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Balancing Risk and Return in a Customer Portfolio

In: Business and Management

Submitted By bluo7
Words 14000
Pages 56
Crina O. Tarasi, Ruth N. Bolton, Michael D. Hutt, & Beth A. Walker

Balancing Risk and Return in a Customer Portfolio
Marketing managers can increase shareholder value by structuring a customer portfolio to reduce the vulnerability and volatility of cash flows. This article demonstrates how financial portfolio theory provides an organizing framework for (1) diagnosing the variability in a customer portfolio, (2) assessing the complementarity/similarity of market segments, (3) exploring market segment weights in an optimized portfolio, and (4) isolating the reward on variability that individual customers or segments provide. Using a seven-year series of customer data from a large business-to-business firm, the authors demonstrate how market segments can be characterized in terms of risk and return. Next, they identify the firm’s efficient portfolio and test it against (1) its current portfolio and (2) a hypothetical profit maximization portfolio. Then, using forward- and back-testing, the authors show that the efficient portfolio has consistently lower variability than the existing customer mix and the profit maximization portfolio. The authors provide guidelines for incorporating a risk overlay into established customer management frameworks. The approach is especially well suited for business-to-business firms that serve market segments drawn from diverse sectors of the economy. Keywords: customer portfolio management, market-based assets, financial portfolio theory, return on marketing, market segmentation

The advantage of knowing about risks is that we can change our behavior to avoid them…. Optimal behavior takes risks that are worthwhile. (Engle 2004, p. 405)

A

lthough risk management is central to financial portfolio theory and occupies much of chief financial officers’ time, researchers have given sparse attention to risk in the theory and practice…...

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