valuable
business customer.
assistance in this study and Renu for copy editing an earlier version of
this manuscript. 2We use the notion of "offering" to indicate physical products,
services, brands, or a combination thereof.

© 2016, American Marketing Association Journal of Marketing: AMA/MSI Special Issue

ISSN: 0022-2429 (print) Vol. 80 (November 2016), 36-68
1547-7185 (electronic) 36 DOI: 1 0.1 509/jm.1 5.041 4

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 What Is Value to Customers? effect chain from concrete offering attributes mapping onto
What Do We Know? abstract benefits generated. The "house of quality" concept
(Hauser and Clausing 1988) is another very successful attempt,
Regardless of whether a physical good or a service is demanded
originating from the operations and quality control domain, to
by individuals for final consumption (direct demand) or mapasobjective
an attributes with customer perceived benefits. In-
input factor used in providing other goods and services (derived
terestingly, this mapping process has been considered virtually
demand), the fundamental economic principle of utility max-
only for the offering's attributes, but an expansive consideration
imization remains the same. Whereas the utility maximization
of monetary and nonmonetary cost aspects (price, transaction
theory is used to study products meant for final consumption,
costs,the
risks, privacy) seems absent from the literature.
profit maximization principle is used to study the inputs usedOncein customers construct an aggregate assessment of an
the production of other products. The traditional model offering's
assumes perceived value, this value acquires meaning in two
that the customer has perfect information about product char-
ways. First, as a necessary condition for customers to perceive
acteristics and associated costs, as well as stable preferences,
an offering to be of positive value, perceived benefits have to
and thus is able to perfectly construct his/her final objective
outweigh undesired consequences. Second, once this is the case
function - an assumption that has of course been relaxed in
(and assuming the customer has the required willingness and
multiple ways (e.g., Hauser and Shugan 1983). means to transact), the assessment of value of a single offering
Given the central role of the notion of value to the customer
among a set of different offers (e.g., from a consideration set)
in the marketing literature, it is not surprising that therequires
subject a comparison standard. This comparison standard
has been dealt with repeatedly (Anderson 1998; Anderson,
mayJain
be concurrent competitive offerings, expectations, or past
and Chintagunta 1993; Monroe 1971; Wilson 1995; Zeithamlexperience (similar to Golder, Mitra, and Moorman's [2012]
1988). In various definitions of "value," there is a reasonable
nomenclature, a "value stock" perspective). Once the customer
variety in the spirit of describing the trade-off betweendetermines
"give" an offer to be of highest value, behavioral (choice,
elements and "get" elements (Anderson, Kumar and Narus
loyalty, CLV) and attitudinal (satisfaction, loyalty) outcomes
2007; Sawyer and Dickson 1984). For the purpose ensue.
of this
article, we define perceived value as customers' net valuation
Toofsummarize, we can observe that customer per
the perceived benefits accrued from an offering that is basedis a central mediating construct, separate from
value
on the costs they are willing to give up for the needs they are
perceived benefits, and satisfaction. Moreover, desp
seeking to satisfy. relevance of this construct in practice, the literature has
Perceived customer value of an offering is the aggregation
most part not been looking at the customer perceive
of benefits that the customer is seeking, expecting, or expe-
construct per se and has either omitted it from con
riencing and the undesired consequences (Gutman 1982) that
models (e.g., Golder, Mitra, and Moorman 2012
come with them. Benefits and undesired consequences are usedtheproxies, such as customer satisfaction, instead.
results of buying and consuming the offering, and these the may
aspects of perceived cost and undesired conse
accrue directly or indirectly and be immediate or delayed.in The
customer value models are arguably underspecifi
central aspect of this conceptualization is that customersunderstudied.
choose
actions that, ceteris paribus, maximize the desired consequences
and minimize concurrent undesired consequences. Benefits (and
How Should (Customer Perceptions
undesired consequences) are generated through offering attri-
of) Product and Service Value Be
butes. Benefits differ from attributes in that people receive ben-

Measured? How Can Key Drivers

efits, whereas offerings have attributes (Gutman 1982). Thus,
of Customer
attributes are features or properties of an offering. De facto, Value Be Identified
customers will never perceive all objective attributes (clearly) but
and Calibrated?
will form a composite perception that recognizes the respective
attribute salience. Measuring customer perceived value is the natural starting
Although much of the literature conceptualizes price point
as before one can even consider giving recommendations
one of many potential attributes, it is of course necessary with to
respect to the value-oriented management.
subsume all cost components separately. Besides price, these
Customer Value Measurement
typically include a vast array of different transaction costs, as
well as learning cost and risk. Interestingly, much of Thethe
key tasks to be completed are (1) measure overall per-
marketing literature typically accounts for price as the onlyvalue, (2) measure the associated underlying attributes
ceived
cost component of an offering, thereby neglecting the many
and benefits, and (3) determine the relative weights that link
different immediate and delayed types of costs that customers attributes/benefits to overall perceived value. Customers are
might incur. seeking offerings that yield the highest expected value or
Perceived attributes then are aggregated by customers utility. Because utility cannot be measured or observed
through a categorization process into more abstract benefits directly,
in market researchers, psychologists, and economists
order to reduce information overload and to facilitate further have devised ways to proxy these utilities. There is a long
processing. The means-end chain model (Gutman 1982; Howard tradition of utility/preference measurement in marketing that
1977) and the Gray benefit chain (Young and Feigin 1975) are commonly uses compositional and decompositional methods
probably the most widely used conceptualizations behind this to model consumer preferences (see Table 1).

Creating Enduring Customer Value 1 37

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 Compositional methods begin with a set of explicitly solutions) will become much more prevalent in the future (Ulaga
chosen attributes/benefits and use them as the basis forand Eggert 2006; Ulaga and Reinartz 2011; Vargo and Lusch
determining overall value evaluations. In the compositional
2004). Therefore, the conceptualization and operationalization
approach, expected utility is a function of the product
of a broader set of cost attributes is required in future customer
attributes or benefits and corresponding costs multipliedvalue by models.
their respective importance weights. The key premise here isFurthermore, in the context of digitization, a new cost-
that relevant attributes and their respective relevant levels related
are aspect has been emerging. For many online services
known to the decision maker, and customers follow largely a Google Maps, Facebook), customers are not expected to
(e.g.,
rational decision-making approach. This approach has found pay in monetary terms. The core benefit is free of monetary
reasonable entrance into the managerial domain (e.g., Gale charge from the end user's perspective. The monetization
1994; Sweeney and Soutar 2001; Ulaga and Eggert 2006). comes mainly from advertising revenues, with ads targeted
In contrast, decompositional techniques attempt to infer at narrow segments or personal individual profiles. Here, we
underlying utilities from observed choice, that is, revealed have a new situation wherein the monetary component within
preferences. They start with measures of preference for the undesired consequences has entirely vanished. Customers
offerings or attribute bundles and use them to infer the now have to understand the value of the personal information
value attached to underlying characteristics. The goal isthat to they will give up in this exchange. Thus, customers pay in
approximate offering value from the customer's willingness terms of less privacy instead of monetary outlays. In fact, some
to pay. A vast literature covers the use of this approach and,customers value privacy of personal information privacy so
therefore, the interested reader should consult those sources much that they would be willing to pay to preserve privacy -
(Rao 2014). The key approaches include survey approaches, this then creates a market for privacy (Rust, Kannan, and Peng
auctions, conjoint analysis, and field experiments, with some 2002). Moreover, Koukova, Kannan, and Kirmani (2012) hint
of these methods having been widely used. Moreover, in at the
new option value that digitization may provide. They show
past 30 years, there has been a strong recognition that nor- how different formats of media (e.g., offline newspaper sub-
mative decision models are usually violated (Huber, Payne, scription vs. online formats) may provide complementary and
and Puto 1982), and an entire stream of behavioral decision incremental value to customers, depending on usage situation,
theory research has unfolded (Simonson 2015) that details as opposed to mere substitution. In other words, digitization
the wide range of systematic deviations that can occur when will provide interesting and important new facets to the value
customers attempt to assess value. debate. Table 2 presents a summary of related findings
From the firm's perspective, the focus of the measurement regarding the measurement of value and value drivers.
approaches pertains mostly to tangible product attributes. The
only intangible aspects that has seemingly found entry into
these measurement models are the brand name dimension
How Should Value from Customers
(e.g., Sinha and DeSarbo 1998) and aesthetic design aspects Be Measured and Managed?
(Kumar 2015). Other intangible aspects seem absent. For ex- Until now we have reviewed (1) how firms can create value to
ample, in the context of digitization, what seems interesting
theis customer, (2) the ways to measure customer perceptions of
how an individual's perception of what constitutes valuevalue,is and (3) the treatment of undesired consequences when
influenced by others (i.e., network effects). managing customer value. However, creating and communi-
cating perceived value to customers is better served when firms
Treatment of Undesired Consequences (Costs)
align perceived value with the resources they spend on cus-
The vast majority of attention in customer value measurement
tomers, to ensure that the right amount of resources go toward
managing perceived value. To identify the right amount of
has been focused on the "get" side of the offering, namely,
documenting the range and depth of attributes and benefits that
resources, it is important to ascertain the value that customers
provide to the firm. Figure 1 illustrates the approach firms can
are associated with the offering. The situation is starkly different
with respect to the undesired consequences and cost aspects. adopt to derive value from customers.
Although perceived sacrifice is multidimensional, it is de facto As seen from Figure 1, the first step in deriving value is to
realize the need for a forward-looking metric rather than a
operationalized as a unidimensional aspect in existing research
(Teas and Agarwal 2000) - namely, on the price dimension. backward-looking
For one. Traditionally, firms have used metrics
such as recency-frequency-monetary value (RFM), past cus-
example, in much of the conjoint analyses and logit models, price
is introduced as another (linear) attribute variable (Hauser tomer
and value (PCV), share of wallet (SOW), and tenure/duration
Urban 1986, p. 448). to measure the value of customers. The guidance from these
However, besides the mere cost (transaction price) of themetrics has driven decisions pertaining to the allocation of
offering to the customer, there is a large set of associated marketing resources. However, many of the traditional metrics
focus on a backward-looking approach that only takes into
transaction costs, learning cost, and maintenance and life cycle
consideration past activity of a customer, which leads to out-
cost, which are for the most part overlooked in existing models.
In many situations, the monetary value of the sum of these dated information being used for customer selection and
nonprice costs easily outsizes the transaction price, typicalresource
in allocation. In contrast, the CLV metric is a forward-
many business-to-business (B2B) settings (Anderson, Narus,
looking metric that takes into account the variable nature of
customer behavior and enables firms to treat individual cus-
and Narayandas 2009). Even more importantly, purchasing and
consumption models that are based on usage (i.e., customer
tomers differentially and distinctly from each other depending

