IDEAS home Printed from https://ideas.repec.org/a/inm/ormksc/v29y2010i1p85-93.html
   My bibliography  Save this article

Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity

Author

Listed:
  • Peter S. Fader

    (Department of Marketing, The Wharton School of the University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • Bruce G. S. Hardie

    (London Business School, Regent's Park, London NW1 4SA, United Kingdom)

Abstract

The past few years have seen increasing interest in taking the notion of customer lifetime value (CLV) and extending it to value a customer base (with subsequent links to corporate valuation). The application of standard textbook discussions of CLV leads to calculations based on a single retention rate. However, at the cohort level, retention rates typically increase over time. It has been suggested that these observed dynamics are due, in large part, to a sorting effect in a heterogeneous population. We show that failing to recognize these dynamics yields a downward-biased estimate of the residual value of the customer base (compared to an aggregate analysis that ignores these dynamics). We also explore the implications of failing to account for retention dynamics when computing retention elasticities and find that the frequently reported values underestimate the true effect of increases in underlying retention rates in a heterogeneous world.

Suggested Citation

  • Peter S. Fader & Bruce G. S. Hardie, 2010. "Customer-Base Valuation in a Contractual Setting: The Perils of Ignoring Heterogeneity," Marketing Science, INFORMS, vol. 29(1), pages 85-93, 01-02.
    • Handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:85-93
    DOI: 10.1287/mksc.1080.0482
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mksc.1080.0482
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mksc.1080.0482?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Fader, Peter S. & Hardie, Bruce G.S., 2009. "Probability Models for Customer-Base Analysis," Journal of Interactive Marketing, Elsevier, vol. 23(1), pages 61-69.
    2. David C. Schmittlein & Donald G. Morrison & Richard Colombo, 1987. "Counting Your Customers: Who-Are They and What Will They Do Next?," Management Science, INFORMS, vol. 33(1), pages 1-24, January.
    3. Hans H.Bauer & Maik Hammerschmidt & Matthias Braehler, 2004. "The Customer Lifetime Value Concept And Its Contribution To Corporate Valuation," Microeconomics 0402006, University Library of Munich, Germany.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fader, Peter S. & Hardie, Bruce G.S., 2011. "Comment on “On Estimating Current-customer Equity Using Company Summary Data”," Journal of Interactive Marketing, Elsevier, vol. 25(1), pages 18-19.
    2. Patrick Winter & Paul Alpar, 2018. "On the relationship between print and mobile channels for newspapers," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(1), pages 79-92, February.
    3. Ascarza, & Neslin, & Netzer, & Lemmens, Aurélie & Anderson, Zachery & Fader, Peter S. & Gupta, S. & Hardie, B.G.S. & Libai, Barak & Neal, David & Provost, Foster, 2018. "In pursuit of enhanced customer retention management : Review, key issues, and future directions," Other publications TiSEM 28a90d28-6daf-42f1-bd8e-e, Tilburg University, School of Economics and Management.
    4. Mark, Tanya & Lemon, Katherine N. & Vandenbosch, Mark & Bulla, Jan & Maruotti, Antonello, 2013. "Capturing the Evolution of Customer–Firm Relationships: How Customers Become More (or Less) Valuable Over Time," Journal of Retailing, Elsevier, vol. 89(3), pages 231-245.
    5. Juha Karvanen & Ari Rantanen & Lasse Luoma, 2014. "Survey data and Bayesian analysis: a cost-efficient way to estimate customer equity," Quantitative Marketing and Economics (QME), Springer, vol. 12(3), pages 305-329, September.
    6. Michael Braun & David A. Schweidel, 2011. "Modeling Customer Lifetimes with Multiple Causes of Churn," Marketing Science, INFORMS, vol. 30(5), pages 881-902, September.
    7. Juha Karvanen & Ari Rantanen & Lasse Luoma, 2013. "Survey data and Bayesian analysis: a cost-efficient way to estimate customer equity," Papers 1304.5380, arXiv.org, revised May 2014.
    8. Chandrasekhar Valluri & Sudhakar Raju & Vivek H. Patil, 2022. "Customer determinants of used auto loan churn: comparing predictive performance using machine learning techniques," Journal of Marketing Analytics, Palgrave Macmillan, vol. 10(3), pages 279-296, September.
