Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Customer Needs and Solutions
Published in: Customer Needs and Solutions 2/2014

01-06-2014 | Research Article

Hedging Customer Risk

Authors: Christopher Groening, Pinar Yildirim, Vikas Mittal, Pandu Tadikamalla

Published in: Customer Needs and Solutions | Issue 2/2014

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Companies and academics rarely account for balancing the risk and reward in a customer portfolio of a firm. Unlike a stock portfolio where both measures are taken into account, many people tend to look only at the customers’ average profit value. Applying financial portfolio management techniques to customer management has been an under-researched topic in academic marketing literature. In this paper, we propose a methodology that allows firms to create a customer portfolio maximizing return for a level of risk. We illustrate the potential benefits by optimally weighting the customer segments based on their risk–reward impact on the firm’s overall customer portfolio. Our method can be used to assist investors in their valuation of a firm or to value an acquisition with a primary goal of increasing the customer base. We use a dataset of 1,901 customers covering seven quarters for a total of 13,307 observations of a major US bank with a market capitalization exceeding $40 billion. We show measurable potential increase in profit by implementing customer portfolio management practices.
previous article Abandoning Innovation in Emerging Industries
next article Price Expectations and Purchase Decisions: Evidence from an Online Store Experiment

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now
Footnotes
1
Some of these segmentation schemes used by marketers may be psychographics, demographics, and CLV-based segmentation.
 