40 1 Journal of Marketing: AM A/MSI Special Issue, November 2016

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 TABLE 2
Summary of Findings Pertaining to the Measurement of Value and Value Drivers
Scholarly Contributions Thus Far Tasks for Future Research

Perceived attributes • Deriving underlying choice-relevant attributes • Understand whether and how attribute
and benefits using decompositional approaches simultaneously pay into a given benefit
• Understanding of longitudinal, situational, and • Broaden conceptualization and measurement
cross-sectional heterogeneity. of intangible attributes and benefits
Perceived costs and • Inclusion of price as key (cost-related) variable • Define conceptualization and operationalization
undesired consequences of a broader set of cost-related attributes
• Include new cost-related aspects due
digitization

Perceived value • Deriving customer perceived value using • Examine value of personal information (context
compositional approaches of digitization)
• Measurement of customer perceived value • Examine influence of value percept
through willingness to pay network
• Accommodating for incentive alignment and
heterogenfeity across time, customers, and
product categories
• Recognition of systematic violations of value
maximization principle

on their contributions to the company. Amid the backward-

to obtain meaningful results. Nevertheless, the point
versus-forward-looking distinction, it is also important
noted here to is the importance of being able to look int
note the role of big data. Using big data that future
containsinpast
determining the future value of customers,
information (e.g., sales, revenue, marketing spending),
posed to it is
relying on insights from past value contribut
possible to accurately predict future behavior of customers
Realizing the need for a forward-looking metric is
and, thus, compute their value to the firm. The use
mostof big data,step for a firm. Once this has been achieved
critical
however, does come with the challenges relating to the quality
subsequent steps only strengthen the firm's position in cultiv
of data, data visualization, computing capabilities, and ability
a customer-centric organization. The following sections de

FIGURE 1
Approach to Deriving Value from the Customer

Move from backward-looking metrics to a forward-looking metric

I
Introduce CLV

I !
Understand
the drivers of -> Choose a type of model (e.g., deterministic vs. probabilistic) ■
CLV ¡ s
I 0

1 iS
i GC
Develop and implement strategies to maximize CLV ,
! §
: .§
>

Extend the customer value concept to an engagement framework ¡ ©

i
* i
i

Realize enhanced firm value and shareholder value ¡

i

Creating Enduring Customer Value 1 41

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the other steps identified in Figure 1 that put in place a cyclical This coverage has expanded the scope and application of
process involving data collection, deciding on the modeling CLV-based models for a multitude of industries and markets.
approach and the type of model, estimating the model, identifying This section discusses some of the popular modeling approaches
the drivers of CLV, developing and implementing CLV-based from the extant literature.
strategies, extending CLV into a customer engagement frame-
work, and reaping the benefits through higher firm value. Estimating models independently. Most models, barring
Firms have realized that just as customers derive value few (Niraj, Gupta, and Narasimhan 2001; Venkatesan, Kumar,
from the products/services being offered, firms, too, derive and Bohling 2007), focus on predicting future revenue and
value from the customer base. Kumar and Reinartz (2012) apply a constant gross margin and retention cost. Venkatesan
define this value from the customer as "the economic value of and Kumar (2004) use a generalized gamma distribution to
the customer relationship to the firm - expressed on the basis model interpurchase time and employ panel-data regression
of contribution margin or net profit" (p. 4). When firms methodologies to model the contribution margin. They con-
identify the value provided by customers, they will be able to sider various supplier-specific factors (channel communication)
(1) better manage their costs, (2) post increases in revenues and customer characteristics (involvement, switching costs, and
and profits, (3) realize better return on investment (ROI), (4) previous behavior) as the antecedents of purchase frequency and
acquire and retain profitable customers, and (5) realign mar- contribution margin. Web Appendix B provides details on the
keting resources to maximize customer value. independent models. Given the factors identified, purchase fre-
More so than customers' past and current contributions to quency and contribution margin are modeled separately, and
the firm, a crucial factor is their contribution in future periods. the equation of CLV is specified as
It is this future component that is of immense interest to
academicians and practitioners. The concept of future value
contribution has been conceptualized in the form of CLV. The (1) clv.-Ì^-ÌLs-, r)/f'
(1 + r)/f' w (1(1
+ r)+ r)
CLV metric has been conceptualized as the present value of
where GCi t is the gross contribution from customer i in pur-
future profits generated from a customer over his or her lifetime
chase occasion t; MQ^j is the marketing cost for customer i in
with the firm (Venkatesan and Kumar 2004). Estimating CLV
communication channel m in time period 1; fi9 or frequency, is
helps the firm to treat each customer differently according to
12/expinti (where expinti is the expected interpurchase time for
his or her contribution, rather than treating all customers in a
customer i); r is the discount rate; n is the number of years to
similar fashion. Furthermore, the sum total of lifetime value of
forecast; and is number of purchases made by customer i.
all customers of the firm represents the customer equity (CE)
of the firm. In other words, CLV is a disaggregate measure of Estimating models simultaneously. Endogeneity is a sta-
customer profitability, and CE is an aggregate measure. After tistical issue in the CLV model that relates directly to causation.
computing the CLV of its customers, a firm can develop When purchase frequency, marketing cost, and gross con-
strategies such as optimally allocating its limited resources, tribution are predicted independently, it becomes unclear
identifying the next products that customers are likely to whether it is current MC that leads to future GC or current GC
purchase, and balancing acquisition and retention efforts, that leads to future MC. In addition, the issue of heterogeneity
among others, to achieve maximum return. relates to the customer profiles and has been found to influence
purchase quantity and timing significantly (Allenby, Leone,
Modeling Approaches to CLV
and Jen 1999). When different customers respond differently
In measuring CLV, marketing literature presents a rich variety of to marketing messages, the contribution margin model must
measurement approaches. However, the main objective across reflect this variation by allowing the regression weights to be
all approaches is clear - identify, maintain, and nurture profit- different for each customer. Simultaneously modeling pur-
able customers. The approaches can be categorized into two chase frequency, MC, and GC solves both these issues and
broad categories: the aggregate approach and the individual provides more accurate results.
approach. In the aggregate approach, the average lifetime value Venkatesan, Kumar, and Bohling (2007) use Bayesian de-
of a customer is derived from the lifetime value of a cohort or cision theory to address the uncertainty in customer response
segment, or even a firm. This level of measurement helps firms to marketing actions in a B2B setting. In this regard, they
in evaluating the overall effectiveness of the marketing plan but model the three parameters simultaneously. In the business-to-
not in customizing strategies for customers. In the individual consumer (B2C) setting, studies have developed a joint model
approach, the CLV of one customer over his or her entire for purchase timing and quantity. For instance, Boatwright,
lifetime with the firm is computed. This level of measurement Borle, and Kadane (2003) use the Conway-Maxwell-Poisson
helps firms personalize strategies according to customer needs distribution to jointly model the purchase timing and purchase
and the future profitability potential of the customer. Web quantity for an online grocery retailer. Similarly, Chintagunta
Appendix A lists the aggregate and individual approaches to (1993) models the incidence of purchase at each time interval
measuring CLV. Table 3 provides an overview of the select and the purchase quantity for grocery purchases by customers
literature from the extensive field of CLV. who make regular and frequent visits to a grocery store. By
simultaneously modeling the parameters, it is possible to
Types of CLV Models obtain an early-warning indication of abrupt changes in
Over the past two decades, research on CLV has covered a wide interpurchase times and purchase quantities for a customer.
range of business conditions through the modeling approaches. When individual customers/customer segments that exhibit

42 1 Journal of Marketing: AMA/MSI Special Issue, November 2016

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44 / Journal of Marketing: AMA/MS

