Marketing Management, 16th Edition

Managing Customer Lifetime Value

Marketing is often viewed as the art of attracting and keeping profitable customers. Yet every company loses money on some of its customers. The well-known 80/20 rule suggests that 80 percent or more of the company’s profits come from the top 20 percent of its customers. Some cases may be more extreme: The most profitable 20 percent of customers (on a per capita basis) may account for over 100 percent of the company’s profits. The least profitable 10 to 20 percent, on the other hand, can actually reduce profits, and the company breaks even with the middle 60 to 70 percent.54 The implication is that a company could improve its profits by “firing” its worst customers.

Companies need to concern themselves with how ...