What Is the True Value of a Lost Customer?

Abstract

Customer profitability models have evolved into an important strategic tool for marketers in recent years. Traditional customer profitability models implicitly assume that customers can be valued in isolation from one another and that social interactions can be ignored. The authors show that these conventional models may be inappropriate for markets involving new products or services because they fail to account for the social effects (e.g., word of mouth and imitation) that can influence future customer acquisitions. They show how the impact of a lost customer on the profitability of the firm depends on (a) whether the customer defects to a competing firm or disadopts the technology altogether and (b) when the customer disadopts the technology—distinctions often overlooked in conventional models. The results demonstrate how the value of a lost customer changes throughout the product life cycle, showing that the loss of an early adopter costs the firm much more than the loss of a later adopter.