Why do banks retain unprofitable customers? A customer lifetime value real options approach

Mariano Méndez-Suárez and Natividad Crespo-Tejero

Journal of Business Research, 2021, vol. 122, issue C, 621-626

Abstract: This article investigates why banks maintain unprofitable customers by applying real options theory to determine their customer lifetime value (CLV) and assessing threshold values above which it is economically desirable to abandon those customers. The proposed valuation method is designed to enable a better understanding of the appraisal process, ensure greater transparency and account for the incremental value added by reputation as a summary of positive perceptions and recommendations about a brand. Using data on customers of a Spanish leading retail bank, the results show that banks act according to real options theory in their decisions to maintain apparently unprofitable customers, that optimal divesting points exist and that the incremental value of reputation may be isolated. The proposed methodology can help better elucidate banks’ decisions on customer management.

Keywords: Customer lifetime value (CLV); Real options; Value of reputation; Customer valuation (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:122:y:2021:i:c:p:621-626

DOI: 10.1016/j.jbusres.2020.10.008

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