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such a warning are identified, firms can implement appropriate never completely terminate their relationship with a firm. Thus,
customer relationship management (CRM) initiatives and cus- in this approach, firms measure future profitability of a customer
tomized marketing actions to each individual or to each cus- by predicting his/her purchase pattern over a prediction period,
tomer segment. but they do not predict when a customer will terminate the
Another setting in which simultaneous modeling has been relationship with the firm. In this model, the profitability of a
offered is in winning back lost customers. Losing customers customer is measured in terms of total profits and net present
for good can be a significant setback for a firm's customer value of profit. The predictions regarding customer behavior
management efforts. While studies have demonstrated the include (1) the propensity for customer i to purchase in each
merits of preventing customers from defecting (Bolton 1998, future time period t and (2) the profit provided by customer i
Bolton and Lemon 1999, Lemon, White, and Winer 2002), given purchase in future time period t. While the predictions of
it is also important to look into ways of winning back lost customer behavior capture the revenue aspect, the marketing
customers. Kumar, Bhagwat, and Zhang (2015) study actions by the firm (e.g., number of sales calls, direct mail sent
whether firms should chase a lost customer by investigating to a customer) capture the cost aspects; these aspects need to be
the impact of the reason for defection on reacquisition and predicted for accurate CLV measurement. Toward this end, the
second-lifetime duration and profitability. They achieve this study proposes a single model framework that predicts customer
by jointly estimating customer reacquisition, second-lifetime purchase incidence (Purit), customer gross profit (nit) condi-
duration, and second-lifetime profitability per month. Web tional on purchase, and firm marketing contacts (Xit) and also
Appendix B provides details on these simultaneous models. models the potential correlations among these factors. Web
Appendix B provides more details on the joint probability
Brand-switching approach. Using information about the
model.
focal brand and the competing brands, Rust, Lemon, and
Zeithaml (2004) model acquisition and retention of customers in Customer migration model. Dwyer (1997) presents a cus-
the context of brand switching. This approach requires collecting tomer migration model for CLV analysis that is applicable for the
information on the brand purchased in the previous purchase "always-a-share" typology. Accordingly, customer behavior can
occasion, the probability of purchasing different brands, and be predicted on the basis of historical probabilities of purchase,
individual-specific CE driver ratings from the customers. depending on recency and the current recency state in which the
Through a Markov switching matrix, the individual customers' customer is located. Further generalizations include segmenta-
probability of switching from one brand to another based on tion variables such as the RFM metric and other demographic
individual-level utilities is modeled. The probability thus cal- variables. In several situations, RFM is used as a segmentation
culated is multiplied by the contribution per purchase to arrive at tool by classifying segments as "low RFM" and "high RFM."
the customer's expected contribution to each brand for each Other segmentation approaches include SOW and customer life
future purchase. The summation of expected contribution over a cycle. Web Appendix B provides the approach to expressing CE.
fixed time period, after adjustments are made for the time value
Deterministic model. Deterministic models precisely
of money, produces the CLV for the customer. Web Appendix
model outcomes as determined by parameter values, rela-
B provides more details on the CLV model specification.
tionship states, and initial conditions. These models focus on
Monte Carlo simulation algorithm. Another approach inputs and outputs and leave little room for variations. Typ-
adopted by researchers to investigate the value created by ically, these models are used to study firm actions such as
customers is the simulation method. While managerial heu- customer acquisition, customer retention, customer profit-
ristics and empirical models have uncovered important in- ability, cross-buying behavior, and product return behavior
sights on customer value, studies have also investigated the (Reinartz and Kumar 2000, 2002, 2003). The basic form of the
use of simulation models. The reason for exploring simulation deterministic approach used to model CLV is described by Jain
methods stems from relatively unsuccessful attempts at pre- and Singh (2002) (see Web Appendix B for the basic model).
dicting future customer profitability, with very simple models While this model does not account for acquisition costs, other
often performing just as well as more sophisticated ones. For models assume a constant gross contribution margin and
instance, Campbell and Frei (2004) find that it is easier to marketing costs (Berger and Nasr 1998). Several variations
predict future profitability for some customers than for others, of this basic model have been proposed (e.g., Dwyer 1997).
even for customers within the same profit tier. Similarly, Blattberg, Getz, and Thomas (2001) provide a comprehensive
Malthouse and Blattberg (2005) find that their best models way to calculate customer equity by accounting for the number
misclassify most customers who are predicted to have high of prospects, acquisition spending, and consumer segments.
profitability. Furthermore, Donkers, Verhoef, and De Jong Probabilistic model In a probabilistic model, the observed
(2007) show that the simplest model they test performs the behavior is viewed as the realization of an underlying stochastic
best and provides better predictions than other models. These process governed by latent (unobserved) behavioral charac-
studies make the case for alternative approaches, such as a teristics, which, in turn, vary across individuals. The focus of
simulation method. this type of model is on describing (and predicting) the observed
behavior instead of trying to explain differences in observed
Rust, Kumar, and Venkatesan (201 1) present a Monte Carlo
behavior as a function of covariates (as is the case with any
simulation method that can accurately predict future customer
regression model). In other words, this type of model assumes
profitability and performs better than existing methods. They
that consumers' behavior varies across the population accord-
accomplish this in an "always-a-share" setting wherein there is
no dormancy in a customer-firm relationship and customers ing to some probability distribution (Gupta et al. 2006). Web

Creating Enduring Customer Value 1 45

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Appendix B provides details on the basic probabilistic model. The drivers of CLV determine the nature of the rela-
Literature provides many models to estimate the CLV of a tionship between the firm and the customer, and they help
customer using the internal data of a company. One such ap- estimate the level of profitability and the CLV of each
proach defines CLV as a function of the time interval between customer. They have been classified into two types: exchange
e-mail contacts sent to a customer (Drèze and Bonfier 2009). characteristics and customer heterogeneity (Reinartz and
Using the data from the entertainment industry, this model Kumar 2003). Exchange characteristics encompass the set
estimates the relationship between the time interval and CLV. of variables that define and describe relationship activities
The objective is to find the optimal time interval for permission- in the broadest sense. Customer heterogeneity refers to the
based e-mails to a customer base. Apart from internal data, demographic and psychographic indicators that help a firm
survey data can also be used to estimate the CE of a firm (see in segmenting customers and managing customer-firm rela-
Rust, Lemon, and Zeithaml 2004; Rust, Zeithaml, and Lemon tionships. As expected, the nature of a business (whether B2B
2001). or B2C) determines the exchange characteristics and customer
heterogeneity factors. Figure 2 lists the classification of these
Structural model The issue of multiple discreteness
drivers in B2B and B2C settings.
(wherein consumers may purchase more than one brand in
Similarly, Palmatier et al. (2006) provide a synthesis of the
one purchase occasion) in studies of CLV has received at-
several empirical studies that have investigated the drivers
tention in the literature (e.g., Kim, Allenby, and Rossi 2002;
that lead to stronger customer-firm relationships, as observed
Manchanda, Ansari, and Gupta 1999). However, the results
through WOM, customer loyalty, sales-related perfor-
have been suboptimal because conclusions regarding the
mance, customer likelihood to repurchase, and customer-
quantity decision could not be made effectively. Sunder,
firm cooperation. These studies clearly identify the drivers
Kumar, and Zhao (2016) adopt a direct utility approach to
that have the greatest impact on customer-seller relation-
structurally model multiple discreteness while accounting for
ships. However, as more investigations on the nature of
variety-seeking behavior in the demand model in assessing
customer-firm relationships are uncovered, we can expect the
CLV of consumers in the consumer packaged goods (CPG)
list of drivers to change.
setting. Furthermore, the study is conducted on a longitudinal
transaction database and allows the budget to vary deter-
ministically with time. In addition, this is the first study to
Strategies for Maximizing CLV
unify choice, timing, and quantity decisions in a single Once the computation of CLV is completed, firms proceed to
equation, thereby providing a direct approach for assessing maximize this metric in order to reap its full benefits. The
CLV. Web Appendix B details this approach. CLV metric assists marketers to increase future profitability
As a summary, Table 4 provides a comparison of the of not just current customers but also prospects. Furthermore,
approaches discussed in the previous sections, according to the CLV metric is not just about the dollar value of future
their merits and shortcomings. customer profitability. It extends beyond that and aids in
strategy development on one or more of the following: cus-
tomer acquisition, customer retention, balancing customer
What Are the Drivers of Customer acquisition and retention, customer churn, and customer win-
Value? How Can Customer Value Be back.3 While the importance of these five tasks in ensuring
Incorporated in Making Real-Time profitability is duly noted, this does not mean that "max-
Marketing Decisions? imizing" each individual metric is the correct recipe for
success. Firms can look into maximizing CLV from an
Until now, we have discussed various models proposed for
optimization perspective wherein the elasticities of each of
understanding and measuring value from customers. The
these factors can be studied. Such an endeavor might be a
choice of model is ultimately decided by the availability of
promising avenue for future research. This section highlights
data (volume and variety), time, and technical resources, as
the importance of understanding these five tasks in devel-
well as the intended use of the CLV measure. Furthermore,
oping the CRM playbook of an organization.
information on competitive actions brings marketplace
realities into the decision-making process through game-
Customer acquisition. The expansive literature on cus-
theoretic approaches. The final choice of model notwith-
tomer acquisition has probed several important questions, such
standing, the results have to lead to managerial as decision
the following:
making that is also conducive to real-time modifications. This
• How likely is it that prospects will respond to our acquisition
involves understanding the drivers of customer value. In
promotion?
discussing the real-time applications, we adopt a relative
• How many new customers can we acquire in this campaign?
approach wherein we focus more on time intervals (e.g.,
• How many orders will each of our newly acquired customers
frequency of buying, pattern of buying cycles, the need to
place?
revise CLV scores periodically) rather than immediate actions.
• How do the marketing variables, such as shipping fee, WOM
In this regard, we survey and present research thatreferral,
has and promotion depth, influence prospects' response
examined this aspect of real-time applications and providebehavior?
related insights for implementation. This, we believe, will
present a new perspective on the real-time nature of decision
3For more details, see the ' ' Wheel -of-Fortune' ' strategies in Kumar
making. (2008).

