Summary A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation (Kumar)

A Theory of Customer Valuatoon Coocepts, Metrics, Strategy aod
Implemeotatoo
Kumar

Customer valuatoo theory (CVT): a theory to value customer contributonss It informs firms about
the conceptualizaton of value generaton from customers and the ways to generate and maximize
value from customers by focussing on two aspects of customer financial contributons:
 Their nature: direct or indirect;
 Their scope: breadth and depths

Valuiog Assets
Asset: any physical, organizatonal or human atribute that enables the firm to generate and
implement strategies that improve its efficiency and efectveness in the marketplaces
The true value of an asset is most ofen observed in its interactons in the external marketplaces

What a valuaton approach should be able to do:
 Identfy the most valuable customers;
 A periodic evaluaton of customer value measures to keep track of changing customer
characteristcs;
 Manage unprofitable customers and provide for profitable customerss

Theoretcal Approach to Valuiog Assets
How do firms view customer assets?
Customers are intangible assets of a firms Certain behavioural drivers of customers (purchases,
product return behaviour etcs) determine the level and change of cash flowss Therefore, the
management of behavioural drivers is critcal in valuing customerss

Why are fiiaicial theories iiappropriate for valuiig customers?
To apply financial theories for valuing customers, some diferences between finance and marketng
must be noted:
 Relationship: the investment-to-earnings relatonship can be linear in the case of stocks, it is
nonlinear in the case of customers;
 Infiormation: investors have more informaton about how long stocks will remain in trading,
than firms about how long their customers will remain their customers;
 Value scalability: the value and volume of investments in stocks is easily scalable, compared
with the investments in customers;
 Impact iof investments: the impact of investng in customers can be observed on the value of
stocks, but investng in stocks has a limited observable impact on the value of customers;
 Risk: it is easier to identfy risks arising from investments in stocks than in customers;
 Investior sentment: the importance of investor sentment is higher in the valuaton of stocks
than in the valuaton of customers;
 Speculation: the importance of speculaton is higher in the valuaton of stocks than in the
valuaton of customers;
 Apprioach: financial theories ofer a passive approach to managing investments, but
customer management requires an actve management approach;
 Predictability: a more accurate predicton of stock returns is possible only in the long run, but
the predicton of customer value is more accurate in the short runs

, How does customer valuatoi worr?
The customer future profitability (CFP) depends on:
 Past and current transacton behaviours;
 Marketng eforts of the firm;
 The identty and profile of the customers (demographic variables);
 The environment in which these customers exist (economic and environmental factors)s

Traosactoo behaviourn all the past and current transacton variables that afect and influence the
customer–firm relatonships

Frequent customer–firm interactons should increase customer trust and commitment in the firm at
a faster rate, provided that the interactons are satsfactorys

Propositoo 1: customer transacton actvites significantly influence customer future profitabilitys

Well-tmed communicaton eforts and well-managed content between firms and customers reduces
the tendency of a customer to quit a relatonships However, to much communicaton has also been
found to be harmful to the relatonship, thereby indicatng the presence of an optmal
communicaton levels

Propositoo 2: marketng cost nonlinearly influences customer future profitabilitys

Firmographic variables include the type of industry, the age and size of the firm, the level of annual
revenue, and the locaton of the businesss Demographic variables include age, gender, income, and
the physical locaton of the customerss These variables can aid firms in characterizing atractve
segments into identfiable and measurable groups of customers which can help firms in their
customer segmentaton and customer relatonship management efortss

Propositoo 3: demographic/firmographic variables significantly influence customer future
profitabilitys

Economic factors (GDP) help determine the consumpton patern of a countrys If a country has a high
GDP and high purchasing power, its consumers will have more income and spend mores

Propositoo 4: economic and environmental factors significantly influence a customer’s future
profitabilitys

Customer Valuatoo Theory
The CVT can be defined as a mechanism to measure the future value of each customer based on:
 Direct ecioniomic value ciontribution: the economic value of the customer relatonship to the
firm, expressed as a contributon margin or net profit;
 Depth iof direct ecioniomic value ciontribution: the intensity of customers’ direct value
contributons to the firm that have produced significant financial results for the firms;
 Breadth iof the indirect ecioniomic value ciontribution: customers’ indirect value contributons
to the firm through their referral behaviour, online influence on prospects’ and other
customers’ purchases and their feedback on the firm oferingss

The implementaton of the CVT can help firms improve their marketng productvity and realize
higher firm value through: valuing customers as assets, managing a portolio of customers and
nurturing profitable customerss