Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 76

Assessing Customer Lifetime Value How important to profitability are customer referrals? What customers feel about your company (and you) and what they are prepared to tell others about you can be just as important as what your customers do themselves. The authors of the following article hypothesize that overall customer value, what they call customer lifetime value, as consisting of two components: the amount a customer brings in from purchases and the value of referrals. See V Kumar, J. A. Petersen, and R. P. Leone, “How Valuable Is Word of Mouth?” Harvard Business Review, October 2007, pp. 139-146, prior to answering the following questions.

Required

1. What is the primary managerial question or issue that the authors of this article are addressing?

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2. Define the terms customer lifetime value (CLV), and customer referral value (CRV). Which of these values do the authors believe is more important for financial success? Why”

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3. Which of the two components of value, CLV or CRV, is the more difficult to estimate? Why?

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4. Explain the customer value matrix developed by the authors and presented on page 144 of their article. Of what strategic importance is this matrix?

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5. In what way can the management accountant aid in the estimation of CLV and CRV (and, by extension, the creation of the customer value matrix)?

Step 1 of 5

Assessing Customer Lifetime Value (45 Minutes)

1. This article deals with the general issue of managing customer relationships to improve profitability. In particular, it focuses on the attempt to estimate overall customer value (in a present-value sense) and the role that customer referrals play in determining such value. Overall customer value is derived from two rather independent components: sales to the customer and referrals made by the customer. A traditional approach to maximizing customer lifetime value is to focus on increasing sales to the customer. Perhaps underexplored, according to the authors of this article, is the value that customer referrals play in terms of overall (or long-term) customer value. As the authors state (p. 140), “…how your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much” as what your customers buy. The authors offer a conceptual model for estimating the value of customer referrals. The ability to understand the drivers of customer value creates opportunities for organizations to target marketing campaigns and, as a result, realize a greater return on their marketing investments.