46 1 Journal of Marketing: AMA/MSI Special Issue, November 2016

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48 / Journal of Marketi

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 FIGURE 2
Drivers of CLV in B2B and B2C Settings

B2B Firm B2C Firm

• Past customer spending

• Cross-buying behavior
• Focused buying behavior
• Past customer spending level • Avera
Exchange # Cross-buying behavior • Pa
• Purchase frequency • Customer returns
Characteristics # Recency of purchase • Customer-initiated contacts
• Past purchase activity • Frequency of marketing contacts
• Marketing contacts by the firm • Type of marketing contacts
• Multichannel shopping
• Consumer deal usage intensity
• Coupon usage intensity

Customer Includes variables such as Includes variables such as age,

industry, annual revenue, and gender, spatial income, and
Heterogeneity location of the business physical location of the customers

• How long will the newly acquired customers stay with of the WOM referral source influence the probability that re-
our
companies? ceived WOM induces a purchase behavior. In a B2B setting,
• How much profit or value will this acquisition campaign
studies have investigated the role of referrals in customer
bring to our companies? acquisition. For instance, Hada, Grewal, and Lilien (2010)
To understand customer acquisition, it is important torecognize
pay the types of referrals (customer-to-potential cus-
tomer
attention to the business setting: noncontractual or contractual. referrals, horizontal referrals, and supplier-initiated
In a noncontractual setting, customers can and do split theirreferrals) and have developed the concept of referral equity to
spending across several firms. As a result, observing when capture
a the net effect of all referrals for a supplier firm in
the market. These authors further propose a framework for
customer ceases to be a customer becomes difficult for the firm.
However, situations wherein customers develop strong rela- managing supplier-initiated referrals that incorporates the
tionships with firms do exist (e.g., strong preference towardsupplier and the supplier's management of the communi-
a particular brand of coffee). In a contractual setting, firms between the referrer and the potential customer. Godes
cation
enjoy a relatively continuous future cash flow for a period (2012)
of explores the conditions and subsequent impact of
time, and they know when customers terminate the relation- firms launching referral programs. The study demonstrates
that launching such programs increases the willingness to pay
ship. Even in such settings, it is possible for customers to defect
without notifying the firm (e.g., failure to renew a magazine of the early adopters in the high-technology B2B market. In
subscription). Studies have developed different models addition,
to Kumar, George, and Leone (2013) develop and test
study these two business settings regarding factors such asan approach to compute business reference value (BRV),
the
identify the behavioral drivers of BRV, and offer strategies to
expected duration or time of the relationship with customers,
the likelihood of a customer continuing the relationship,target
and and manage the most promising customers on the basis
of
indicators of defection at the end of a service period, among their CLV and BRV scores.

others. Table 5 lists a representative set of studies that haveIn addition to customer acquisition, the number of newly
considered these issues and accounted for many of acquiredthe customers and their initial order quantity are also
problems that might occur in the model-building process. important. While Lewis (2006b) identifies that shipping fees
A fundamental research interest in understanding cus- influence the customer acquisition process and the initial
tomer acquisition is in identifying the probability of a order
cus- size, Villanueva, Yoo, and Hanssens (2008) show that
tomer being acquired. Several studies have explored market
this channels also influence the customer acquisition
question and have uncovered valuable insights (Lix et process
al. and the value that newly acquired customers will
1995; Reinartz, Thomas, and Kumar 2005). For instance,bring to the company. The latter study develops two func-
Von Wangenheim and Bayón (2007) find that customer tions: (1) the value-generating function, which links newly
acquired customers' contributions to the firm's equity
satisfaction influenced the number of WOM referrals, which
growth, and (2) the acquisition response function, which
had an impact on customer acquisition, and that the recep-
expresses
tion of a WOM referral had an increased marginal effect on the interactions between marketing spending and
the number of acquisition. Using a three-variable vector
the likelihood of a prospect to purchase. This is achieved
by studying (1) whether prospects' purchase likelihoodautoregression
is a modeling technique for data from an online
function of WOM referrals, and (2) whether the characteristics
retailer, the study finds that marketing-induced customers add

Creating Enduring Customer Value 1 49

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50 / Journal of Marketing: AMA/

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more short-term value, but WOM customers add nearly twice measure a customer's future value and profitability to the firm,
as much long-term value to the firm. The study also dem- which makes it easier to make decisions on how much to spend
onstrates the long-term impact of different resource alloca- as compared with the future value. This logical approach to
tions for acquisition marketing using dynamic simulations. customer retention calls for data pertaining to several aspects of
Of course, making marketing decisions using the response customer transactions over a period of time. With respect to
probability, initial order quantity, and duration is not enough. modeling techniques required to understand customer reten-
Companies should select prospects to acquire according to tion, simulated maximum likelihood estimation is the most
their lifetime contribution, which can be termed lifetime value, commonly used procedure. However, more advanced esti-
CLV, or CE. For instance, Reinartz, Thomas, and Kumar (2005) mation techniques, such as Markov chain Monte Carlo,
estimate customer profitability with a standard right-censored Bayesian estimation, and generalized method of moments,
Tobit model using a set of exogenous variables and including the have been used. Understanding customer retention also calls
predicted duration and response probability. The authors find for accounting for customers' responsiveness to retention efforts
that decreasing marketing spending for a B2B firm and catalog because this determines the method of communicating the
retailer and increasing spending to customers for a pharma- intention to retain and the costs related to it.
ceutical firm leads to increases in total customer profitability. Researchers and managers alike are placing higher im-
portance on the study of customer retention and its impact on
Customer retention. Aside from customer acquisition, company profits. In both B2B and B2C firms, model-based
firms devote large amounts of resources toward customer approaches are becoming increasingly available, and thus
retention practices. To gain a better understanding of cus- necessary, in both contractual and noncontractual relation-
tomer retention and to advise firms in a better manner, studies ships. In developing strategies for firms, research studies have
have typically focused on answering the following questions: drawn insights from (1) explaining customer retention or
• Will the recently acquired customer repurchase or not? defection (Bolton and Lemon 1999; Borle, Singh, and Jain
• What will be the lifetime duration of the customer (i.e., when 2008); (2) predicting the continued use of the service rela-
will the customer churn)? tionship through the customer's expected future use and
• Given that the customer is going to repurchase, (1) How overall satisfaction with the service (Lemon, Włiite, and Winer
many items is that customer going to purchase? (2) How 2002; Lewis 2006a); (3) predicting renewal of contracts using
much is that customer likely to spend? (3) Will the customer dynamic modeling (Bolton, Kannan, and Bramlett 2000), (4)
purchase in multiple product categories? modeling the probability of a member lapsing at a specific time
• What will firms have to do in order to retain a customer worth
using survival analysis (Bhattacharya 1998); (5) modeling
retaining?
the duration of relationship using the negative binomial dis-
• What is the long-term impact of this customer's purchase tribution (NBD)/Pareto model and the proportional hazard
behavior on firm value?
model (Fader, Hardie, and Lee 2005; Reinartz and Kumar
Various studies have been conducted and many models have 2000; Schmittlein, Morrison, and Colombo 1987); (6) use of
been developed to answer these questions. Table 6 shows a loyalty and rewards programs for retention (Leenheer et al.
representative set of studies that have considered these issues 2007; Meyer-Waarden 2007); and (7) assessing the impact of a
and accounted for many of the problems that might occur inreward program and other elements of the marketing mix
the model building process. (Anderson and Simester 2004; Schweidel, Fader, and Bradlow
When to engage in the activity of retaining a customer can 2008).
be a highly misunderstood and undervalued component in An important strategy for retaining customers is to
customer retention. Monitoring a customer's purchasing andnurture their cross-buying behavior. It has been shown that
attitudinal behavior is vital in understanding when a firm when customers purchase more products or services from
should aggressively and actively pursue his or her retention. the same firm, they extend the duration of their relationship
This is important for three reasons. First, firms can often lose with the firm (Reinartz and Kumar 2003) and increase
sight of a customer's loyalty and lose their profitable cus- purchase frequency (Reinartz, Thomas, and Bascoul 2008).
tomers, thereby creating undue financial stress. Second,Cross-buying results not only in an increase in revenue con-
monitoring customer behavior allows the firm to identify the tribution for the firm but also in more engagement with the
attitudinal changes in a customer. This is important because firm, higher profit contribution, and higher switching costs
understanding the attitudinal changes of a customer with (Kumar, George, and Paneras 2008). Although cross-buying
regard to the firm's brand advises the firm on how and when has the potential to increase profitability, some firms (e.g.,
to be aggressive in its retention strategies for that particularfinancial services firms) have encountered unprofitable cus-
customer. Finally, a defecting customer can cause harm to tomers despite taking efforts to promote cross-buying (Brown
the firm's brand through negative WOM if the customer's 2003). Greater customer cross-buying does not always
defection is due to unmet needs. If such unmet needs prevail result in higher customer profitability. Shah et al. (2012)
over a large set of customers, and if this possibility is not study this phenomenon of unprofitable cross-buying and
addressed, the negative WOM may quickly snowball into a find that (1) customer cross-buying is not necessarily prof-
serious issue, thereby damaging both the brand and firm value. itable for all customers of the firm and can in fact adversely
Determining how much to spend on a customer is an im- affect a firm's bottom line, (2) persistent adverse customer
portant assessment involved in identifying who and when to behavior drives unprofitable customer cross-buying over
retain. Innovations in statistical modeling now allow firms to time, and (3) a company's marketing policies and practices

Creating Enduring Customer Value 1 51

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Creating Enduring

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 TABLE 7
Summary of Select Balancing Customer Acquisition and Retention Studies
Representative Study Study
Studies Study Focus Type Model Type Setting Insights

Reinartz, Thomas, Develop a modeling Empirical Probit two-stage B2B high- Firms can manage their
and Kumar (2005) framework for balancing least squares technology customer bases profitably
resources between manufacturer through resource allocation
customer acquisition efforts decisions that involve trade-
and customer retention offs between acquisition and
efforts. retention initiatives.

