A Note on Willingness to Spend and Customer Lifetime Value for Firms with Limited Capacity

Phillip E. Pfeifer and Anton Ovchinnikov

Journal of Interactive Marketing, 2011, vol. 25, issue 3, 178-189

Abstract: The paper draws a distinction between customer lifetime value (CLV) and willingness to spend (WTS). By WTS we mean the maximum amount the firm should be willing to spend to acquire (retain) the customer relationship. In order to avoid the double counting of cash flows when summing the CLVs of customers, we suggest including only direct cash flows in the formulation of CLV. This convention means that CLV will equal WTS if (and, for the most part, only if) the firm's relationships with customers are independent. By independent we mean that the acquisition (retention) of Jane Doe has no effect on the cash flows of any other current or future customers. In contrast to well-understood demand-side dependencies among customer relationships (such as referrals), this paper highlights a particular kind of supply-side dependency—that created when the firm is limited in the number of customers it can serve. Using an extended version of the model of Blattberg and Deighton (“Manage Marketing by the Customer Equity Test,” Harvard Business Review, July–August 1996, 136–144) of customer equity, we demonstrate that, for a firm at capacity (in this model), CLV is no longer relevant to marketing spending decisions and the firm can prefer a lower-CLV customer.

Keywords: Customer lifetime value; Marketing spending; Customer relationship management (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1094996811000223
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:joinma:v:25:y:2011:i:3:p:178-189

DOI: 10.1016/j.intmar.2011.02.003

Access Statistics for this article

Journal of Interactive Marketing is currently edited by B. T. Ratchford

More articles in Journal of Interactive Marketing from Elsevier
Bibliographic data for series maintained by Catherine Liu ().