Risk considerations in the management of customer equity

Customers are intangible assets of the firm. Customer equity represents the total value of the current and potential customers to the firm. When firms measure or manage customer equity, they typically focus on expected cash flow streams but not the risk associated with them. Hence, customer risk complements the concept of customer equity - it allows managers to assess whether the firm’s returns from customers are commensurate with their risk. The notion of balancing customer equity and customer risk is rather new, so many scholars and managers have an incomplete understanding of how to manage the customer portfolio and optimize customer equity. The marketing literature has typically approached customer risk by considering the probability of customer defection and all other risks are assumed to be accounted for in the cost of capital. However, in the finance literature, risk is considered to arise from unanticipated variability in future cash flows. This chapter discusses the implications of this conceptualization of risk for managing customer equity. We argue that it is important to consider the variability or unpredictability of cash flows - arising from underlying customer interactions, consumption patterns, and purchase behavior, plus from organizational processes that support them. An understanding of customer variability is critical for firms to effectively forecast, allocate expenditures, manage customer equity, and prepare for the future via strategic investments.