THE DYNAMIC EFFECT OF CUSTOMER EQUITY ACROSS FIRM GROWTH
pp.302-333
Although several causal studies investigate the relationships between customer equity (CE) and firm performance, there has been some debate about whether their positive relationship is valid over long time horizons and across firm/industry environments. In this paper, we investigate the dynamic effect of CE on firm performance. Using individual-level purchase data for an online retailer, we find a weak relationship between CE and firm profitability, which is not consistent with previous assumptions and beliefs. Additional analysis to resolve this gap shows that in the early stage when a firm’s growth rate is relatively high the firm is required to manage many newly enrolled customers. This means that newly acquired customer equity (NCE) has a larger effect than retained customer equity (RCE) on firm profitability in the early stage. In contrast, in the mature stage when a firm’s growth rate is stable and low the firm should retain its customers. This means that RCE has a larger effect than NCE on firm profitability in the mature stage. Thus, marketing managers need to leverage the drivers of acquisition and retention to continue to grow overall CE and firm performance.