V. Kumar is probably the most published author in marketing (strategy). (2021 update, he is in the premier journals see here). He was editor of the Journal of Marketing (JM) until recently and is best known for his work in customer-based marketing analysis. In a piece in JM he outlines a number of ideas and findings around the use of customer valuation. There is much good stuff in this piece. Lots of useful concepts and references to work (much of it his own work) outlining the benefits and challenges of customer valuation. It is a (move towards) a better theory of customer valuation.
Risk And CLV
Kumar notes some key concepts that probably haven’t received as much attention as they should in the customer valuation literature. Most notably risk. Often when we discuss customers as assets we discuss a single value. This value is discounted (which should be at a rate specific to the customer but often isn’t). More pertinently the value of customers depends upon an awful lot on future decisions, strategies, and plain luck. One might be best thinking of customer valuations as a range. (Obviously working with these is challenging so while sensible it might be a bit hard).
Basic Propositions To Assess The Benefits And Challenges Of Customer Valuation
Kumar outlines some basic propositions to set the scene; e.g., “P1: customer transaction activities significantly influence customer future profitability” (Kumar, 2018, page 5). He addresses key differences between customer valuation and stock valuation. Outlining a lot of important points. For example, Kumar notes that firms can’t buy and sell customers as shareholders can buy and sell shares in a company. This means that “rebalancing a stock portfolio is easier than rebalancing a customer portfolio.” (Kumar, 2018, page 3). Once you have gained a customer, then getting rid of the customer is often fiendishly difficult. Given this is makes more sense to think deeply before recruiting customers.
The Context Of CLV
One of the exciting, and frustrating, things about customer valuation is that the context differs by customer type. Most obviously some customers are contractually bound to a firm (safe bets). Whereas others buy little amounts regularly. Still, others buy large amounts irregularly. Kumar suggests that customer valuation can cover a wide variety of customer relationships and helpfully provides a table of models (Table 1). This shows different approaches to valuing customers and the strengths and weaknesses of each approach.
Indirect Economic Value Of Customers
He addresses a fascinating, important, but infuriating topic — the indirect economic value contribution of the customer. This includes customer referral value [CRV], customer influence value [CIV], and customer knowledge value [CKV]. Few would argue that customers don’t have value beyond their direct contribution – e.g., creating recommendations, referring their friends, and giving information to the firm. Still, it can be notoriously difficult to judge this. Kumar outlines some key ideas to consider when assessing indirect economic value. I’m a big proponent of keeping these ideas separate from CLV but that doesn’t mean they aren’t important.
Kumar’s is a useful piece that helps outline some of the benefits, but also the challenges, of customer valuation.
For more on CLV see here.
Read: V. Kumar (2018) A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation, Journal of Marketing, 82 (1), pages 1-19