Valuing Customer Portfolios under Risk-Return-Aspects: A Model-based Approach and itsApplication in the Financial Services Industry

For identifying and selecting the most profitable customers in terms of the shareholder value, the Customer LifetimeValue (CLV) gained broad attention in marketing literature. However, in this paper, the authors argue that the CLV doesnot take into account the risk associated with customer relationships and consequently does not conform to the principleof shareholder value. Therefore, a quantitative model based on financial portfolio selection theory is presented that considersthe expected CLV of customer segments as well as their risk. The latter includes the correlation among the segments.It is shown how imperfect correlation among segments may be employed to maximize the value of the customerportfolio. Since portfolio selection theory does not allow for the consideration of fixed costs, it is extended by a heuristicmethod consisting of two algorithms, referred to as “subtract”- and “add”-approach...