Customer Portfolio Analysis : Applying Financial Risk and Volatility Measures to Customer Segmentation and Risk-Adjusted Lifetime Value Determination

In this paper, we discuss the concept of risk in customer relationships and derive simple metrics that allow for a customer segmentation which focuses on the dynamics of the customer lifecycle. We propose that a customer's trend in revenues as well as her temporal inactivity over time adequately capture customer risk and can function as central descriptors of customer relationship lifecycle patterns. These metrics are empirically tested for their longitudinal stability and predictive validity, using data from a European airline. Results show that the proposed metrics effectively depict a customer's lifecycle pattern and allow for a segmentation that is able to differentiate between customers with the same historic values, but different developments in the future. Furthermore, our method allows for calculation of a customer-specific discount rate, thus expanding past CLV models by an individual risk component