1 Chapter 29 CUSTOMER LIFETIME VALUE V. Kumar, University of Connecticut Introduction In the past two decades, the firms tended to focus on either cost management or revenue growth. When a firm adopts one of these approaches it looses out on the other (Rust, Lemon, & Zeithaml, 2004). For instance, if a firm focuses only on revenue growth without emphasis on cost management, it fails to maximize the profitability. Similarly, cost management without revenue growth affects the market performance of the firm. What is needed is an approach which balances the two, creating market-based growth while carefully evaluating the profitability and return on investment (ROI) of marketing investments. Optimal allocation of resources and efforts across profitable customers and cost effective and customer specific communication channels (marketing contacts) is the key to the success of such an approach. This calls for assessing the value of individual customers and employing customer level strategies based on customers’ worth to the firm. The assessment of the value of a firm’s customers is the key to this customer- centric approach. But what is the value of a customer? Can customers be evaluated based only on their past contribution to the firm? Which metric is better in identifying the future worth of the customer? These are some of the questions for which a firm needs answers before assessing the value of its customers. Many customer oriented firms realize that the customers are valued more than the profit they bring in every transaction. Customers’ value has to be based on their contribution to the firm across the duration of their