The document summarizes three studies on customer lifetime value and profitability relationships. Study 1 finds the relationship between lifetime and profits is not always positive, and both short-term and long-term customers can be profitable. Study 2 develops a model to estimate individual customer profitable lifetime durations based on projected revenues and costs. Study 3 analyzes factors that impact profitable lifetime durations, finding purchase amount, cross-buying, and mailings increase duration while returns and buying in a single department decrease it.

1. Customer Relationship Management A Databased Approach V. Kumar Werner J. Reinartz Instructor’s Presentation Slides

2. Chapter Twelve Applications of Database Marketing in B-to-C and B-to-B Scenarios

11. Illustrative Lifetime Determination of Individual Household Source: Reinartz W. And Kumar V., “On the Profitability of Long –life Customers in a Non-Contractual Setting: An empirical Investigation and Implications for Marketing

16. Tests of Propositions - Results (Cohort 2 results in parentheses) High Lifetime Revenue Low Lifetime Revenue 63.54 (64.47) 0.065 (0.064) 11.67 (12.57) 257.96 (284.20) 783 (942) 47.97 (46.80) 0.141 (0.143) 2.41 (2.67) 50.49 (53.67) 1208 (1504) Average Item Price Mailing Cost/ Sales Ratio Relative Profit ($/month) Lifetime Profit per Customer ($) # of customers Av: Item Price Mailing Cost/ Sales Ratio Relative Profit ($/month) Lifetime Profit per Customer ($) # of customers Short Life time Segment 3 Segment 4 58.43** (58.25)** 0.063* (0.062)* 8.18 (9.31) 289.83 (322.03) 1322 (1546) 47.74 (48.72) 0.128 (0.124) 1.43 (1.56) 50.85 (55.26) 889 (973) 5 ) Average Item Price 4) Mailing Cost/ Sales Ratio 3) Relative Profit ($/month) 2) Lifetime Profit per Customer ($) 1) # of customers 5) Av: Item Price 4) Mailing Cost/ Sales Ratio 3) Relative Profit ($/month) 2) Lifetime Profit per Customer ($) 1) # of customers Long Life Time Segment 1 Segment 2

19. Aggregate Profits ($) for Short-life Segments

20. Aggregate Profits ($) for Long-life Segments

26. Conceptual Model of Profitable Customer Lifetime Earlier Study B-to-C context only Present Study B-to-C and B-to-B contexts Profitable Lifetime Duration Exchange characteristics Observed heterogeneity Customer Profitability Lifetime Duration Non-contractual setting Revenues Cost

33. Variables for Profitable Lifetime Model (-)Inverse U-shaped relationship for AIT and AIT 2 (Number of Days) 2 (Average Interpurchase Time it ) 2 (+) Inverse U-shaped relationship for AIT and AIT 2 Number of Days Average Interpurchase Time it Non-directional hypothesis Dummy: 1 = buys consistently in single dept. only 0 = all other Focus of Buying i (+) Number of departments shopped in Cross Buying it + Monthly spending level ($), moving average over 6 month period Purchase amount it ** Hypothesized Directional Impact on Profitable Lifetime Measured as Independent Variables Months Profitable Lifetime i * Measured as Dependent Variable

34. Variables for Profitable Lifetime Model (contd.) No directional hypothesis Age of individual in years Age i (+) Scale from 1 to 9 where 1 is < $10,000 and 9 is > 150,000 Income i (-) Number of people in 2 digit zip code Population Density No directional hypothesis 1 = more than 50 % of purchases in softgoods, 0 = more than 50 % of purchases in hardgoods Product Category i (+) Number of mailings sent in last 6 months (= 1 season) since current t , exponential decay, one month lag Mailings it (+) Ownership of Charge card. Dummy variable, 1 = owns card, 0 = no card Loyalty Instrument i (-) Proportion of returns (of sales) Returns it

36. Summary of Results Supported However, the relationship is negative, indicating that buying in only a single department results in shorter lifetime duration Supported However, the relationship is negative, indicating that buying in only a single department results in shorter lifetime duration Related to the Focused Buying behavior exhibited by customers 2 b Partial Support Only the linear term is significant Supported Related to Average Interpurchase Time in an inverse U-shaped manner whereby intermediate AIT is associated with the longest profitable lifetime 3 Not Supported However, the interaction of Returns with Purchase amount variable is significant Not Supported However, the interaction of Returns with Purchase amount variable is significant Inversely related to the proportion of merchandise returned by the customers. 4 Supported Supported Positively related to degree of cross-buying behavior exhibited by customers 2 a Supported Supported Positively related to the customer’s spending level 1 B-to-B Setting Result B-to-C Setting Result Description Profitable Customer Lifetime Duration is: Hypothesis

37. Summary of Results (contd.) Supported Supported Profitable Customer Lifetime Duration is positively related to the Income of the customer (B-to-C) or Income of the firm (B-to-B) 8 Not supported Supported Profitable Customer Lifetime Duration is higher for customers living in areas with lower population density (B-to-C) or businesses existing in lower population density (B-to-B) 7 Supported Supported Positively related to the number of mailing efforts of the company (B-to-C) or the number of contacts (B-to-B) 6 Supported Supported Positively related to the customer’s ownership of the company’s loyalty instrument (B-to-C) or the availability of line of credit (B-to-B) 5