What is the True Value of a Lost Customer?

Customer profitability models have evolved into an important strategic tool for marketers in recent years. The authors show that conventional models may be inappropriate for markets involving new products or services because they fail to account for the social effects (e.g., word-of-mouth and imitation) that can influence future customer acquisitions. They develop a customer profitability model that captures these social effects and show how the value of a lost customer depends on (a) whether the customer defects to a competing firm or disadopts the technology altogether and (b) when the customer disadopts the technology -distinctions often overlooked in customer retention models. An empirical application of the model to the online banking industry shows that the financial impact of disadoptions can be substantial. The results demonstrate that firms suffer financial losses not only when their own customers disadopt a new service or product, but also when their competitor’s customers disadopt. By incorporating the effect of competitors’ disadopters into the customer profitability model, the authors identify a heretofore unrecognized link between a firm’s market share and customer profitability. In addition, the model enables the firm to quantify the value of a lost customer throughout the product lifecycle with the results demonstrating that the loss of an early adopter costs the firm much more than the loss of a later adopter. Results also suggest that managers must pay greater attention to post-purchase service strategies early in the product-market evolution to minimize the effect of disadoption on future customer acquisitions. An appealing aspect of the proposed approach is that it can be implemented using a spreadsheet, making it a practical tool that can help firm’s manage their customer relationships more profitably.