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

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Author Info

  • 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)

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    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.

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    File URL: http://dx.doi.org/10.1287/mksc.1080.0482
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 29 (2010)
    Issue (Month): 1 (01-02)
    Pages: 85-93

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    Handle: RePEc:inm:ormksc:v:29:y:2010:i:1:p:85-93

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    Related research

    Keywords: customer lifetime value; shifted-beta-geometric; retention elasticity;

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    Cited by:
    1. 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.
    2. 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.

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