Making customers pay: measuring and managing customer risk and returns

Abstract

CRM (Customer Relationship Management) builds on the Relationship Marketing idea that lifetime relationships with customers are more profitable than short-term transactional relationships. However, subsequent work on the profitability of customers has shown that some customers are very unprofitable. This leaves managers with a problem: how to focus their relationship management efforts to maximise shareholder value. A suggested theoretical approach is to view the customer base as an investment portfolio. This paper uses the portfolio management model of risk and return to explore the measurement of returns and of the risk of the customer. Some implications for CRM managers are outlined.