Will the frog change into a prince? Predicting future customer profitability

Roland T. Rust, V. Kumar and Rajkumar Venkatesan

International Journal of Research in Marketing, 2011, vol. 28, issue 4, 281-294

Abstract: More and more companies have customer databases that enable them to analyze customer profitability over time. These companies often seek to determine the most important customers as indicated by their current or historical profitability and focus attention on them. Focusing on profitable customers can result in more efficient use of marketing resources, but this approach neglects the fact that customers can evolve over time. Some customers begin as low-profit customers but eventually develop into high-profit customers. Others may start out as high-profit customers but become unprofitable over time. Previous efforts to predict future profitability have been relatively unsuccessful, with relatively simple, naïve models often performing just as well as or better than more sophisticated ones. Our paper presents a new approach to predicting customer profitability in future periods that performs significantly better than naïve models. We estimate the models on data from a high-tech company in a business-to-business context and validate the models' predictive ability on a holdout sample.

Keywords: Dynamic customer profitability; Customer lifetime value; Efficient marketing; Business to business marketing; Customer relationship management; Simulation model (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ijrema:v:28:y:2011:i:4:p:281-294

DOI: 10.1016/j.ijresmar.2011.05.003

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