A Suite of Metrics to Understand Return on Investments in Customers

When making customer investments under resource constraints, approaches based on next-period accounting profit fail to consider the long term. As the authors show, marketers’ suggested solutions often omit retention spend from the customer investment, understating the required committed marketing spend. Unfortunately, the logical outcome is a focus on the wrong customers: those with high retention cost. Marketers may even try to acquire customers as long-term investments and then refuse to invest in their retention. The authors develop a suite of metrics to consider investments in customers, including customer return on investment, acquisition return on investment, retention return on investment, and option return on investment. Using the suite can help marketers make meaningful calculations of return on investment, even when they cannot clearly differentiate between acquisition and retention marketing spend. The key contributions show how to assess the value of customer investments and treat customer acquisition as gaining an option to spend on retention. The authors outline the connection between the metrics, detail when each is appropriate, and show how to apply the suite of metrics to a variety of simulated datasets.