The basic idea behind customer value estimation is that not all customers are equally valuable; there are customers who are very valuable and customers whom you lose money on serving. You can rarely blame the customers for being unprofitable; after all, we set the price and define what the services or products are. Nevertheless, in a world where costs constantly have to be reduced, you will have situations where customers are queuing (as with a call center, to get into a restaurant, for the best seats, etc.), which will create some customer dissatisfaction and lead to question: Which customers would you prefer not to risk losing? The logical answer is that if a low-value customer calls and then a high-value customer calls, the high-value customer should always get through first. If you lose the low-value customer, it is of less cost to you because your way of doing business is simply not configured to this type of customer. This all links back to the company strategy, or the way by which you have decided to do business. Your strategy is based on some choice of which customer segments to pursue.

If you have unprofitable customers in your customer base, you could consider raising prices to them in order to make them profitable. If they leave, so be it; they do not fit into your business model in the first place, and now you lose less money.

Presenting the Model

Exhibit 2.4 presents the basic idea of dividing customers into categories according to their value. ...

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