Hedging Customer Risk

Cust. Need. and Solut. (2014) 1:105–116

12 Pages Posted: 14 Apr 2015

See all articles by Christopher Groening

Christopher Groening

Kent State University

Pinar Yildirim

University of Pennsylvania - The Wharton School

Vikas Mittal

Rice University

Pandu R. Tadikamalla

University of Pittsburgh - Operations, Decision Sciences, and Artificial Intelligence Group

Date Written: 2014

Abstract

Companies and academics rarely account for balancing the risk and reward in a customer portfolio of a firm. Unlike a stock portfolio where both measures are taken into account, many people tend to look only at the customers’ average profit value. Applying financial portfolio management techniques to customer management has been an under-researched topic in academic marketing literature. In this paper, we propose a methodology that allows firms to create a customer portfolio maximizing return for a level of risk. We illustrate the potential benefits by optimally weighting the customer segments based on their risk–reward impact on the firm’s overall customer portfolio. Our method can be used to assist investors in their valuation of a firm or to value an acquisition with a primary goal of increasing the customer base. We use a dataset of 1,901 customers covering seven quarters for a total of 13,307 observations of a major US bank with a market capitalization exceeding $40 billion. We show measurable potential increase in profit by implementing customer portfolio management practices.

Keywords: Customer portfolio, Embeddedness, Portfolio

Suggested Citation

Groening, Christopher and Yildirim, Pinar and Mittal, Vikas and Tadikamalla, Pandu R., Hedging Customer Risk (2014). Cust. Need. and Solut. (2014) 1:105–116 . Available at SSRN: https://ssrn.com/abstract=2593919

Christopher Groening (Contact Author)

Kent State University ( email )

Kent, OH 44242
United States

Pinar Yildirim

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Vikas Mittal

Rice University ( email )

6100 South Main Street
250 McNair
Houston, TX 77005-1892
United States

Pandu R. Tadikamalla

University of Pittsburgh - Operations, Decision Sciences, and Artificial Intelligence Group ( email )

United States

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