Ruth N. Bolton, Arizona State University
Ranjit M. Christopher, Arizona State University
Long term relationships must be managed so that they are beneficial to both the organization and its customers. Sometimes, as customers stay longer with a service organization, they may expect price discounts or better service – leading to increased costs to serve them and lower margins. Hence, customer equity may be increased by better managing individual customers’ cash flows (through resource allocation decisions) or by altering the customer mix/portfolio to yield larger cash flows with the same degree of risk (Tarasi et al 2013). For example, the budget allocation between customer acquisition and retention can be optimized by analyzing the cash flow patterns of customers (Blattberg and Deighton 1996; Rust, Lemon, and Zeithaml 2004; Tarasi et al 2011).
Why do service managers and researchers study the length of the customer-organization relationship rather than studying (more broadly) relationship depth, breadth, strength or profitability? The key reason is that customer lifetime duration – and its inverse, customer churn or defection – is a significant and substantial problem for organizations in many service industries, including financial, health, utilities, telecommunications and publishing service sectors. Some service organizations face churn rates of 25-40%, implying that a firm’s entire customer base can vanish within about five years unless these losses are offset by expensive customer acquisition efforts. Hence, there is intensive interest in how to predict and understand churn so that firms can better manage it (Neslin et al 2006b). We do not assume that a long relationship is always a more valuable relationship (to either party). However, when all else is equal, a long relationship is preferable to a short relationship. Moreover, as this chapter will discuss, managers sometimes find customer lifetime duration a useful surrogate when estimates of customer value are difficult to make and error-prone.
This chapter reviews and synthesizes prior work by considering four questions:
This paper will appear in Handbook on Research in Services Marketing, Roland T. Rust and Ming-Hui Huang (Editors), Edward Elgar Publishing Ltd., forthcoming (lead article).