Thomas (2001) Establish that the customer Empirical Tobit Airplane pilot The proposed methodology
acquisition process affects membership corrects for biases in the
the customer retention customer retention analysis
process. that result from assuming
that customer acq
and retention are
independent processes.
Berger and Bechwati Create a framework for the Conceptual Decision calculus - The study discusses
(2001 ) optimal allocation of decisions about expenditure
promotion budget for allocation between
customer acquisition and acquisition and retention in
retention. different market conditions.

Blattberg and Find the optimal balance Conceptual Decision calculus - The authors recommend
Deighton (1996) between acquisition and that once managers have
retention that maximizes determined the balance
customer equity. between acquisition and
retention, they plan f
task separately.

Table 7 lists a select set

could facilitate (or deter) the persistence ofof adverse
studies that have considered
customer
behavioral traits associated withbalancing customer acquisition
unprofitable and retention.
cross-buying.
In modeling
Using data from five firms, the study finds independently,
that the Lewis (2006b)with
firm investigates
the most liberal product-return whether
policyshippinghad fees differentially
the maximum influence customer
acquisition
level of unprofitable cross-buying due and toretention. In a system
excessive of simultaneous
product
returns. equations, the study examines the effects of shipping fees
Even though several studies have highlighted the and other marketing variables on the number of new
importance of customer retention as a single link in the chain customers acquired, the average order size for new cus-
of CRM, many firms have not yet understood the larger tomers, and the number of daily orders and the average
comprehensive view of the CRM process. For instance, someorder size for established customers. Furthermore, to
managers still view customer acquisition and retention as account for the possible correlation between various equations
separate processes. Although most studies assess acquisitionand the possibility of endogenously determined explanatory
and retention separately, the literature provides an abundance variables, the author estimates the equations using three-stage
of direction through which firms can link the two together in least squares.
order to improve their CRM process. In another study, Lewis (2006a) investigates the influ-
ence of customer acquisition promotion depth on customer
Balancing acquisition and retention. Apart from iden-
retention, including repeat purchasing and duration. In an
tifying the balance in marketing effort between acquisition
online retailing setting, the study adopts a logistic regression
and retention in order to maximize profitability, studies have
to model whether the customer makes a subsequent pur-
addressed questions such as the following:
chase within the next three quarters, using acquisition
• What are the drivers of customer acquisition? discount as an explanatory variable. Using data from the
• After being acquired, how long can the customer be expectednewspaper industry, the study adopts accelerated failure
to stay with the firm? time models to model the time as a subscriber, using
• How much investment is required in order to keep theacquisition discount and its quadratic form as an explan-
firm-customer relationship alive? atory variable. The study also examines the effects of
• Given the resource constraints, how much should be spent onacquisition discount on customer asset value.
acquisition efforts versus retention efforts to maximize long- Berger and Bechwati (2001) optimize the allocation of
term profitability?
promotion budget between acquisition spending and reten-
In investigating such topics, researchers have modeled tion spending. When companies are considering one market
acquisition and retention both independently and jointly. segment and using one promotion method, such as direct

54 / Journal of Marketing: AM A/MSI Special Issue, November 2016

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mailing, managers decide the allocation of existing budget and Van den Poel 2005), (3) modeling churn using two
between acquisition and retention to maximize CE. cost-sensitive classifiers (Glady, Baesens, and Croux 2009;
In modeling acquisition and retention jointly, Thomas Lemmens and Croux 2006), (4) determining the factors that
(2001) proposes a method known as a Tobit model with induce service switching (Capraro, Broniarczyk, and Srivastava
selection to account for the impact of the customer acquisition 2003), and (5) analyzing the impact of price reductions on
process on the retention process. The proposed model suc- switching behavior (Danaher 2002).
cessfully links customer acquisition to retention because the
Customer win-back. It is no surprise that it is not pos-
length of a customer's lifetime is observed conditional on
sible for firms to retain all acquired customers. When cus-
the customer being acquired. The model also establishes that
tomers churn, managers usually consider this indicative of the
the error term in the acquisition equation is possibly corre-
end of the customers' life cycle with the firm. However, it
lated with that in the retention equation. Finally, Reinartz, does not have to be: firms can still win the lost customers back
Thomas, and Kumar (2005) model customer acquisition,
and give them a second life. Unlike new customers, lost
retention, and profitability together as a system of equations,
customers have certain knowledge about the products and
using a probit two-stage least squares model and estimate it
services of the company and have their own judgment on
as a system of equations.
the attributes and functions of the products and services.
In summary, customer acquisition modeling is actually
While it is easier to approach lost customers because they have
a probability prediction, and customer retention modeling
familiarity with the firm, lost customers often switch firms
essentially concerns the duration of customer lifetime.
because they are not satisfied with the product, which makes
Acquisition probability can be estimated by a probit or logit
it difficult for the reacquiring firm to change customers'
model; hazard models can also be used if the timing of
attitudes and persuade them to come back. Furthermore, firms
incidence is concerned. Duration data are usually right-
also have to consider whether it is worth trying to bring
censored, so Tobit or hazard models are by nature suit- customers back to the firm - not all customers are worth
able estimation techniques. Researchers link acquisition and
chasing after they leave the firm.
retention modeling either by specifying the correlation
Once a customer is likely to churn, the firm response vis-
of the error terms in probability and duration models or by
à-vis letting a customer go or winning the customer back is
specifying the joint distribution of acquisition and reten-
critical. Researchers have studied this phenomenon from
tion for estimation.
three aspects:
Customer churn. Determining who is likely to churn is • Should the firm intervene in customer churn?
an essential step. This is possible by monitoring customer
• If so, how should the firm approach customers to win them
purchase behavior, attitudinal response, and other metrics back?
that help identify customers who feel underappreciated or
• What elements would help firms in reacquiring lost
underserved. Customers who are likely to churn demonstrate customers?
"symptoms" of their dissatisfaction, such as fewer purchases,
lower response to marketing communications, longer time The answers to these questions will drive the optimal cus-
between purchases, and so on. It is important to note that tomer win-back strategy. Table 9 lists select literature that has
while customer retention and customer churn are similar explored the topic of customer win-back.
concepts, the need to study customer churn separately is Stauss and Fliege (1999) provide a conceptual framework
for regaining lost customers that consists of analysis, actions,
rooted in the business setting. Whereas customer retention
and controlling. The study contends that to determine cus-
applies to both noncontractual and contractual business
tomer value in the context of regain management, the lifetime
settings, customer churn is relevant only in a contractual
setting. Therefore, understanding customer churn becomes value of the terminated relationship is not an appropriate
measurement. Furthermore, Griffin and Lowenstein (2002)
crucial in certain customer-firm relationships. In this regard,
the CLV-based churn models provide directions on several highlight the importance of highly trained win-back teams
topics, including the following: and provide a general outline for winning back lost cus-
tomers. This study proposes that not all churned customers
• When are the customers likely to defect? are contenders to be won back. Instead, firms should calculate
• Can we predict the time of churn for each customer? second-lifetime value (SLTV), segment customers on the
• When should we intervene and prevent the customers from
basis of SLTV, and evaluate customers in each segment to
churning?
determine why they defected. In addition, Thomas, Blattberg,
• How much do we spend on churn prevention with respect to a and Fox (2004) investigate the best price strategy for reac-
particular customer?
quisition of lapsed customers, using a split hazard model (or
Table 8 shows a representative set of studies that investigate censored duration model). Using data from the newspaper
the customer churn process. publishing industry, this study finds that lowering reac-
Researchers have strong interest in the causes of customer quisition prices to increase the likelihood of reacquisition is
churn and switching behaviors. They have developed various an optimal strategy. Finally, Kumar, Bhagwat, and Zhang
models that include (1) modeling churn with time-varying (2015) investigate whether lost customers are worth the
covariates (Jamal and Bucklin 2006; Van den Poel and investment in reacquisition and whether they will remain
Lari viere 2004), (2) analyzing the mediation effects of customer profitable if reacquired. The study finds that (1) the lost
status and partial defection on customer churn (Buckinx customers' first-lifetime experiences and behaviors, (2) the

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 TABLE 8
Summary of Select Customer Churn Studies
Representative Study
Studies

Glady, Baesens,
Croux (2009) using a profit-sensitive neural network, services approaches achieve
loss function for the decision tree, cost- good results in terms of
selection of the best sensitive classifier the defined profit
classification measure and overall
techniques with classification,
respect to the
estimated profit.

Jamal and Bucklin Study the empirical link Empirical Weibull hazard Satellite television Prediction of customer
(2006) between customer churn is significantly
churn and factors such improved when
as customer service heterogeneity is added
experience, failure to the churn rates and
recovery, and payment to the response
equity. parameters.
Lemmens and Croux Investi
(2006) bagging and classification trees telecommunications techniques
stochastic gradient significantly improve
boosting can improve the classification
churn prediction performance, and
accuracy. balanced calibration
sample redu
classification error
rate.

Buckinxand Van den Identify which of the Empirical Logistic regression, CPG retailer RFM variables are the
Poel (2005) currently behaviorally automatic relevance best predictors of
loyal customers are determination, neural partial customer
likely to (partially) network, random defection; variables
churn in the future. forests such as customer
relationship durat
mode of payment
cross-buying beha
usage of promoti
and brand purch
behavior are
moderately useful in
attrition models.

Van den Poel and Develop a Empirical Proportional hazard Financial sen/ices Demographic
Lariviere (2004) comprehensive characteristics,
retention model environmental
including time-varying changes, and
covariates related to interactive and
customer behavior. continuous customer
relationships af
retention.

Capraro, Study repurchase Empirical Hierarchical logistic Health insurance After satisfaction level
Broniarczyk, and decisions that involve regression is accounted for,
Srivastava (2003) an information-based objective and
evaluation of subjective knowledge
alternatives. about alternatives
directly affe
defection likelihood.

