Abstract

Many firms collect tremendous amounts of personalized transaction data and integrate them in their customer databases to analyse the profitability of their customers. Prior research shows that focusing on those customers with high estimated lifetime value can result in higher profitability and thus in a more efficient investment of scarce marketing resources. However, in spite of their forward looking properties, such metrics typically ignore the dynamic nature of evolving customer relationships. This paper develops a modelling framework for studying the profitability dynamics of non-contractual customer-firm relationships. Our approach is based on the building blocks of the customer lifetime value concept, but explicitly accounts for the evolution of customer profitability over time. We classify each customer's period-wise profitability contributions to the firm into profitability tiers and model period-to-period transitions between these tiers as a Markov process with unknown transition matrix. Unsupervised heterogeneity is captured by assuming a finite mixture of Markov chains. The model parameters are estimated using empirical Bayesian methodology. We demonstrate that the presented Markov chain clustering model enables loyalty managers to detect customer segments which differ significantly in terms of the profitability evolution of their respective members. The approach is empirically illustrated using transaction data of a customer cohort acquired by an apparel retailer. We conclude with a discussion of managerial insights gained from the study and outline some extensions of the proposed approach as an agenda for future research.

Biography

In parallel with his role at Surrey Business School, Thomas is a Professor of Marketing and Head of the Institute for Service Marketing and Tourism at the Vienna University of Economics and Business (WU Vienna). He currently also serves as Academic Director of WU's Master's Program (MSc) in Marketing. Thomas received his doctoral and habilitation degree from WU. He spent one year as a Visiting Professor at the University of Sydney (AUS) and has held other visiting or substitute positions at universities in St. Gallen, Bangkok, Wollongong, Frankfurt/Main, and Munich. He also previously worked as a full-time consultant with Simon-Kucher & Partners, Marketing & Strategy Consultants. This and other prior business experiences give his research and teaching activities a strong focus on issues of managerial relevance. Thomas serves as a referee for numerous academic journals and was recently appointed as a co-editor of the WU-based Jfb (Journal für Betriebswirtschaft).