On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implications for Marketing

Abstract

Relationship marketing emphasizes the need for maintaining long-term customer relationships. It is beneficial, in general, to serve customers over a longer time, especially in a contractual relationship. However, it is not clear whether some of the findings observed in a contractual setting hold good in noncontractual scenarios: relationships between a seller and a buyer that are not governed by a contract or membership. The authors offer four different propositions in this study and subsequently test each one in a noncontractual context. The four propositions relate to whether (1) there exists a strong positive customer lifetime–profitability relationship, (2) profits increase over time, (3) the costs of serving long-life customers are less, and (4) long-life customers pay higher prices. The authors develop arguments both for and against each of the propositions. The data for this study, obtained from a large catalog retailer, cover a three-year window and are recorded on a daily basis. The empirical findings observed in this study challenge all the expectations derived from the literature. Long-life customers are not necessarily profitable customers. The authors develop plausible explanations for findings that go against the available evidence in the literature and identify three indicators through discriminant analysis that can help managers focus their efforts on more profitable customers. The authors draw several marketing implications and acknowledge the limitations of the study.