£
Gross Sales by Customer x
Less Sales Discounts & Allowances x
Net Sales by Customer x
Less Direct Cost of Sales x
Gross Customer Contribution x
Less Customer Specific Marketing Expenses x
Direct Sales Support Costs x x
x
Less Customer Specific Direct Transaction Costs
Order Processing x
W/Housing & Distribution x
Invoice Processing x
Inventory Financing x
A/Cs Receivable Processing & Financing x
Specific Sales Support x x
x
Less Customer Attributable Overheads x
Net Customer Contribution x
524 The Marketing Book
original marketing investment in acquiring the
customer has failed to create shareholder
value.
Companies are now trying to assess cus-
tomer lifetime value and are using increasingly
sophisticated tools to do so. Data warehouses
and data mining tools assist organizations in
measuring the economic value of customers.
Predictive modelling techniques can be used to
predict the remaining lifetime of the relation-
ship with the customer and the likely resultant
future stream of profits and cash flows. The
economic lifetime value of the customer is the
present value of the netcash flows expected to
be generated from the customer.
True relationship marketing suggests,
however, that even this direct lifetime economic
value does not necessarily reflect the total value
of the customer to the company. There may be
other relationship benefits, which seem to be of
four types. Referrals (word of mouth) and
referencability can reduce the cost of acquiring
other customers; product innovation for, and
learning from, these customers may benefit the
whole company. These indirect relationship
effects can mean that certain customer relation-
ships do create shareholder value, even though
the directfinancial returns generated do not
indicate a positive net present value.
However, because these indirect relation-
ships are more contingent upon the continuing
strength of the relationship, different valuation
techniques need to be adopted. Three tech-
niques are particularly useful for financially
evaluating and controlling these types of cus-
tomer relationships: conditional probability,
simulation, and real options. Real options are
particularly fascinating, as there is some evi-
dence to suggest that options thinking explains
some significant marketing decisions in this
Figure 20.9 Customer account profitability analyses: illustrative example for an FMCG company selling
through retailers