Customer Lifetime Value with Dr. V. Kumar

VALUING YOUR CUSTOMERS

Defining Customer Valuation Theory

A mechanism to measure the future value of each customer that is based on (1) their direct economic value contribution, (2) the depth of the direct economic value contribution, and (3) the breadth of the indirect economic value contribution; by accounting for volatility and vulnerability of customer cash flows (Kumar (2018), "A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation," Journal of Marketing).

Based on the well-tested propositions that transaction behavior, marketing variables, demographic variables, and economic and environmental factors all significantly influence future customer profitability, CVT stands as an overarching, marketing-specific theory that aims to measure the future value of each customer. This valuation is based on the following key components:

Key Components of CVT

Customers contribute direct economic value in the form of profits; this value is therefore to be expressed in monetary terms. A firm that can measure this contribution not only acquires insight into its current marketing performance, but also enhances its decision-making effectiveness in the future. This can be measured by the Customer Lifetime Value. Learn More
The direct value contribution only refers to the net profit of a given customer’s relationship to the firm. The depth of that contribution refers to the strength of its impact on a firm’s continued financial performance. A customer that purchases from multiple product categories or demonstrates future value potential tends to have a greater depth of contribution. This can be measured by the Augmented Customer Lifetime Value. Learn More
Not all value is contributed directly in terms of profit. Customers can also contribute value indirectly in the form of referrals (Customer Referral Value), online influence (Customer Influence Value), and review/feedback on products and services (Customer Knowledge Value). Not only do these things drive cash flows of existing or prospective customers, but they also help the firm to make value-enhancing decisions. Learn More

The above-mentioned CLV, CRV, CIV, and CKV metrics can be viewed on how customers perceive brands. In this regard, the Customer Brand Value (CBV) metric measures the value that the customer attaches to the brand as a result of all the marketing and communication messages delivered via various media. In other words, the CBV is a multi-dimensional composite metric that measures the customer’s brand knowledge, brand attitude, brand behavior intention, and brand behavior. It enables companies to devise appropriate strategies depending on where the problem exists – awareness, trust, or loyalty.

Reference
Kumar, V.,  (2018) "A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation," Journal of Marketing, forthcoming.