Customer Portfolio Analysis: Applying Financial Risk and Volatility Measures to Customer Segmentation and Risk-Adjusted Lifetime Value Determination

44 Pages Posted: 18 Aug 2005

See all articles by Florian V. Wangenheim

Florian V. Wangenheim

ETH Zurich; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)

Patrick Lentz

Fachhochschule des Mittelstands (FHM) University of Applied Sciences Bielefeld; University of Dortmund

Date Written: October 2005

Abstract

In this paper, we discuss the concept of risk in customer relationships and derive simple metrics that allow for a customer segmentation which focuses on the dynamics of the customer lifecycle. We propose that a customer's trend in revenues as well as her temporal inactivity over time adequately capture customer risk and can function as central descriptors of customer relationship lifecycle patterns. These metrics are empirically tested for their longitudinal stability and predictive validity, using data from a European airline. Results show that the proposed metrics effectively depict a customer's lifecycle pattern and allow for a segmentation that is able to differentiate between customers with the same historic values, but different developments in the future. Furthermore, our method allows for calculation of a customer-specific discount rate, thus expanding past CLV models by an individual risk component.

Keywords: Customer Lifecycle Analysis, Risk, Customer Relationship Management, Marketing Metrics, Customer Lifetime Value

JEL Classification: M3, M31

Suggested Citation

Wangenheim, Florian V. and Lentz, Patrick, Customer Portfolio Analysis: Applying Financial Risk and Volatility Measures to Customer Segmentation and Risk-Adjusted Lifetime Value Determination (October 2005). Available at SSRN: https://ssrn.com/abstract=782064 or http://dx.doi.org/10.2139/ssrn.782064

Florian V. Wangenheim (Contact Author)

ETH Zurich ( email )

Weinbergstrasse 56
Zurich, 8092
Switzerland
41-44-632 6924 (Fax)

HOME PAGE: http://www.techmarketing.ethz.ch/

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Zurich
Switzerland

Patrick Lentz

Fachhochschule des Mittelstands (FHM) University of Applied Sciences Bielefeld ( email )

Ravensberger Straße 10 G
33602
Germany

University of Dortmund ( email )

Otto-Hahn-Str. 6
Dortmund, D-44221
Germany
+49 231 7553277 (Phone)
+49 231 7553271 (Fax)

HOME PAGE: http://www.wiso.uni-dortmund.de/LSFG/M

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