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

Journal of Interactive Marketing, Forthcoming

Posted: 31 Jan 2009 Last revised: 2 Mar 2011

See all articles by Phillip E. Pfeifer

Phillip E. Pfeifer

University of Virginia - Darden School of Business

Anton Ovchinnikov

Smith School of Business - Queen's University

Date Written: January 4, 2011

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 Blattberg and Deighton (1996) model 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: CLV, customer, lifetime, value, capcity, spending, acquisition, retention, selection, capcity, limit

JEL Classification: M31, M10

Suggested Citation

Pfeifer, Phillip E. and Ovchinnikov, Anton, A Note on Willingness to Spend and Customer Lifetime Value for Firms with Limited Capacity (January 4, 2011). Journal of Interactive Marketing, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1335471

Phillip E. Pfeifer

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4803 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/Pfeifer.htm

Anton Ovchinnikov (Contact Author)

Smith School of Business - Queen's University ( email )

143 Union Str. West
Kingston, ON K7L3N6
Canada

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