A Theory of Customer Valuation: Concepts, Metrics, Strategy, and Implementation

Customer value refers to the economic value of the customer's relationship with the firm. This study approaches the topic of customer value for measuring, managing, and maximizing customer contributions by proposing a customer valuation theory (CVT) (based on economic principles) that conceptualizes the generation of value from the customers to the firms. We review the established economic theories for valuing investor assets (e.g. stocks) and draw a comparison to valuing customer contributions. Further, we recognize the differences in the guiding principles between valuing stocks and valuing customers in proposing CVT. Using CVT, this study discusses the concept of customer lifetime value (CLV) as the metric that can provide a reliable, forward-looking estimate of direct customer value. Additionally, economic models to estimate CLV, ways to manage CLV using portfolio management principles, and strategies to maximize CLV are discussed in detail. We extend the customer value concept by discussing ways a customer can add value to the firm indirectly through incentivized referrals, social media influence and feedback. Finally, the benefits of CVT to multiple constituencies are offered.