When making customer investments under resource constraints, approaches based on next-period accounting profit fail to consider the long term. As the authors show, marketers’ suggested solutions often omit retention spend from the customer investment, understating the required committed marketing spend. Unfortunately, the logical outcome is a focus on the wrong customers: those with high retention cost. Marketers may even try to acquire customers as long-term investments and then refuse to invest in their retention. The authors develop a suite of metrics to consider investments in customers, including customer return on investment, acquisition return on investment, retention return on investment, and option return on investment. Using the suite can help marketers make meaningful calculations of return on investment, even when they cannot clearly differentiate between acquisition and retention marketing spend. The key contributions show how to assess the value of customer investments and treat customer acquisition as gaining an option to spend on retention. The authors outline the connection between the metrics, detail when each is appropriate, and show how to apply the suite of metrics to a variety of simulated datasets.
BendleNeil ThomasButtMoeen Naseer (2018), “The Misuse of Accounting-Based Approximations of Tobin’s q in a World of Market-Based Assets,” Marketing Science, 37 (3), 484–504.
2.
BendleNeilWangXin (Shane) (2023), The Customer Asset: Understanding and Managing Its Value. Palgrave Macmillan.
3.
BergerPaul D.NasrNada I. (1998), “Customer Lifetime Value: Marketing Models and Applications,” Journal of Interactive Marketing, 12 (1), 17–30.
4.
BinksMartinEnnewChristine (1996), “Growing Firms and the Credit Constraint,” Small Business Economics, 8 (1), 17–25.
5.
BlattbergRobert C.DeightonJohn (1996), “Manage Marketing by the Customer Equity Test,” Harvard Business Review, 74 (4), 136–44.
6.
BlattbergRobert C.GetzGaryThomasJacquelin (2001), Customer Equity: Building and Managing Relationships as Valuable Assets. Harvard Business School Press.
7.
BlattbergRobert C.MalthouseEdward C.NeslinScott A. (2009), “Customer Lifetime Value: Empirical Generalizations and Some Conceptual Questions,” Journal of Interactive Marketing, 23 (2), 157–68.
8.
CaoYongGrucaThomas S. (2005), “Reducing Adverse Selection Through Customer Relationship Management,” Journal of Marketing, 69 (4), 219–29.
FaderPeter S. (2012), Customer Centricity: Focus on the Right Customers for Strategic Advantage. Wharton School Press.
11.
FaderPeter S.HardieBruce G.S.JerathKinshuk (2007), “Estimating CLV Using Aggregated Data: The Tuscan Lifestyles Case Revisited,” Journal of Interactive Marketing, 21 (3), 55–71.
12.
FaderPeter S.HardieBruce G.S.LeeKa Lok (2005), “RFM and CLV: Using Iso-Value Curves for Customer Base Analysis,” Journal of Marketing Research, 42 (4), 415–30.
13.
FaderPeter S.HardieBruce G.S.McCarthyDaniel M.VaidyanathanRamnath (2019), “Exploring the Equivalence of Two Common Mixture Models for Duration Data,” American Statistician, 73 (3), 288–95.
14.
FarrisPaul W.HanssensDominique M.LenskoldJames D.ReibsteinDavid J. (2015), “Marketing Return on Investment: Seeking Clarity for Concept and Measurement,” Applied Marketing Analytics, 1 (3), 267–82.
15.
FerrentinoR.CuomoM.T.BonielloC. (2016), “On the Customer Lifetime Value: A Mathematical Perspective,” Computational Management Science, 13, 521–39.
16.
GuptaSunilLehmannDonald R. (2003), “Customers as Assets,” Journal of Interactive Marketing, 17 (1), 9–24.
HanssensDominiqueRustRolandSrivastavaRajendra (2009), “Marketing Strategy and Wall Street: Nailing Down Marketing’s Impact,” Journal of Marketing, 73 (6), 115–18.
19.
HolmMortenKumarV.RohdeCarsten (2012), “Measuring Customer Profitability in Complex Environments: An Interdisciplinary Contingency Framework,” Journal of the Academy of Marketing Science, 40, 387–401.
20.
JainDipakSinghSiddhartha S. (2002), “Customer Lifetime Value Research in Marketing: A Review and Future Directions,” Journal of International Marketing, 16 (2), 34–46.
21.
KumarV. (2017), “A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation,” Journal of Marketing, 82 (1), 1–19.
22.
KumarV.GeorgeMorris (2007), “Measuring and Maximizing Customer Equity: A Critical Analysis,” Journal of the Academy of Marketing Science, 35 (2), 157–71.
23.
KumarV.PetersenJ. Andrew (2004), “Maximizing ROI or Profitability: Is One Better Than the Other?” Marketing Research (Fall), 28–34.
24.
KumarV.PetersenJ. AndrewLeoneRobert P. (2010), “Driving Profitability by Encouraging Customer Referrals: Who, When, and How,” Journal of Marketing, 74 (5), 1–17.
