Balancing risk and return in a customer portfolio

Crina O. Tarasi, Ruth N. Bolton, Michael D. Hutt, Beth A. Walker

Research output: Contribution to journalArticle

45 Scopus citations

Abstract

Marketing managers can increase shareholder value by structuring a customer portfolio to reduce the vulnerability and volatility of cash flows. This article demonstrates how financial portfolio theory provides an organizing framework for (1) diagnosing the variability in a customer portfolio, (2) assessing the complementarity/similarity of market segments, (3) exploring market segment weights in an optimized portfolio, and (4) isolating the reward on variability that individual customers or segments provide. Using a seven-year series of customer data from a large business-to-business firm, the authors demonstrate how market segments can be characterized in terms of risk and return. Next, they identify the firm's efficient portfolio and test it against (1) its current portfolio and (2) a hypothetical profit maximization portfolio. Then, using forward-and back-testing, the authors show that the efficient portfolio has consistently lower variability than the existing customer mix and the profit maximization portfolio. The authors provide guidelines for incorporating a risk overlay into established customer management frameworks. The approach is especially well suited for business-to-business firms that serve market segments drawn from diverse sectors of the economy.

Original languageEnglish (US)
Pages (from-to)1-17
Number of pages17
JournalJournal of Marketing
Volume75
Issue number3
DOIs
StatePublished - May 1 2011
Externally publishedYes

Keywords

  • Customer portfolio management
  • Financial portfolio theory
  • Market segmentation
  • Market-based assets
  • Return on marketing

ASJC Scopus subject areas

  • Business and International Management
  • Marketing

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