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Related Experiment Videos

Hedging customers.

Ravi Dhar1, Rashi Glazer

  • 1Yale School of Management, New Haven, Connecticut, USA.

Harvard Business Review
|May 16, 2003
PubMed
Summary
This summary is machine-generated.

Businesses can manage unpredictable customers like investment portfolios. Diversifying customer assets based on risk-adjusted lifetime value optimizes acquisition and retention for better returns.

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Area of Science:

  • Marketing Strategy
  • Customer Relationship Management
  • Financial Risk Management

Background:

  • Customer acquisition and retention decisions are complex, especially with unpredictable spending patterns.
  • Traditional approaches struggle to differentiate between erratic high-value and consistent low-value customers.
  • Businesses increasingly view customers as risky assets, similar to financial investments.

Purpose of the Study:

  • To introduce a portfolio approach for managing customer acquisition and retention.
  • To develop a method for calculating risk-adjusted customer lifetime value.
  • To demonstrate how this approach can identify optimal customer prospects.

Main Methods:

  • Applying portfolio diversification principles to customer management.

Related Experiment Videos

  • Constructing customer portfolios based on risk-adjusted lifetime value.
  • Analyzing the impact of individual customers on group riskiness.

    • Main Results:

    • A novel framework for evaluating customers as risky assets was developed.
    • The study identified Myron Corporation's best customer prospects using this method.
    • The concept of risk-adjusted lifetime value was shown to be transformative for business strategy.

    Conclusions:

    • Customer management should shift from product-centric to customer-centric accounting.
    • Risk-adjusted customer lifetime value is a key performance metric.
    • This approach enhances strategic decision-making in customer acquisition and retention.