*Corresponding author. Tel: +98 21 8288 3395 E-mail address: albadvi@modares.ac.ir (A. Albadvi) © 2013 Growing Science Ltd. All rights reserved. doi: 10.5267/j.msl.2013.10.021 Management Science Letters 3 (2013) 3003–3012 Contents lists available at GrowingScience Management Science Letters homepage: www.GrowingScience.com/msl Using downside CAPM theory to improve customer lifetime value prediction in non-contractual setting Amir Albadvi a* and Ashraf Norouzi b a Professor of Industrial Engineering, Faculty of Engineering, Tarbiat Modares University, Tehran, Iran b PhD student in Industrial Engineering, Faculty of Engineering, Tarbiat Modares University, Tehran, Iran C H R O N I C L E A B S T R A C T Article history: Received May 12, 2013 Received in revised format 12 September 2013 Accepted 7 October 2013 Available online October 22 2013 Identifying and selecting the most profitable customers from a shareholder’s perspective is of great interest to marketing managers. One promising line in this regard is to explore the customer lifetime value and its profitable management over time. There is a significant body of marketing literature about CLV evaluation in terms of various perspectives. However, much less attention has been paid to the risk associated with customer relationships. Previous researches in this area considered risk as “variability of cash flows generated by customers”, regardless of the trend of variability. Whereas the upside and downside variability from the customer’s expected profitability are extremely different in CRM context. This paper provides a quantitative model based on downside Capital Asset Pricing Model (D-CAPM) to evaluate risk- adjusted CLV and compares the results by employment of traditional CAPM. This paper contributes to this field by extending the discussion on customer risk measurement and provides an approach that enables marketing managers to evaluate the risk of decline from average profitability for different customer segments. © 2013 Growing Science Ltd. All rights reserved. Keywords: Customer lifetime Value (CLV) Capital Asset Pricing Model (CAPM) Downside beta Marketing finance interface 1. Introduction Managing organizational assets in a way that maximizes a company’s shareholder value is the main goal of every organization (Srivastava et al., 1998). To achieve this goal and to create shareholder value, every investment, under a certain level of risk, must return more than the firm’s cost of capital. The cost of capital reflects the minimum expected return by company’s shareholders. While considering these concepts in managing tangible assets is crucial for financial managers, much less attention has been devoted on managing intangible assets. (Rego et al., 2009; Tarasi, et al. 2011). Among different Intangible assets, customer relationships is the most valuable one (Gruca & Rego 2005; Gupta et al., 2004; Hogan, et al. 2002; Ryals, 2003). There are various metrics to evaluate customer relationships. Among them, Customer Lifetime Value (CLV) is the most popular measure for evaluating customer relationship assets and a great effort has been made for its determination and