    9. Guofang Huang & K. Sudhir, 2021. "The Causal Effect of Service Satisfaction on Customer Loyalty," Management Science, INFORMS, vol. 67(1), pages 317-341, January.
    10. Chang, Chun-Wei & Zhang, Jonathan Z., 2016. "The Effects of Channel Experiences and Direct Marketing on Customer Retention in Multichannel Settings," Journal of Interactive Marketing, Elsevier, vol. 36(C), pages 77-90.
    11. Shi, Ruixia & Chen, Hongyu & Sethi, Suresh P., 2019. "A generalized count model on customers' purchases in O2O market," International Journal of Production Economics, Elsevier, vol. 215(C), pages 121-130.
    12. Antonello Maruotti & Jan Bulla & Tanya Mark, 2019. "Assessing the influence of marketing activities on customer behaviors: a dynamic clustering approach," METRON, Springer;Sapienza Università di Roma, vol. 77(1), pages 19-42, April.
    13. Guofang Huang & K. Sudhir, 2019. "The Causal Effect of Service Satisfaction on Customer Loyalty," Cowles Foundation Discussion Papers 2177, Cowles Foundation for Research in Economics, Yale University.
    14. Fader, Peter S. & Hardie, Bruce G.S. & Liu, Yuzhou & Davin, Joseph & Steenburgh, Thomas, 2018. "“How to Project Customer Retention” Revisited: The Role of Duration Dependence," Journal of Interactive Marketing, Elsevier, vol. 43(C), pages 1-16.
    15. Eva Ascarza & Scott A. Neslin & Oded Netzer & Zachery Anderson & Peter S. Fader & Sunil Gupta & Bruce G. S. Hardie & Aurélie Lemmens & Barak Libai & David Neal & Foster Provost & Rom Schrift, 2018. "In Pursuit of Enhanced Customer Retention Management: Review, Key Issues, and Future Directions," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 65-81, March.
    16. Aurélie Lemmens & Sunil Gupta, 2020. "Managing Churn to Maximize Profits," Marketing Science, INFORMS, vol. 39(5), pages 956-973, September.
    17. Haenlein, Michael & Libai, Barak & Muller, Eitan, 2023. "Satiation and cross promotion: Selling and swapping users in mobile games," International Journal of Research in Marketing, Elsevier, vol. 40(2), pages 342-361.
    18. Patrice Cailleba & Herbert Casteran, 2010. "Do Ethical Values Work? A Quantitative Study of the Impact of Fair Trade Coffee on Consumer Behavior," Journal of Business Ethics, Springer, vol. 97(4), pages 613-624, December.
    19. Eva Ascarza & Bruce G. S. Hardie, 2013. "A Joint Model of Usage and Churn in Contractual Settings," Marketing Science, INFORMS, vol. 32(4), pages 570-590, July.
    20. Lily (Xuehui) Gao & Evert Haan & Iguácel Melero-Polo & F. Javier Sese, 2023. "Winning your customers’ minds and hearts: Disentangling the effects of lock-in and affective customer experience on retention," Journal of the Academy of Marketing Science, Springer, vol. 51(2), pages 334-371, March.
    21. David A. Schweidel & Eric T. Bradlow & Peter S. Fader, 2011. "Portfolio Dynamics for Customers of a Multiservice Provider," Management Science, INFORMS, vol. 57(3), pages 471-486, March.
    22. Hans Jørn Juhl & Morten H. J. Fenger & John Thøgersen, 2017. "Will the Consistent Organic Food Consumer Step Forward? An Empirical Analysis," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 44(3), pages 519-535.
    23. Vahideh Sadat Abedi & Oded Berman & Fred M. Feinberg & Dmitry Krass, 2022. "Strategic new product media planning under emergent channel substitution and synergy," Production and Operations Management, Production and Operations Management Society, vol. 31(5), pages 2143-2166, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chou, Ping & Chuang, Howard Hao-Chun & Chou, Yen-Chun & Liang, Ting-Peng, 2022. "Predictive analytics for customer repurchase: Interdisciplinary integration of buy till you die modeling and machine learning," European Journal of Operational Research, Elsevier, vol. 296(2), pages 635-651.
    2. Park, Chang Hee & Park, Young-Hoon & Schweidel, David A., 2014. "A multi-category customer base analysis," International Journal of Research in Marketing, Elsevier, vol. 31(3), pages 266-279.
    3. Eva Ascarza & Scott A. Neslin & Oded Netzer & Zachery Anderson & Peter S. Fader & Sunil Gupta & Bruce G. S. Hardie & Aurélie Lemmens & Barak Libai & David Neal & Foster Provost & Rom Schrift, 2018. "In Pursuit of Enhanced Customer Retention Management: Review, Key Issues, and Future Directions," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 65-81, March.
