Chapter 8: Customer Profitability

8.1 Introduction

8.2 Acquisition Cost

8.3 Cost of Default

8.4 Revenue

8.5 Profit

8.6 The Optimum Cut-off Point

8.7 Alternative Scenarios of Response and Risk

8.8 Customer Lifetime Value

8.9 Suggestions for Extending Results

8.1 Introduction

This chapter presents a general framework for calculating the profitability of different groups of customers, using a simplified example. The methodology can be extended to calculate profits at the individual customer level as well.

My goal is to illustrate how costs of acquisition and the costs associated with risk factors can affect the decision to acquire new customers, using the example of a credit card company.

For example, suppose you have a population of 10,000 prospects. ...

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