The Persistence of Customer Profitability: Empirical Evidence and Implications From a Financial Services Firm

Abstract

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.