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Why do banks retain unprofitable customers? A customer lifetime value real options approach

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  • Méndez-Suárez, Mariano
  • Crespo-Tejero, Natividad

Abstract

This article investigates why banks maintain unprofitable customers by applying real options theory to determine their customer lifetime value (CLV) and assessing threshold values above which it is economically desirable to abandon those customers. The proposed valuation method is designed to enable a better understanding of the appraisal process, ensure greater transparency and account for the incremental value added by reputation as a summary of positive perceptions and recommendations about a brand. Using data on customers of a Spanish leading retail bank, the results show that banks act according to real options theory in their decisions to maintain apparently unprofitable customers, that optimal divesting points exist and that the incremental value of reputation may be isolated. The proposed methodology can help better elucidate banks’ decisions on customer management.

Suggested Citation

  • Méndez-Suárez, Mariano & Crespo-Tejero, Natividad, 2021. "Why do banks retain unprofitable customers? A customer lifetime value real options approach," Journal of Business Research, Elsevier, vol. 122(C), pages 621-626.
    • Handle: RePEc:eee:jbrese:v:122:y:2021:i:c:p:621-626
    DOI: 10.1016/j.jbusres.2020.10.008
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    2. Adela-Laura POPA & Dinu Vlad SASU & Teodora Mihaela TARCZA, 2021. "Investigating The Importance Of Customer Lifetime Value In Modern Marketing - A Literature Review," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 30(2), pages 410-416, December.
    3. Gorupec Natalia & Brehmer Nataliia & Tiberius Victor & Kraus Sascha, 2022. "Tackling uncertain future scenarios with real options: A review and research framework," The Irish Journal of Management, Sciendo, vol. 41(1), pages 69-88, July.
    4. Greig Cowan & Salvatore Mercuri & Raad Khraishi, 2023. "Modelling customer lifetime-value in the retail banking industry," Papers 2304.03038, arXiv.org.
    5. Tu Van Binh & Ngo Giang Thy & Ho Thi Nam Phuong, 2021. "Measure of CLV Toward Market Segmentation Approach in the Telecommunication Sector (Vietnam)," SAGE Open, , vol. 11(2), pages 21582440211, June.
    6. Marcel Röser, 2024. "More certainty in uncertainty: a special life-cycle approach for management decisions in volatile markets," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 35(1), pages 165-197, March.
    7. Dongyun Nie & Michael Scriney & Xiaoning Liang & Mark Roantree, 2024. "From data acquisition to validation: a complete workflow for predicting individual customer lifetime value," Journal of Marketing Analytics, Palgrave Macmillan, vol. 12(2), pages 321-341, June.
    8. Yang, Jingwen & Gong, Qingbin & Sendra García, Javier & Xu, Bing, 2022. "Non-parametric identification of public guarantee schemes and commercial banks," Journal of Business Research, Elsevier, vol. 144(C), pages 1196-1206.

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