Danaher (2002) Derive a revenue- Field Time-series Cellular service Access and usage
maximizing strategy experiment regression prices have different
for subscription relative effects on
services. demand and retention.

56 1 Journal of Marketing: AMA/MSI Sp

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 TABLE 9
Summary of Select Customer Win-Back Studies
Representative
Studies Study Focus Study Type Model Type Study Setting Insights

Kumar, Bhagwat, Demonstrate how lost Empirical Probit, right-censored Telecomm

and Zhang . customers' first-lifetime Tobit, regression service customer's first-
(2015) . experiences and lifetime relationship
behaviors, the reason with the firm, the more
for defection, and the likely the customer is
nature of the win-back to accept the win-back
offer made to lost offer.
customers are related
to reacquisition
likelihood, their second-
lifetime duration, and
second-lifetime
profitability per month.

Homburg, Hoyer, Test the relationship Empirical Logistic regression Telecommunications Health of the first-
and Stock between customers' service lifetime relationship is
(2007) first-lifetime satisfaction positively related to
and their reacquisition. reacquisition
likelihood; custom
perceptions of
fairness regardin
win-back offer are
positively related to
reacquisition.
Tokman et al. Identify the factors Quasi- Analysis of variance Auto repair and Price and service
(2007) driving win-back offer experimental maintenance service benefits provided in
effectiveness. design the win-back offer,
social capital, and
service importanc
are important in
shaping customer
switch-back
intentions, regardless
of previous
satisfaction, regret, or
delight with the new
service provider.

Thomas, Study the probability of Empirical Split-hazard, Newspaper industry For the win-back offer
Blattberg, and customer reacquisition Bayesian Markov to be effective, it
Fox (2004) and the duration of the chain Monte Carlo should consist of low
second lifetime, with a promotional prices;
focus on the impact of successful
the depth of the price reacquisition should
discount. be followed by price
increases.

Stauss and Conceptual basis for Conceptual - - Retention policy in

Friege (1999) "regain management" service companies
aimed at winning back needs to be
customers who either complemented by
give notice to terminate regain management,
the business
relationship or whose
relationship has already
ended.

reason for defection, and (3) the nature of the win-back offer Customer win-back is a critical component within the overall
made to lost customers are all related to the likelihood of the CRM strategy, but it has received relatively less research
attention than customer acquisition, retention, and churn. Firms
customers' reacquisition, their second-lifetime duration, and
their second-lifetime profitability per month. must first be able to understand the drivers of customer

Creating Enduring Customer Value 1 57

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reacquisition, customer duration in a second lifetime, and George, and Leone 2007), (2) the identification of the
second-lifetime customer profitability before they can make behavioral drivers of CRV and the methods of soliciting
accurate strategic decisions regarding which customers to try to referrals according to each customer's CLV and CRV scores
win back, and what offers to provide to maximize customer (Kumar, George, and Leone 2010), and (3) studying referral
profitability. behavior in a business setting, that is, BRV (Kumar, George,
and Leone 2013). The BRV is defined as the ability of and
Extending CLV to Engage with Customers degree to which a client's reference influences prospects to
purchase. The BRV of each referencing client and the CLV of
Typically, customer contribution to firm profitability oc-
each referencing client and newly acquired client from the
curs (1) directly, through their purchases, and (2) indirectly,
through their nonpurchase reactions, which include referring
prospect pool are measured using a three-step method
potential customers, influencing current and potential cus-
comprising (1) determining whether client references
influenced the prospect's decision to adopt, (2) determining
tomers in their social network, and offering review/feedback
the influence each client reference had on the prospect's
for improvements. In this regard, Kumar et al. (2010)
propose the customer engagement value framework, which
decision to adopt, and (3) computing the CLV of the
can be used to identify and evaluate the right customer,
converted prospect. Furthermore, Kumar, George, and
Leone (2013) empirically determine the key drivers of BRV
who is successfully engaged with the firm and who generates
value and positively contributes to the profits of the firm. The
and recommend that a firm using a client-referencing
strategy needs to leverage a portfolio of client references
following discussion elaborates on customers' indirect con-
that includes clients with varied characteristics in order to
tribution to value.
match the client to the prospect successfully.
Role of referrals. Studies in this area have found that
Valuing customer influences. The spread of information
customers acquired through referrals are not only less
by WOM is a critical component in converting prospects into
expensive to acquire but also more valuable for the firm, as
customers. To better understand the impact of WOM, several
compared with customers acquired through traditional meth- studies have called for its inclusion in customer value models
ods (Schmitt, Skiera, and Van den Bulte 2011; Villanueva,
(Hogan, Lemon, and Libai 2003; Libai et al. 2010). Research
Yoo, and Hanssens 2008). For instance, Schmitt, Skiera, and
has investigated WOM propagation in the context of online
Van den Bulte (201 1) examine the difference in value derived
referrals (Trusov, Bucklin, and Pauwels 2009) and the evo-
from each customer depending on acquisition method, using
lution of the network as a whole with every consecutive
customer data from a financial services firm. The study finds
instance of WOM (Robins et al. 2007). Kumar et al. (2013)
that referred customers are more profitable than nonreferred
develop a framework to capture the value of an individual's
customers. However, Villanueva, Yoo, and Hanssens (2008)
WOM in terms of both its viral impact and the net sales that
find that customers acquired through traditional techniques are
it facilitates through two key metrics - customer influence
more valuable in the short term to some extent, but referred
effect (CIE) and customer influence value (CIV). Whereas the
customers are twice as valuable in the long term. In addition,
CIE measures the net spread and influence of a message
the value differential becomes even larger when the disparity in
from a particular individual; the CIV calculates the monetary
acquisition costs is considered, due to the considerably lower
gain or loss realized by a firm that is attributable to a cus-
costs of referrals. Table 10 summarizes the other key contri-
tomer, through that customer's spread of positive or negative
butions of past research in this area.
influence. The study implements the framework by creating
Kumar, George, and Leone (2007) introduce the customer
and deploying a social media strategy at an ice cream
referral value (CRV) metric, which captures the net present
retailer. By tracking these two metrics for the retailer, this
value of the future profits of new customers who purchased the
study is able to demonstrate a 49% increase in brand
firm offerings as a result of the referral behavior of the current
awareness, 83% increase in ROI, and 40% increase in sales
customer. Simply put, it represents the value of how firm-
revenue growth rate. While most firms are still struggling
initiated and firm-incentivized customer referral programs can
with social media accountability, this study effectively
improve the profitability of the customer base by acquiring
shows the importance of CIE and CIV. Although these
cost-effective prospects (Kumar, George, and Leone 2010).
early studies illustrate the importance of valuing customer
Most notably, this metric makes a distinction between the
influences, more research is required to get a deeper
customers that initiated a relationship with the firm solely
because of the referral and those that would have become
understanding of this phenomenon.

customers even in the absence of a referral. Therefore, CRV Valuing customer knowledge contributions. Customers
can add value to the company by helping elucidate customer
includes both the acquisition savings and the profits of the
future transactions of customers who join as a result of the
preferences and participating in the knowledge development
referral. However, it includes only the acquisition savingsprocess.
of In this regard, beta site customers that use/review
customers who would join anyway, because their future products and provide valuable feedback to firms are a great
transactions would happen even in absence of the referral,example
so of customer knowledge contribution. Studies have
they cannot be attributed to the referrer. investigated the amount of value added by customers through
their knowledge contributions. For instance, Füller, Matzler,
Research in this area has focused on (1) developing models
that use only a customer's actual past referral behavior and
to Hoppe (2008) find that brand community members who
compute an individual customer's referral value (Kumar, have a strong interest in the product and in the brand usually

