Real options and marketing interface customer lifetime value and real options

Abstract

Customer value management (CVM) emphasizes quality of customers over quantity of customers while seeking to increase the aggregate value of the customer base. CVM shifts the focus of the company from managing products or marketing activity to managing the profitability of each individual customer over the entire life of the relationship. This profitability can be measured. The sum of cumulated cash flows of a customer over his or her entire lifetime with the company is called customer lifetime value (CLV). The purpose of this paper is to determine the financial value and risk of profitable customers. Since the simple net present value analysis can’t reflect the value of the flexibility a customer relationship may have, we use real options theory in our research.