    4. Reutterer, Thomas & Platzer, Michael & Schröder, Nadine, 2021. "Leveraging purchase regularity for predicting customer behavior the easy way," International Journal of Research in Marketing, Elsevier, vol. 38(1), pages 194-215.
    5. Valendin, Jan & Reutterer, Thomas & Platzer, Michael & Kalcher, Klaudius, 2022. "Customer base analysis with recurrent neural networks," International Journal of Research in Marketing, Elsevier, vol. 39(4), pages 988-1018.
    6. David A. Schweidel & Young-Hoon Park & Zainab Jamal, 2014. "A Multiactivity Latent Attrition Model for Customer Base Analysis," Marketing Science, INFORMS, vol. 33(2), pages 273-286, March.
    7. Park, Chang Hee & Yoon, Tae Jung, 2022. "The dark side of up-selling promotions: Evidence from an analysis of cross-brand purchase behavior☆," Journal of Retailing, Elsevier, vol. 98(4), pages 647-666.
    8. Romero, Jaime & van der Lans, Ralf & Wierenga, Berend, 2013. "A Partially Hidden Markov Model of Customer Dynamics for CLV Measurement," Journal of Interactive Marketing, Elsevier, vol. 27(3), pages 185-208.
    9. Michael Platzer & Thomas Reutterer, 2016. "Ticking Away the Moments: Timing Regularity Helps to Better Predict Customer Activity," Marketing Science, INFORMS, vol. 35(5), pages 779-799, September.
    10. Peter S. Fader & Bruce G. S. Hardie & Jen Shang, 2010. "Customer-Base Analysis in a Discrete-Time Noncontractual Setting," Marketing Science, INFORMS, vol. 29(6), pages 1086-1108, 11-12.
    11. Goić, Marcel & Jerath, Kinshuk & Kalyanam, Kirthi, 2022. "The roles of multiple channels in predicting website visits and purchases: Engagers versus closers," International Journal of Research in Marketing, Elsevier, vol. 39(3), pages 656-677.
    12. Juha Karvanen & Ari Rantanen & Lasse Luoma, 2013. "Survey data and Bayesian analysis: a cost-efficient way to estimate customer equity," Papers 1304.5380, arXiv.org, revised May 2014.
    13. Clemente-Císcar, M. & San Matías, S. & Giner-Bosch, V., 2014. "A methodology based on profitability criteria for defining the partial defection of customers in non-contractual settings," European Journal of Operational Research, Elsevier, vol. 239(1), pages 276-285.
    14. Shaohui Ma & Joachim Büschken, 2011. "Counting your customers from an “always a share” perspective," Marketing Letters, Springer, vol. 22(3), pages 243-257, September.
    15. Jaiswal, Anand K. & Niraj, Rakesh & Park, Chang Hee & Agarwal, Manoj K., 2018. "The effect of relationship and transactional characteristics on customer retention in emerging online markets," Journal of Business Research, Elsevier, vol. 92(C), pages 25-35.
    16. Juha Karvanen & Ari Rantanen & Lasse Luoma, 2014. "Survey data and Bayesian analysis: a cost-efficient way to estimate customer equity," Quantitative Marketing and Economics (QME), Springer, vol. 12(3), pages 305-329, September.
    17. Ascarza, & Neslin, & Netzer, & Lemmens, Aurélie & Anderson, Zachery & Fader, Peter S. & Gupta, S. & Hardie, B.G.S. & Libai, Barak & Neal, David & Provost, Foster, 2018. "In pursuit of enhanced customer retention management : Review, key issues, and future directions," Other publications TiSEM 28a90d28-6daf-42f1-bd8e-e, Tilburg University, School of Economics and Management.
    18. Kati Stormi & Anni Lindholm & Teemu Laine & Tuomas Korhonen, 2020. "RFM customer analysis for product-oriented services and service business development: an interventionist case study of two machinery manufacturers," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(3), pages 623-653, September.
    19. Ryosuke Igari & Takahiro Hoshino, 2018. "A Bayesian Gamma Frailty Model Using the Sum of Independent Random Variables: Application of the Estimation of an Interpurchase Timing Model," Keio-IES Discussion Paper Series 2018-021, Institute for Economics Studies, Keio University.
    20. Dominikus Kleindienst & Daniela Waldmann, 2018. "Between death and life - a formal decision model to decide on customer recovery investments," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(4), pages 423-435, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:85-93. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.