58 1 Journal of Marketing: AM A/MSI Special Issue, November 2016

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Creating Enduring Custo

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have extensive product knowledge and engage in product- study finds that the increases in stock price for the B2B firm and
related discussions and support each other in solving prob- the B2C firm were approximately 32.8% and 57.6%, respec-
lems and generating new product ideas. With respect to the tively. Furthermore, when the average monthly values of the
roles played by customers in this process, studies have stock price are plotted over time and compared with the actual
categorized them into two categories: information providers average values of the stock prices of the two firms, the results
and codevelopers (Fang 2008). In capturing the value con- indicate that it is possible to track the actual movement of stock
tribution through knowledge sharing, Kumar et al. (2010) prices within a maximum deviation range of 12%- 13%. It is
introduce the customer knowledge value (CKV) metric as also found that the stock price of the B2B firm outperformed
the value a customer adds to the firm through his or her the S&P 500 by 200%, and the B2C firm outperformed the
feedback. The need for computing the knowledge value S&P 500 by 360%. Finally, the study also finds that the
contributed by customers has been recognized by studies B2B firm's stock increases by 32.8% during the observation
that have posited that (1) tracking a customer's product or period, while its three closest competitors' stocks go up by
service expertise (which is correlated with the customer's an average of 12.1% over the same period. Similarly, the
CLV) can be valuable in assessing CKV (Von Hippel 1986), B2C firm's stock increases by 57.6%, while its three closest
and (2) defected customers might contribute to CKV by competitors' stocks go up by an average of 15.3% over the
sharing their reasons for leaving, allowing the firm to same period. These findings clearly demonstrate the link-
identify service improvement opportunities and increase its age between CE and MC.
capability to detect at-risk customers (Stauss and Friege The studies discussed here sufficiently demonstrate the
1999; Tokman, Davis, and Lemon 2007). These studies power of real-time decision making that firms would gain
constitute a nascent stream of research that has much when the drivers of customer value and timely marketing
promise. interventions are carefully understood and coordinated. This
implementation would not only refine marketing actions but
Realizing Enhanced Firm and Shareholder Value
also enhance value to the firm.
Customer equity represents the sum of the lifetime values
of all customers of the firm. This topic has been a subject
of constant attention; it has been shown to maximize the Key Insights and Future Research
return on marketing investments and guide the allocation
Directions
of the marketing budget (Blattberg, Getz, and Thomas Extant marketing literature has investigated the concept of
2001; Reinartz, Thomas, and Kumar 2005; Rust, Lemon, customers providing value to firms and have sought to
and Zeithaml 2004). For instance, Gupta, Hanssens, and understand the process of deriving value from customers,
Stuart (2004) show across multiple firms that customer ways of measuring it, and strategies for maximizing it. The
value can be a method of firm valuation that is as good as a current study has discussed the knowledge created by
better than traditional accounting. They also quantify the researchers thus far in understanding customer value. This
impact of firm value resulting from improvements in research has shown that value is created to and from the
retention, margin, and acquisition costs. Customer sat- customers. While this creation happens fairly regularly, this
isfaction has also been linked to higher firm value in that it process is beneficial only if it is long-lasting, which is pos-
increases immediate cash flows and creates future growth sible only when the customer perceived value (i.e., value to
options (Fornell et al. 2006; Gruca and Rego 2005; Malshe customers) and firm value (i.e., value from customers) are
and Agarwal 2015). aligned. This alignment, however, only happens over time.
Kumar and Shah (2009) propose a framework to link Furthermore, the alignment process is constantly shaped by
the outcome of marketing initiatives (as measured by CE) what we know about value and the knowledge we still seek.
to the firm's market capitalization (MC) (as determined by When these two value sources are aligned, it leads to the
the stock price of the firm). The intuition behind this creation of enduring customer value, as opposed to just value.
framework is that the stock price of the firm is based on the The alignment is materialized through the appropriate setting
expected future cash flows of the firm. If cash flow is of prices in a manner that reflects customer and competitive
primarily generated from customers, an increase in CE (or factors. In effect, there is a constant réévaluation from the
cash flow from customers) should relate to an increase in firm's side vis-à-vis prices to ensure the value alignment to
MC (or the stock price of the firm). Such an approach and from the customers. The setting of prices is subsequently
would answer three important questions: (1) Can marketing reflected in the development of products and services, as well
strategies that increase CE also increase the stock price of the as in the designing of marketing campaigns. Figure 3 presents
firm? (2) If so, can such increases in stock price be predicted an organizing framework that describes the process of value
on the basis of changes in CE? (3) Can the increases in the alignment.
stock prices of the two firms be attributed to shareholder value This study has uncovered some valuable insights that will
creation? be helpful in understanding the creation and communication
To answer these questions, Kumar and Shah (2009) im- of value. With regards to value to customers, this study has
plement CLV-based strategies that are designed to strengthen defined customer perceived value that incorporates both the
the CRM practices of a firm. The implementation was done "give versus get" perspective and the value-communicated
over a nine-month period in a B2B firm and a B2C firm, both aspect. Such an approach to defining and understanding per-
Fortune 1 ,000 companies. At the end of the implementation, the ceived value highlights the importance of thinking beyond

60 1 Journal of Marketing: AMA/MSI Special Issue, November 2016

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 FIGURE 3
Ensuring Value Alignment: An Organizing Framework

What We Know

! ' !

,.,Ý,

Ä/^ ^^L-^- ^ttr'

mrau -,6Shhht *!^ !rL- ^ MüH
1 Meeting p«^ Al
' / BflKB BBBBH Engagement Customer Customer
' ' Perceived Undesired / / 8™>P™b niriiiiiiiiiiimiiiiiiiiiiiiiir
J k Cost Consequences I

What We Would Like to Know What We Would Like to Know

t

♦ Impact of products' intangible aspects on perceived value • CLV for a basket of goods
♦ Value of privacy • Effect of customer attitudes on CLV
♦ Source of perceived vaiue • Impact of macroeconomic trends on CLV
• Nature of relationship on value creation
• Customer engagement and privacy
• Level of engagement and successive generation of products

the value component, to include the costs given

For up forconsider
instance, the the case of a profess
benefits that are being sought. Following team. Sports fans
this definition, would like to get to the
this
study has identified three tasks for measuring
ues in time customer
for the game and the other attrac
perceptions of value: measuring overall perceived
However, a game value,
day brings with it the probl
measuring the associated underlying attributes and benefits,
and changing weather conditions, which crea
and determining the relative weights of the attributes/benefits
in finding the fastest route to the venue. Wit
ensuring
linked to overall perceived value. With respect fan satisfaction,
to value from a sports team c
providing
the customers, this study has identified that a wearable device to fans that would
a forward-looking
metric such as CLV is ideal in metricizing customer
of traffic value
conditions, road closures, and weat
contributions. Furthermore, this study in has observed
addition tothat to
team-related and game-related
create net value for the firm, the perceived
Such avalue
device that
fromcus-
the team management, apart
tomers receive must be aligned with the resources
piece of fanspent on
merchandise, would also keep fans
the team. The
the customers, through the adoption of forward-looking technology to create such a dev
metrics.
To this end, CLV is identified as the metric
through IoT,(among
but how can firms create value
the popularly used metrics) that most accurately
offering? com-
To begin with, what value-based met
putes the net present value of a customer to according
identify the fans
to his or who would receive such
her future transactions with the firm, suchaftera accounting
device capture for fan satisfaction effective
revenue, expense, and customer behavior. Various
the team view CLV-
fan satisfaction at the venue and fan sat-
based strategies have been proposed that firms
isfaction cantouse
getting to
and coming from the venue? In other
maximize value from customers after computing
words, would an unpleasantCLV. experience away from the venue
Table 11 lists the key insights from this adversely
study. influence a fan's satisfaction at the game and
Looking ahead, we would like to offer three key lead
subsequently areasto a that
decline in loyalty? Furthermore, what
could spur future research. First, we believe
insightsthe
couldInternet
the team gainwill regarding fan experience on
attain even more dynamism in terms of the game uses,
day and abilities,
the ways to andmitigate any loss in following?
How could
opportunities it presents. In this regard, the Internetthe teamofcapture
Things these fan sentiments and use the
(IoT) is bound to offer several avenues device
for toresearchers
offer a valuableand proposition that both engages the
practitioners to identify and maximize waysfan with the teamvalue
to create and ensures
for value to the team through
firms and customers. With its origins consistent
in the ticket sales?
supply chain
context (Ashton 2009), the IoT now encompassesSecond, health and usesfitness in
consciousness has been on the
virtually all areas, including health care, urban
rise, with planning
fitness studios offering varied programs to suit
and management, emergency services, every
construction,
customer need. envi-
These paid options provide several
customization
ronment monitoring, lifestyle, and sports options for The
management. users to design their visit and
structure their
ready applicability to a wide range of industries fitness regimen.
is largely due These options include
to the connectivity to media and transportation channels
scheduling visit times (somethe
studios are even open 24 hours
IoT provides to firms. a day), personal training, designing meal plans, and studio

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 TABLE 11
Key Insights from This Study
Value to Customers Value from Customers

• Customer perceived value is different from qualit

benefits, and satisfaction. This article defines perc
as the customer's net valuation of the perceived b
accrued from an offering that is based on the cost
willing to give up for the needs they are seeking
• Benefits and undesired consequences are the resu
and consuming the offering (i.e., the attributes of
and these may accrue directly or indirectly and m
immediate or delayed. for revenue, expense, and customer behavior.
• Perceived value is measured according to attributes, which • CLV can be modeled at the aggre
may be objective attributes (i.e., produced attributes) or customer level.
perceived attributes (i.e., experienced attributes). • CLV-based strategies can be used not
• Approaches to modeling consumer preferences have adopted revenue, minimize costs, or both
two types of methods: compositional and decompositional. acquisition and retention, balancing
While the former is a set of explicitly chosen attributes/benefits customer churn, and customer
that are used as the basis for determining overall value • The customer contribution to firm p
evaluations, the latter attempts to infer underlying utilities from through customer purchases, and
observed choice. actions that might include referrals or influencing others via
• Firms can create perceived value for customers through (1) social networks, customer reviews,
leveraging their own capabilities, (2) aligning with customers' • The concept of customer engageme
perception of what is valuable for them, and (3) claiming a identification and evaluation of the
differential advantage (e.g., premium or margin) over successfully engaged with the firm,
competitive offerings. who positively contributes to the profits of the firm.
• Customers form a judgment of value as a function of perceived,
not actual, benefits and costs.
• Measuring customer perceptions of value involves three key
tasks: (1 ) measuring overall perceived value, (2) measuring the
associated underlying attributes and benefits, and (3)
determining the relative weights of the attributes/benefits linked
to overall perceived value.

