On the Profitability of Long Lifetime Customers: An Empirical Investigation and Implications for Marketing

The analysis of customer lifetime value is seeing a strongly increasing interest in the marketing community. This interest has been sparked for three reasons. First, firms are interested in customer management processes for which an understanding of the lifetime value concept is a prerequisite. Second, the Marketing Science Institute (1998) has elevated the topic to a capital research priority – which reflects the interest of both, academics and managers. Third, given this high interest of multiple constituencies, empirical evidence is particularly scarce in this domain. The paper focuses on the managerial aspects of lifetime dynamics with the purpose of contributing to a better understanding of the customer management process. The authors’ study presents a structured framework for identifying the customer lifetime profitability pattern in a non-contractual context. The explicit research objective is to empirically investigate the nature of the association of customer lifetime duration and customer profitability. For this purpose, four commonly stated propositions are tested: 1) customer lifetime duration and customer profitability are strongly related, 2) profits of long life customers increase over time, 3) the cost of serving long-life customers are lower, and 4) long-life customers pay higher prices. The propositions are tested in the context of the general merchandise direct marketing industry with customer cohort data covering three years. The authors’ results represent evidence that it is a gross oversimplification to simply equate long-life customers with higher profits. In fact, the authors find a very differentiated picture in that both long- and short life customers can be highly profitable. The contribution of this research lies in the structured framework for analyzing the customer lifetime profitability pattern. It enables the manager to understand the specific driving forces of customer lifetime profitability. Based on this framework, the firm can identify at any given time the general nature of its customer’s lifetime patterns and the individual-specific status along the lifetime continuum. Knowing these two dynamic characteristics is a necessary prerequisite for the manager to engage in true customer management.