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This study addresses three research questions related to persistence in customer profitability. How well does current customer profitability explain future customer profitability? Does current customer profitability fully reflect the future customer profitability implications of demographics and other customer characteristics ? How do different components of customer profitability affect its persistence over time? The authors find that a substantial amount of variation in 1-year ahead customer profitability is left unexplained by current customer profitability. They also find that different components of customer profitability have vastly different levels of persistence and that data on customer demographics and other characteristics have little incremental value relative to current profitability in explaining future profitability. Segmenting customers based on how their profitability is generated within a profit tier reveals that the efficacy of predicting future profit tier based on current profit tier varies greatly even among customers in the same current profit tier.
Keywords: customer profitability; financial services; segmentation; persistence
Firms across a variety of industries are increasingly using measures of customer profitability as a basis for allocating scarce service resources across their customer base. Academics in accounting, marketing, and operations management advocate making these types of decisions based on estimates of a customer's expected contribution to firm profits over the entire tenure of their relationship with the firm or their "lifecycle profitability."1 However, many firms make service management decisions based on estimates of current customer profitability. Nowhere is this perhaps more apparent than in the financial services industry. For example, a recent study by the Gartner Group found that 75% of banks with more than $4 billion in deposits were measuring current customer profitability in 2000 (Hallenborg 2000). Rust, Zeithaml, and Lemon (2000) documented examples of several firms that provide differential service across customers based on estimates of a customer's current and/or future profitability.
Although current customer profitability alone might not be sufficient for decisions about individual customer relationships, we know of no research that has empirically examined the ability of current customer profitability to explain variation in realized future customer profitability. An issue of central importance in this regard is the persistence of customer profitability. Persistence regards the extent to which currently profitable (unprofitable) customers are likely to remain profitable (unprofitable) in the future.
This article uses...