Incorporating word-of-mouth effects in estimating customer lifetime value

Abstract

The benefit of managing customer relationship by inputs (acquisition and retention costs) and outputs (revenues) for each customer is that marketing managers can better prioritise their efforts by examining the return on marketing investment and thus better differentiate customers by their relative benefits and costs. Valuing customers and measuring marketing effect using only direct financial contributions, however, carries a potential risk of misleading marketing managers since much of the relationship-based indicators are latent such as word of mouth (WOM) but still contribute substantially to customer lifetime value (CLV). In this paper, based on the company data and simulation, we empirically investigate the effect of WOM in estimating CLV. Managerial implications and future research directions are discussed.