CUSTOMER VALUATION THEORY & FIRM VALUE

Create Portfolio of Customers

The maximization of direct economic value contribution hinges on the construction of a customer portfolio. How is this done? By drawing on the fundamentals of modern portfolio theory – but with some marketing-specific adjustments. Modern portfolio theory seeks to eliminate unique risk by diversifying the stock portfolio by means of the constant buying and selling of stocks. But because customers cannot be acquired and divested at will, it is necessary for firms to constantly ‘rebalance’ its allocation of resources, such that enough resources are being leveraged toward the most profitable customers, as determined by CLV. There is a linear relationship between investment in stocks and subsequent returns, but that connection does not necessarily hold for customer investments – allocation of resources is the most effective strategy for firms. Recent studies have identified ways of optimizing resource allocation at the individual customer level to maximize overall profitability (Kumar et al. 2014; Luo and Kumar 2013; Petersen and Kumar 2015).

References
Kumar, V., Xi Zhang, and Anita Luo (2014), "Modeling Customer Opt-In and Opt-Out in a Permission-Based Marketing Context," Journal of Marketing Research, 51 (4), 403-19.
Luo, Anita, and V. Kumar (2013), "Recovering Hidden Buyer–Seller Relationship States to Measure the Return on Marketing Investment in Business-to-Business Markets," Journal of Marketing Research, 50 (1), 143-60.
Petersen, J Andrew, and V. Kumar (2015), "Perceived Risk, Product Returns, and Optimal Resource Allocation: Evidence from a Field Experiment," Journal of Marketing Research, 52 (2), 268-85.