amenities, among others. In addition, fitness studios Finally,

now household purchase decisions have received
substantial
have a strong online presence through blogs and social research attention (e.g., Epp and Price 2008
networking sites. They now interact with customers Gupta,
andHagerty, and Myers 1983). The decision-making role
typically include influencers, gatekeepers, deciders, buyers
fitness enthusiasts by exchanging fitness-related information.
Consumers also have access to unpaid options such as users, and disposers. In situations in which the head of th
fitness
household
videos and predesigned fitness routines available on the is the decider and buys a good, the product i
Internet. While this option lacks customization, beingeither for personal use or common use. Household
intended
available for free compensates for this dearth. Perhapsconsumption
the is also known to be affected by scale econo-
mies,even
major attraction of the unpaid option is the availability wherein the utilization rate of a good can be raised by
during travel. However, some fitness studios also increases
now have in family size (Lazear and Michael 1980). In such
dedicated members' websites that offer health tips, along
conditions, for the purposes of identifying value and designin
with tools to manage workout schedules through videos and strategies, firms would benefit if they had answers t
customer
questions such as the following: (1) Is the good being pur-
instruction manuals, in addition to regular studio admission.
From the perspective of a fitness studio, the challengechasedoffor personal use or common use? (2) Who will b
such a site is twofold. First, how does the firm present
paying itsfor the good - the individual or the family? (3) Will
value proposition vis-à-vis other competing studios (e.g.,be necessary to buy the good, either by the individua
trade-off
www.my360gym.com)? Second, how does it fight or thethe
com-family? (4) In the case of a common good, will the
petition from the unpaid fitness options? In such goodcases,
hold the same value to all members of the household
what other novel and innovative programs can be offeredand if not,
by how can the disparity be alleviated? (5) In the cas
fitness studios to attract customers? Furthermore,of how can
a common good, will there be any design changes necessary
to satisfy
studios design, price, and offer online fitness material (text, all the users? (6) How should the media mix be de
audio, and video) that can effectively compete with thesigned such that the influencers of the household are reache
existing
unpaid options? In addition, can studios exist only in with the right message, in the right format, and at the right
the online
format (e.g., www.booyafitness.com) without any time? physical
(7) Given these questions regarding the decision-makin
roles, the usage of the good, and the awareness of the good
presence, and if so, how would the value then be determined
for a fitness customer? should firms compute the value as a comprehensive amount

62 1 Journal of Marketing: AMA/MSI Special Issue, November 2016

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 TABLE 12
Future Research Directions

Value to the Customers Value from the Customers

• The effect of customer costs and consumer needs on • Wh

perceived value has been studied largely from the viewpoint
a product's tangible features. Intangible aspects, such as, fo
instance, the network effect on perceived value, have not be
explored. Network- effects have been addressed in the 'Valu
from customers" perspective (e.g., Kumar et al. 2013; Robi
et al. 2007) to strengthen profitable customer-firm m
relationships. Future research could explore individuals' • L
perception of value and its constituents in a network sett
that exhibits influences across customers. influence customer behavior (e.g., Anderson 1998; Hogan,
• Studies of undesired consequences have explored the realm Lemon, and Libai 2003), which in turn influences CLV. But do
of privacy concerns primarily in an online business setting. customer attitudes directly influence CLV? Answering this
However, a more comprehensive treatment of the value of question is bound to provide insights into the reasoning behind
privacy is required to better our understanding in terms of (1) customer behavior and how they affect customer profitability,
quantifying the overall value of privacy, (2) determining the • While most CLV implementation studies account for marketing
value of personal information that customers will be willing to and financial variables, the macroeconomic trends remain
give up for products with lower prices, and (3) establishing the unaccounted for. What approaches can we adopt to account
offline product categories that privacy costs apply to for macroeconomic factors such as GDP growth rate, rate of
customers. unemployment, and so on, in the CLV implementation to make
• In identifying the source of perceived value, while usage, costs, it more accurate and reflective
and profits involved have been considered, the nature of • Although the benefits of implem
product has not been considered. Future studies could focus have been demonstrated, we nee
on the source of perceived value - simple product design or relationship between level of en
sophisticated product design. (e.g., linear or inverted U shaped).
• Furthermore, what is the role of customer engagement in
customer privacy issues? That is, if customers are enga
more, will they be less sensitive to sharing private informat
• In realizing value through customer engagement, is it pos
to identify which form of engagement will work with a cer
type of customer? That is, can a customer provide value in
forms of engagement?
• Research has identified other forms of engagement, such
gifting behavior. Bhagwat and Kumar (2015) propose that
encouraging customers to take part in gifting behavior is
way to effectively engage them with the firm and to
consequently see profitable outcomes. In this regard, are th
any other forms of engagement that can lead to profits for
firm?
• When firms launch products, the performance of the previous
generation of products and the overall firm performance are
challenged. For instance, whenever Apple launches a product
(e.g., ¡Phones), the prices of the previous-generation products
are lowered, prompting many consumers to wait for such a
price drop to buy the earlier version. In this regard, does the
level of engagement facilitate the adoption of successive
generation of products, and if so, how?
• CLV maximization can also be viewed from an optimization
standpoint. Firms often plan and change their resource inputs.
When the elasticities of factors such as customer acquisition,
retention, and win-back are considered, the resulting
optimization may lead to better-informed resource planning.
• Despite the prevalence of coalition loyalty programs, they have
received little attention in academic research. Future studies
could investigate the profitability drivers of such loyalty
programs.
• The identification of the lifetime value for dealers (e.g., dealer
lifetime value) would help firms such as car dealerships to find
a reliable method of (re)allocating scarce marketing resources
to the "besť-performing dealerships.

Creating Enduring Customer Value 1 63

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that accounts value derived by all the users of the household, Future studies could also focus on identifying the nature
or as a summation of individual values of all the users? of the relationship between level of customer engagement and
This study has also presented specific research areas
value creation (e.g., linear or inverted U shaped). This will
help in refining the engagement strategies aimed at enhanc-
regarding value to and value from the customers. With respect
to value to the customers, for instance, this study recom- ing customer value creation. Furthermore, identifying newer
forms of engagement would expand the number of ave-
mends looking into the network, effects because the effect of
customer costs and consumer needs on perceived value has
nues through which a firm could establish engagement. For
been studied largely from the viewpoint of a product's
instance, research has determined that encouraging cus-
tangible features, while the intangible aspects, such as the tomers to take part in gifting behavior effectively engages
network effects, have been explored by only a few studies them with the firm and consequently leads to higher profits
(Kumar et al. 2013; Robins et al. 2007). Therefore, a more(Bhagwat and Kumar 2016). Future studies could investigate
detailed investigation into this is required to broaden our other forms of engagement that, when encouraged among
understanding on delivering customer value. customers, can lead to profits for the firm.
Another issue that requires research attention is the case An area of loyalty that is gaining significant traction is
of privacy. In order to use online services, customers arecoalition loyalty. Such a program brings together two or more
required to share their personal information instead of being companies to offer loyalty incentives across a wide spectrum
charged a fee. In effect, while customers get to use the of retail and service offerings (e.g., Star Alliance in the air-
services for free, the cost incurred is sharing personal line industry). These programs provide significant advan-
information. Amid this growing digitization climate, firms tages such as shared operational costs, higher cross-selling
now will have to understand (1) the value of shared private potential, and a symbiotic relationship among participating
data, (2) the business settings in which such an option will companies (Lee, Lee, and Sohn 2013). Limited research in
(and will not) work, and (3) how the value proposition can this be area has found that service failure by one partner has a
communicated to customers. Future research along these spillover effect on other partners (Schumann, Wiinderlich,
lines will be helpful in understanding the drivers of value inand a Evanschitzky 2014), and positive spillover effects from
digitized format and in customizing offerings to maximize one partner are reflected in cross-buying of other partners
value to and from customers. (Lemon and Von Wangenheim 2009). Future research could
With respect to value from customers, this study has look into the profitability drivers of these programs to gain a
identified several areas for future research. For instance, better understanding of the outcomes.
while a structural approach to measuring CLV that incor- Another area of research opportunity lies in determining
porates the choice, timing, and quantity decisions of con- the optimal balance of resource allocation between tradi-
sumers to assess CLV in the CPG setting has been proposed tional and new media, and the role of each in maximizing
(Sunder, Kumar, and Zhao 2016), more studies in this area ROI. The challenge here for researchers lies in determining
are needed to formalize this learning. Specifically, studies the optimal mix of media options and how they should be
that can expand the specific product-level categorization to prioritized among the customer deciles in order to max-
include a basket of goods will facilitate the study of CLV imize ROI. When the rebalancing of resources is linked
from a retailer's perspective. Such studies will likely result in back to customer acquisition, retention, and win-back ini-
(1) further refinements to the drivers of customer and retailer tiatives, the results would lead to better informed resource
profitability, (2) better customization of product offerings, planning.
and (3) targeted store-level product promotions. The identification of lifetime value of distributors/dealers
Another area that could be fruitful for research on CLV (e.g., car dealerships) is another area with opportunities for
involves accounting for macroeconomic trends and new future research. In the case of U.S. car dealerships, auto
product introductions by competitors. Specifically, future manufacturers sell their cars through exclusive dealerships
studies should look into identifying approaches that can be and/or dealerships that carry multiple brands. Here, the auto
adopted to account for macroeconomic factors such as GDP manufacturers need to find a reliable method of (re)allocating
growth rate, rate of unemployment, inter- and intracountry scarce marketing resources to the "best-"performing dealerships.
variations, consumption and investment spending, and inter- In this regard, creating a "dealer lifetime value," classifying
national trade balance in the CLV implementation to make it dealers as "high-value" or "low-value" and placing them in
more accurate and reflective of market realities. In this regard, appropriate deciles, would help manufacturers solve the
Kumar and Pansari (2016) have shown that national cultural reallocation problem. Table 12 provides a compilation of
dimensions affect the drivers of purchase frequency and topics that might be considered for future research.
contribution margin and that economic factors influence the This study has discussed the major developments in the
components of CLV directly. In effect, the relative effects ofCLV area of research and highlighted potential future re-
the drivers of CLV are influenced by the differences in the search directions. Specific refinements and improvements
macroeconomic trends of the countries as well as in the cul- can be expected in (1) approaching measurement of CLV, (2)
tures of the countries. However, more studies across countries understanding the drivers of CLV, and (c) gathering more
with different levels of economic stability/performance areempirical evidence regarding the various business applica-
needed to more thoroughly understand this result. These tion of CLV. When these developments feed into real-time
insights will be of use to firms that have international oper-decision making for marketers, marketing's accountability to
ations to plan their resource allocation well ahead of time. the corporate boardroom will have been enhanced.

64 1 Journal of Marketing: AM A/MSI Special Issue, November 2016

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