Value Creation

Customer Lifetime Value

The customer value is an intangible factor which has significant role in influencing the buying decisions. The customer value broadly includes psychometric variables like brand name, loyalty, satisfaction and referral opinions. The customer lifetime value is built over time by the business firms which also contributes to the individual perceptions of the customers and augments their value. The new school of business thought and contemporary researchers have emphasized that to maximize the lifetime value of customers, a firm must manage customer relationships for the long term. In a disagreement to this notion a study demonstrates that firm profits in competitive environments are maximized when managers focus on the short term with respect to their customers (Villanueva et al., 2004).

Intuitively, while a long term focus yields more loyal customers, it sharpens short term competition to gain and keep customers such that overall firm profits are lower than when managers focus on the short term. Further, a short term focus continues to deliver higher profits even when customer loyalty yields a higher share-of-wallet or reduced cost of services from the perspective of the firm. Such revenue enhancement or cost reduction effects lead to even more intense competition to gain and keep customers in the short term. The findings of the study suggest that the competitive implications of a switch to a long term customer focus must be carefully examined before such a switch is advocated or implemented. Paradoxically, customer lifetime value may be maximized when managers focus on the short term.

There have been limited studies that have discussed the impact of convergence of product services offered by a firm to the new products towards generating customer value over time. However, some of the studies find no evidence of absolute convergence, while a few find evidence of conditional convergence, i.e. convergence having controlled for differences in technological and behavioural parameters (Kenny and Marshall, 2000). The lack of evidence of absolute convergence leads to the lowering of perceived use value of the new products and further results into the lowering the returns on the aggregate customer value in terms of repeat buying (b’) and market coverage (s) for a firm in a given time. However, most of the convergence studies are aimed at proving or rejecting the neoclassical growth model and hence there is need to take the 'product' as the unit of measurement of customer value.

It has been observed that there is an increase in the number of customer goods and services offered in recent years suggesting that product-line extensions have become a favoured strategy of product managers. A larger assortment, it is often argued, keeps customers loyal and allows firms to charge higher prices. There also exists a disagreement about the extent to which a longer product line translates into higher profits keeping the customer value higher. The academics, consultants and business people speculated that marketing in the new century would be very different from the time when much of the pioneering work on customer loyalty was undertaken (Churchill 1942; Brown 1953; Cunningham 1956, 1961; Tucker 1964; Frank 1967). Yet there exists the scope for improving the applied concepts as there have been many changes over conventional ideologies. A study using market-level data for the yogurt category developed an econometric model derived from a game-theoretic perspective explicitly considers firms’ use of product line length as a competitive tool (Dragnska and Jain, 2005). On the demand side, the study analytically establishes the link between customer choice and the length of the product line and includes a measure of line length in the utility function to investigate customer preference for variety using a brand-level discrete-choice model. The study reveals that the supply side is characterized by price and line length competition between oligopolistic firms.