CRM (Customer Relationship Management) literature has professed the importance of managing individual customer relationships vis-à-vis managing products. As a consequence, several retail firms have rolled out marketing initiatives aimed at improving customer service, customer experience, customer satisfaction and/or customer loyalty as the means to increase firm’s profitability. A common feature of most marketing programs is that customer value in the past is used as the basis to guide future investment in customer relationships. The problem with such an approach lies in the fact that past customer behavior need not stay the same in the future. Using the database of a national level retailer, this study shows that the correlation between customer loyalty (observed in the past) and profitability (observed in the future) is surprisingly low. In such a scenario, retailers may want to rethink their customer management strategy.

Recently, the customer lifetime value (CLV) concept has received a lot of attention in the research literature. The CLV is essentially a forward-looking metric that can compute the profitability of a customer in the foreseeable future (for e.g. the next three years). This makes the metric extremely appealing to managers who are interested in knowing what marketing initiatives need to be administered today for a customer to provide value to the firm in the foreseeable future. The power of the metric is augmented when computation is done at individual customer level. The outcome is a strong decision support tool for retailers to maximize overall firm profitability by managing individual customer level profitability. This study demonstrates how lifetime value of individual customers can be computed in the retail context and how it can be applied to design various customer-level and store-level management strategies to maximize retailer profitability. One of the interesting findings of the study is the fact that the retailer used in the study has 30% of its customer base with a negative lifetime value and the top 20% of the customers are accounting for 95% of the retailer’s profits! This emphasizes the need for individual customer management by unearthing the drivers of CLV. This study finds cross-purchase, multi-channel shopping behavior, and purchase of specific product categories from the retail store are the top three drivers of lifetime value of a customer. Further, the study finds an interesting difference in the profile of high CLV and low CLV customers. While extending the CLV concept to the stores of a retail chain, the study shows that the past revenue from individual stores can bear a poor correlation with the expected future profitability of the stores. This holds tremendous managerial implications for store management of the retailer which are discussed in the study.

Overall, the study underscores the importance of CLV metric in retail setting and how it facilitates a paradigm shift in doing business by taking the emphasis from managing customer relationships to managing customer value. Most importantly, consistent with the resource based view theory of strategic management, CLV based strategies can instill a competitive advantage that is sustainable and hard to imitate by competition.