Determining The Indirect Value Of A Customer Essay

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Words: 7403
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Journal of Marketing Management, Vol.24, Nos.7-8, September
2008, Pp.847-864

Determining the indirect value of a customer
Professor Lynette Ryals, MA (Oxon), MBA, PhD, FSIP
Professor of Strategic Sales and Account Management
Centre for Advanced Research in Marketing
Cranfield School of Management
Cranfield University
Cranfield
Bedford MK43 0AL*
Tel: 01234 751122
Fax: 01234 752158 email: lynette.ryals@cranfield.ac.uk
* Address for correspondence

Submitted to:

Journal of Marketing Management
Special issue: Marketing / Finance interface

First submission:
Date of resubmission:
Accepted:
Word count:

20th December 2006
11th February 2008
4th June 2008
4,884 excluding figures, tables and references

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Determining the indirect value of a customer

The issue of accountability in marketing has led to a substantial and growing body of work on how to value customer relationships. Net present value methods (customer lifetime value / customer equity) have emerged as generally preferred ways to assess the financial value of customers. However, such calculations fail to take account of other important but indirect sources of value noted by previous researchers, such as advocacy. This paper examines the development and application of three processes to determine indirect value in business-to-business and business-to-consumer contexts. The research shows that indirect value has a measurable monetary impact not captured by conventional financial tools, and that understanding this changes the way in which customers are managed. Keywords: customer lifetime value, customer equity, indirect value, advocacy Author’s Biography:
Lynette Ryals MA (Oxon) MBA PhD FSIP
Professor of Strategic Sales and Account Management, Cranfield School of
Management
Lynette specializes in key account management and marketing portfolio management, particularly in service businesses, and has completed a PhD on customer profitability. She came into marketing from a financial background and much of her work focuses on the marketing / accounting interface. She is a Registered Representative of the London Stock
Exchange and a Fellow of the Society of Investment Professionals. Lynette is the Director of
Cranfield’s Key Account Management Best Practice Research Club and of the Demand Chain
Management community, which includes faculty in Marketing, Sales and Supply Chain
Management. As well as the Journal of Marketing Management, her work has been published in the Journal of Marketing, European Journal of Marketing, and Industrial Marketing
Management.

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INTRODUCTION

The advent of relationship marketing has had a profound impact on the marketing / finance interface. Relationship marketing focuses on customers and long-term relationship building rather than on products (Christopher,
Payne and Ballantyne 2003). A major implication of relationship marketing is that marketing decisions should be about optimising the long-term value of the customer (Berger and Bechwati 2001). Consequently, accounting for marketing has shifted from the traditional product profitability approach (Grant and Schlesinger 1995) to a customer profitability focus.

The new focus has revealed that customer profitability is principally determined not by the cost of the products that the customer buys, but by the costs of managing the customer relationship (Kalwani and Narayandas 1995;
Reinartz and Kumar 2002). This is particularly an issue in business-tobusiness markets, in which substantial proportions of sales and marketing resources may be allocated to individual customers (Bowman and
Narayandas 2004). Overspending on customer retention can mean that retained customers are not necessarily more profitable (Thomas, Reinartz and
Kumar 2004), and the influence of customer management activities on the profitability of customers is well-attested (Bowman and Narayandas 2004;
Ryals and Knox 2004; Ryals 2005).

Focusing on the profitable management of customer relationships has also helped to address…