What Are Your Customers Worth?
Not all customers are created equal. You need to know their lifetime value, then compare the cost of acquiring, serving, and keeping them. By Sunil Gupta and Donald R. Lehmann

Most senior executives say their companies should be customer-focused. Yet in times like these, when budgets are tight, some of the first expenditures to be cut are for marketing and IT, both of which are supposed to help companies better understand and serve customers. Professors Elizabeth Demers of the University of Rochester and Baruch Lev of New York University confirmed these conclusions in a study last year. They found that while investors implicitly capitalize product-development and R&D expenditures, considering them assets that are potentially useful over a long period of time, they expense marketing and customer-acquisition costs. This apparent contradiction stems too often from the fact that business strategies in general and marketing in particular don't look at their customers in terms of quantifiable value, so they don't develop metrics to measure the return on investment in terms of the value of their customers. It's still typical for most companies to organize marketing plans around the 4Ps: product, price, promotion, and place--the traditional view espoused in most marketing textbooks. In addition to leaving out the customer, this focus makes it difficult to measure ROI for marketing activities, and therefore makes getting funding for them difficult. The measurements that do exist tend to be "soft" metrics --say, an average customer-satisfaction rating that moves from 4.1 to 4.5 on a scale of 1 to 5, where 1 is not at all satisfied and 5 is totally satisfied. That's a nice jump, but it's hard to convince senior management that it justifies an investment of, say, $25 million. Most managers simply don't know how much a unit improvement in