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Customer lifetime duration: an empirical framework for measurement and explanation

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A customer management orientation emphasizes the importance of customer lifetime analysis, retention, and the dynamic nature of an individual's customer-firm relationship over time. Discrepancies exist between concept and reality of relationship marketing, and therefore it is important to study the concept of customer management and customer lifetime duration. In particular, an area in need of research is non-contractual relationships - relationships between buyer and seller that are not governed by a contract or by membership. Specifically, how can the length of a customer's relationship with a firm be measured in this context? Given that customers choose to interact with these firms at their own will, this is a non-trivial question. Also, managers are eager to identify the strength and directional impact of the antecedent factors on the duration of a customer's relationship with a firm. This study presents an integrated framework for measuring customer lifetime duration and assessing antecedent factors. The explicit research objectives are · to empirically measure lifetime duration for non-contractual customer-firm relationships, · to show the factors that impact on a customer's lifetime duration, and · to develop managerial implications for building and managing a longer lifetime. Customer lifetime duration is measured such that the net present value of future cash flows (expected contribution margin) is incorporated in the proposed framework. The hypothesized antecedent factors include consumer, firm, exchange, and environmental characteristics. If managers can understand the temporal dynamics involved in a customer's relationship with the firm, they can for example predict the vulnerability of a customer to leave the relationship. Consequently, they can spend marketing dollars more effectively by either not chasing customers "whose time has come" or by employing judicious marketing actions to save customers who are at risk. Factors such as quantity of merchandise returned, across department purchases, company specific charge card ownership in addition to the traditional factors - recency and frequency (monetary outlays have already been incorporated in the computation of lifetime duration) -- are found to be important predictors of a customer's lifetime duration. The results are validated with a split sample using two cohorts. The dynamic nature of the customer purchase process is captured in our framework by the time-varying covariates included in the model.

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en

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application/pdf

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http://flora.insead.edu/fichiersti_wp/inseadwp2000/2000-55.pdf

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Copyright INSEAD. All rights reserved