Literature
1.
2.
Srivastava RK, Shervani T, Fahey L (1998) Market-based assets and shareholder value: a framework for analysis. J Mark Res 62(1):2–18CrossRef
3.
Gupta S, Lehmann DR, Stuart JA (2004) Valuing customers. J Mark Res 41(1):7–18CrossRef
4.
Trautwein F (1990) Merger motives and merger prescriptions. Strateg Manag J 11(4):283–295CrossRef
5.
Bettis RA, Mahajan V (1985) Risk/return performance of diversified firms. Manag Sci 31(7):785–799CrossRef
6.
Bettis RA (1983) Modern financial theory, corporate strategy and public policy: three conundrums. Acad Manag Rev 8(3):406–415
7.
Nenonen S (2008) Why finance does not help customer asset management—challenges in applying financial theories to customer relationship management. Paper presented at the Academy of Marketing Science Annual Conference 2008
8.
Caldieraro F, Coughlan AT (2009) Optimal sales force diversification and group incentive payments. Mark Sci 28(6):1009–1026CrossRef
9.
Dhar R, Glazer R (2003) Hedging customers. Harv Bus Rev 81(5):86–92
10.
Tarasi CO, Bolton RN, Hutt MD, Walker BA (2011) Balancing risk and return in a customer portfolio. J Mark 75(3):1–17CrossRef
11.
Wubben M, Wangenheim FV (2008) Instant customer base analysis: managerial heuristics often “get it right”. J Mark 72(3):82–93CrossRef
12.
Xia J, Yan J-A (2006) Markowitz’s portfolio optimization in an incomplete market. Math Financ 16(1):203–216CrossRef
13.
Ball R, Brown P (1969) Portfolio theory and accounting. J Account Res 7(2):300–323CrossRef
14.
Ryals L (2003) Making customers pay: measuring and managing customer risk and returns. J Strateg Mark 2:165–175CrossRef
15.
Buhl HU, Heinrich B (2008) Valuing customer portfolios under risk-return-aspects: a model-based approach and its application in the financial services industry. Acad Mark Sci Rev 12(5):1–32
16.
Zhao Y, Zhao Y, Song I (2009) Predicting new customers’ risk type in the credit card market. J Mark Res 46(4):506–517CrossRef
17.
Elton EJ, Gruber MJ (1997) Modern portfolio theory, 1950 to date. J Bank Financ 21(11–12):1743–1759CrossRef
18.
Hlavacek JD, Ames BC (1986) Segmenting industrial and high-tech markets. J Bus Strateg 7(2):39–50CrossRef
19.
Wedel M, Kamakura WA (2003) Market segmentation: conceptual and methodological foundations, 3rd edn. Kluwer Academic Publishers, Norwell
20.
Moorthy KS (1984) Market segmentation, self-selection, and product line design. Mark Sci 2(4):288–307
21.
Smith WR (1956) Product differentiation and market segmentation as alternative marketing strategies. J Mark 21(1):3–8CrossRef
22.
Emmelhainz MA, Kavan CB (1999) Using information as a basis for segmentation and relationship marketing: a longitudinal case study of a leading financial services firm. J Mark-Focus Manag 4(2):161–177
23.
Kamakura WA, Russell GJ (1989) A probabilistic choice model for market segmentation and elasticity structure. J Mark Res 26(4):379–390CrossRef
24.
KeyCorp Community Banking KeyCorp Community Banking Presentations (2006) In: Mooney BE (ed) BancAnalysts Association Boston Conference
25.
Lee JH, Park SC (2005) Intelligent profitable customers segmentation system based on business intelligence tools. Expert Syst Appl 29(1):145–152CrossRef
26.
27.
Venkatesan R, Kumar V (2004) A customer lifetime value framework for customer selection and resource allocation strategy. J Mark 68(4):106–125CrossRef
28.
Machauer A, Morgner S (2001) Segmentation of bank customers by expected benefits and attitudes. Int J Bank Mark 19(1):6–17CrossRef
29.
Hwang H, Jung T, Suh E (2004) An LTV model and customer segmentation based on customer value: a case study on the wireless telecommunication industry. Expert Syst Appl 26(2):181–188CrossRef
30.
Reinartz WJ, Thomas JS, Kumar V (2005) Balancing acquisition and retention resources to maximize customer profitability. J Mark 69(1):63–79CrossRef
31.
Ryals L (2005) Making customer relationship management work: the measurement and profitable management of customer relationships. J Mark 69(4):252–261CrossRef
32.
Krapfel RKJ, Salmond D, Spekman R (1991) A strategic approach to managing buyer-seller relationships. Eur J Mark 25(9):22–37CrossRef
33.
Haspeslagh P (1982) Portfolio planning: uses and limits. Harv Bus Rev 60(1):58–73
34.
35.
Cardozo RN, Smith DK Jr (1983) Applying financial portfolio theory to product portfolio decisions: an empirical study. J Mark 47(2):110–119CrossRef
36.
Cardozo RN, Wind J (1985) Risk return approach to product portfolio strategy. Long Range Plan 18(2):77–85CrossRef
37.
Johnson MD, Selnes F (2004) Customer portfolio management: toward a dynamic theory of exchange relationships. J Mark 68(2):1–17CrossRef
38.
Yorke DA, Droussiotis G (1994) The use of customer portfolio theory: an empirical study. J Bus Ind Mark 9(3):6–18CrossRef
39.
Chen P-Y, Hitt LM (2002) Measuring switching costs and their determinants in internet enabled businesses: a study of the online brokerage industry. Inf Syst Res 13(3):255–276CrossRef
40.
Haenlein M, Kaplan AM, Schoder D (2006) Valuing the real option of abandoning unprofitable customers when calculating customer lifetime value. J Mark 70(3):5–20CrossRef
41.
Mittal V, Sarkees M, Murshed F (2008) The right way to manage unprofitable customers. Harv Bus Rev 86(4):94–102
42.
43.
Konno H, Yamazaki H (1991) Mean-absolute deviation portfolio optimization model and its applications to Tokyo Stock Market. Manag Sci 37(5):519–531CrossRef
44.
Treynor JL, Black F (1973) How to use security analysis to improve portfolio selection. J Bus 46(1):66–86CrossRef
45.
Choi YK, Murthi BPS (2001) Relative performance evaluation of mutual funds: a non-parametric approach. J Bus Finance Account 28(7/8):853–876CrossRef
46.
Markowitz HM (1952) Portfolio selection. J Financ 7(1):77–91
47.
Queen LE (2006) The Laws of customer attraction. Bank Strateg 72(3):82–93
48.
Rylander D, Strutton D, Pelton LE (1997) Toward a synthesized framework of relational commitment: implications for marketing channel theory and practice. J Mark Theory Pract 5(2):58–71
49.
Kumar V, Venkatesan R (2005) Who are the multichannel shoppers and how do they perform?: correlates of multichannel shopping behavior. J Interact Mark 19(2):44–62CrossRef
50.
51.
Frost PA, Savarino JE (1986) An empirical Bayes approach to efficient portfolio selection. J Financ Quant Anal 21(3):293–305CrossRef
52.
Black F, Litterman R (1990) Asset allocation: combining investor views with market equilibrium. Fixed Income Research, New York
53.
Michaud RO (1998) Efficient asset management: a practical guide to stock portfolio optimization and asset allocation, 2nd edn. Harvard Business School Press, Boston
54.
Homburg C, Steiner VV, Totzek D (2009) Managing dynamics in a customer portfolio. J Mark 73(5):70–89CrossRef
55.
Baird IS, Thomas H (1985) Toward a contingency model of strategic risk taking. Acad Manag Rev 10(2):230–243
56.
BusinessWeek (2009) Financial regulations: what Obama wants. Theo Francis and Jane Sasseen
Metadata
Title
Hedging Customer Risk
Authors
Christopher Groening
Pinar Yildirim
Vikas Mittal
Pandu Tadikamalla
Publication date
01-06-2014
Publisher
Springer US
Published in
Customer Needs and Solutions / Issue 2/2014
Print ISSN: 2196-291X
Electronic ISSN: 2196-2928
DOI
https://doi.org/10.1007/s40547-014-0011-2

Other articles of this Issue 2/2014

Customer Needs and Solutions 2/2014 Go to the issue

Research Article

An Across-Store Analysis of Intrinsic and Extrinsic Cross-Category Effects

Research Article

Effect of Time Preferences on Optimal Prices and Profitability of Advance Selling

Research Article

Efficiency Analysis of Marketing Organizations with Interconnected Departments

Research Article

Abandoning Innovation in Emerging Industries

Research Article

Price Expectations and Purchase Decisions: Evidence from an Online Store Experiment