25.
KumarV.VenkatesanRajkumarBohlingTimBeckmannDenise (2008), “The Power of CLV: Managing Customer Lifetime Value at IBM,” Marketing Science, 27 (4), 585–99.
26.
KumarV.VenkatesanRajkumarReinartzWerner (2006), “Knowing What to Sell, When, and to Whom,” Harvard Business Review, 84 (3), 131–37.
27.
KumarV.VenkatesanRajkumarReinartzWerner (2008), “Performance Implications of Adopting a Customer-Focused Sales Campaign,” Journal of Marketing, 72 (5), 50–58.
28.
LenskoldJames D. (2002), “Marketing ROI: Playing to Win,” Marketing Management, 11 (3), 30–34.
29.
LenskoldJames D. (2003), Marketing ROI: The Path to Campaign, Customer, and Profitability. McGraw Hill.
30.
LibaiBarakMullerEitanPeresRenana (2009), “The Diffusion of Services,” Journal of Marketing Research, 46 (2), 163–175.
31.
MalthouseEdward C.BlattbergRobert C. (2005), “Can We Predict Customer Lifetime Value?” Journal of Interactive Marketing, 19 (1), 2–16.
32.
Marketing Accountability Standards Board (2024), “The MASB Mission,” (accessed May 24, 2024), https://themasb.org/.
33.
McCarthyDaniel M.FaderPeter S. (2018), “Customer-Based Corporate Valuation for Publicly Traded Noncontractual Firms,” Journal of Marketing Research, 55 (5), 617–35.
34.
MintzOferCurrimImran S. (2013), “What Drives Managerial Use of Marketing and Financial Metrics and Does Metric Use Affect Performance of Marketing-Mix Activities?” Journal of Marketing, 77 (2), 17–40.
NeslinScott A.GuptaSunilKamakuraWagnerLuJunxiangMasonCharlotte H. (2006), “Defection Detection: Measuring and Understanding the Predictive Accuracy of Customer Churn Models,” Journal of Marketing Research, 43 (2), 204–11.
37.
OfekElie (2016), “Customer Lifetime Value (CLV) vs. Customer Lifetime Return on Investment (CLROI),” Harvard Business School Technical Note 515–049.
38.
OliveiraBlandinaFortunatoAdelino (2006), “Firm Growth and Liquidity Constraints: A Dynamic Analysis,” Small Business Economics, 27 (2–3), 139–56.
39.
PetersenJ. AndrewKumarV. (2015), “Perceived Risk, Product Returns, and Optimal Resource Allocation: Evidence from a Field Experiment,” Journal of Marketing Research, 52 (2), 268–85.
40.
PfeiferPhillip E. (2005), “The Optimal Ratio of Acquisition and Retention Costs,” Journal of Targeting, Measurement and Analysis for Marketing, 13 (2), 179–88.
41.
PfeiferPhillip E. (2011), “On Estimating Current-Customer Equity Using Company Summary Data,” Journal of Interactive Marketing, 25 (1), 1–14.
42.
PfeiferPhillip E.FarrisPaul W. (2004), “The Elasticity of Customer Value to Retention: The Duration of a Customer Relationship,” Journal of Interactive Marketing, 18 (2), 20–31.
43.
PfeiferPhillip E.OvchinnikovAnton (2011), “A Note on Willingness to Spend and Customer Lifetime Value for Firms with Limited Capacity,” Journal of Interactive Marketing, 25 (3), 178–89.
44.
ReinartzWernerThomasJacquelynKumarV. (2005), “Balancing Acquisition and Retention Resources to Maximize Customer Profitability,” Journal of Marketing, 69 (1), 63–79.
45.
RustRoland T.LemonKatherine N.ZeithamlValarie A. (2004), “Return on Marketing: Using Customer Equity to Focus Marketing,” Journal of Marketing, 68 (1), 109–27.
46.
RustRoland T.ZeithamlValarie A.LemonKatherine N. (2000), Driving Customer Equity: How Customer Lifetime Value Is Reshaping Corporate Strategy. The Free Press.
47.
SrivastavaRajenda K.ShervaniTasadduq A.FaheyLiam (1998), “Market-Based Assets and Shareholder Value: A Framework for Analysis,” Journal of Marketing, 62 (1), 2–18.
48.
StewartDavid W.GugelCraig T. (2016), Accountable Marketing: Linking Marketing Actions to Financial Performance. Routledge.
49.
VenkatesanRajkumarKumarV. (2004), “A Customer Lifetime Value Framework for Customer Selection and Resource Allocation Strategy,” Journal of Marketing, 68 (4), 106–25.
50.
VenkatesanRajkumarKumarV.BohlingTimothy (2007), “Optimal Customer Relationship Management Using Bayesian Decision Theory: An Application for Customer Selection,” Journal of Marketing Research, 44 (4), 579–94.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
