What to do with Unprofitable Customers? Customer Lifetime Value, Customer Metrics of Adverse Behavior, and Feasible Strategies for Managing Unprofitable Customers

Table of Contents

1 Introduction

2 Customer lifetime value and its measurement models

2.1 Different perspectives on CLV

2.2 Measurements models of CLV in contractual context

2.2.1 Basic structural model

2.2.2 Recency, frequency and monetary model

2.3 Measurement models of CLV in noncontractual context

2.3.1 Pareto/NBD model and its variations

2.3.2 Markov chain model

3 Customer metrics of adverse behavior

3.1 Share of wallet

3.2 Demand for customer service

3.3 Partial churn

3.4 Deal-proneness

4 Analysis of feasible strategies for managing unprofitable customers and their linkage to customer metrics and CLV

4.1 Retention strategies

4.2 Explanatory framework for retaining unprofitable customers

4.3 Abandonment strategies

4.4 Explanatory framework for abandoning unprofitable customer

5 Conclusion

Research Objectives and Topics

The primary objective of this thesis is to examine the impact of unprofitable customers on firm profitability and to investigate effective management strategies, specifically retention and abandonment, linked to customer metrics and Customer Lifetime Value (CLV).

• Measurement and evaluation of Customer Lifetime Value (CLV)
• Identification of behavioral patterns in unprofitable customers
• Analysis of retention strategies versus abandonment strategies
• Interconnections between customer metrics, CLV, and strategic decision-making

Excerpt from the Book

Summary of Chapters

1 Introduction: This chapter highlights the significance of valuing customers and managing unprofitable ones to maintain firm profitability and optimize marketing resource allocation.

2 Customer lifetime value and its measurement models: It provides an overview of various CLV perspectives and measurement models, distinguishing between contractual and noncontractual business contexts.

3 Customer metrics of adverse behavior: This section characterizes specific behaviors such as share of wallet, service demand, churn, and deal-proneness that contribute to customer unprofitability.

4 Analysis of feasible strategies for managing unprofitable customers and their linkage to customer metrics and CLV: It contrasts retention and abandonment strategies, providing frameworks for deciding how to address customers based on their CLV and behavioral metrics.

5 Conclusion: The final chapter summarizes the findings regarding the interconnectedness of CLV models, adverse behavior, and management strategies, emphasizing the importance of informed decision-making.

Keywords

Customer Lifetime Value, CLV, Unprofitable Customers, Retention Strategy, Abandonment Strategy, Share of Wallet, Customer Metrics, Adverse Behavior, Deal-proneness, Partial Churn, Customer Service, Marketing Resources, Pareto/NBD Model, Profitability, Customer Satisfaction

Frequently Asked Questions

What is the core focus of this research?

The research focuses on the management of unprofitable customers, investigating how firms can identify these customers using CLV and behavioral metrics, and whether to employ retention or abandonment strategies.

What are the central thematic areas?

The central themes include Customer Lifetime Value (CLV) measurement, analysis of adverse customer behaviors, and strategic frameworks for either retaining or terminating customer relationships.

What is the primary goal of the thesis?

The primary goal is to provide a comprehensive framework that links CLV measurement models and customer metrics to effective management strategies for unprofitable customers.

Which scientific methods are applied?

The work utilizes a literature-based synthesis of various CLV measurement models (such as Pareto/NBD, RFM, and Markov Chain) and customer behavioral metrics to derive strategic management insights.

What is covered in the main body of the work?

The main body examines various perspectives on CLV, characterizes metrics for adverse behavior like share of wallet and deal-proneness, and contrasts direct and indirect abandonment versus retention strategies.

Which keywords best characterize this work?

Key terms include Customer Lifetime Value (CLV), unprofitable customers, retention strategy, abandonment strategy, share of wallet, and adverse behavior patterns.

Why is the Markov chain model mentioned as a limitation?

The research notes that while the Markov chain model was considered, no significant connections to the other specific customer metrics and strategies could be identified within the scope of this study.

How does "deal-proneness" affect customer profitability?

Deal-prone customers often switch firms to seek the best discounts, contributing little to long-term profitability and potentially causing "adverse selection" for the firm.

What is the difference between direct and indirect abandonment?

Direct abandonment involves explicitly informing the customer that the relationship is being terminated, while indirect abandonment involves subtle changes, such as price increases or reduced service quality, to push the customer away.