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Customer lifetime valuation using real options analysis

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Abstract

As the concept of Customer Lifetime Value (CLV) is gaining a growing acceptance to achieve superior efficiency and effectiveness of marketing plans, development of more accurate models to measure CLV is becoming an important issue. Most CLV models cannot consider the management flexibility in uncertain situations. Real options valuation is the approach in such situations. This article aims to provide models to measure CLV using real options valuation. The research firstly aims to identify major options a seller has in relationship with its customers. Then, we focus on development of models to measure options’ values for better estimation of CLV. In this research, we develop three models based on real options. Each model is useful when the following options are available: option to market penetration, option to customer development through add-on selling and option of stage investment. The applicability of the models is demonstrated by numerical illustrations. Results show the classical models of CLV measurement ignore the value of options despite the fact that sometimes these options have considerable values and are decisive in managers’ decision making.

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Authors and Affiliations

  1. Department of Industrial Engineering, Ferdowsi University of Mashhad, Mashhad, 31242, Iran

    Hamidreza Koosha

Authors
  1. Hamidreza Koosha
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  2. Amir Albadvi
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Correspondence to Hamidreza Koosha.

Additional information

1received his BSc and MSc in Industrial Engineering from Sharif University of Technology and his PhD in Industrial Engineering from Tarbiat Modares University. He is assistant professor in Industrial Engineering at Ferdowsi University of Mashhad. His main research interests include mathematical modeling and optimization of customer equity and customer lifetime value in Customer Relationship Management (CRM), economic analysis and project selection, and application of data mining techniques in CRM. His publications appear in books and journals such as Management Decision, International Journal of Industrial Engineering and Production management and International Journal of Management Perspective.

2holds BSc and MSc in Industrial Engineering from Sharif University of Technology. He graduated from London School of Economics (LSE), in 1997 with PhD in Information Systems. His teaching experiences include courses at MSc and PhD level in Information Technology, Customer Relationship Management (CRM), Internet Marketing, Change Management and Research Method in Business. In addition to LSE, he taught in the Joint MBA Program in Marketing and e-Commerce for Lulea University of Technology and Tarbiat Modares University, in Graduate School of Management and Economy, Int’l MBA program of Sharif University of Technology and also in MBA program of University of Victoria. He has published in many esteemed international journal in the area of information systems, business and marketing and operations research. His areas of research are e-Business; relationship marketing and CRM, quantitative modeling for Customer Life-time Value and optimization of Customer Equity.

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Koosha, H., Albadvi, A. Customer lifetime valuation using real options analysis. J Market Anal 3, 122–134 (2015). https://doi.org/10.1057/jma.2015.12

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  • DOI: https://doi.org/10.1057/jma.2015.12

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