The study empirically links different recurring customer behaviors to the future level and volatility of a customer’s cash flows. The results provide new insights into how firms can implement differentiated marketing efforts to better manage individual customer cash flows and, ultimately, overall firm value.
Several key questions motivated this research:
1. Can habit-based measures help explain the variation in the customer's future cash flow volatility?
2. What is the relative importance of different habitual behaviors in driving the future cash flow volatility and level of each customer and, ultimately, the firm?
3. Can marketing result in the conflicting outcomes of increasing both the cash flow level and the volatility?
4. How can customer-level differentiated marketing interventions help improve the overall effectiveness of marketing?
5. How can firms apply these findings to implement marketing practices with the objective of maximizing the shareholder value?
We use a large data set from a Fortune 500 retailer consisting of rich information on daily transactions, marketing interventions, and customer characteristics for about 700,000 million customers over 4 years. From this longitudinal data set, we construct stock variables to measure the customer’s habit strength and the trend of cash flow levels and volatility. We use a hierarchical linear model to account for individual-level differences in habit formation and response to marketing. We specify an econometric model to link a customer's habit(s) to the future level and volatility of cash flows.
Figure: We empirically link (1) marketing to customer behavior and (2) customer behavior to the future cash flow level and volatility of the customer and, ultimately, to shareholder value.
We find that customers' recurring behaviors are significant drivers of the firm's future cash flow level and volatility. Moreover, we find that firm-initiated marketing can change each customer's recurring behaviors at differing magnitudes and that customers with certain characteristics have a higher tendency to develop recurring behaviors and stronger responsiveness to marketing actions. Thus, firm-initiated marketing selectively targeted to customers based on certain characteristics is 1.9–3.2 times more effective at managing future cash flow level and volatility.
Customers have four major types of shopping habits: purchase, promotion, return, and low-margin. Marketers can manage the level and volatility of future cash flows of customers by efficiently managing these types of shopping habits through differentiated and selectively targeted marketing efforts. For firms whose customers are the primary source of cash flow, the marketing organization of the firm in general, and the marketer in particular, can play a leading and strategic role in augmenting the shareholder value of the firm.
Questions for the Classroom
Can marketing actions of a firm result in conflicting outcomes? That is, increase the future cash flow level while adversely impacting the future cash flow volatility of the firm? If so, how and why?
What types of customer behavior(s) can significantly impact the future cash flow level and/or volatility of the firm?
How can marketers manage these customer behaviors?
Denish Shah, V. Kumar, Kihyun Hannah Kim, and Jeewon Brianna Choi (2017), “Linking Customer Behaviors to Cash Flow Level and Volatility: Implications for Marketing Practices,” Journal of Marketing Research, 54 (1), 27-43.
Denish Shah is Barbara and Elmer Sunday Professor and Associate Professor of Marketing, J. Mack Robinson College of Business, Georgia State University (e-mail: email@example.com).
V. Kumar (VK; corresponding author) is Regents’ Professor, Richard and Susan Lenny Distinguished Chair Professor, Executive Director of the Center for Excellence in Brand and Customer Management, and Director of the PhD Program in Marketing, J. Mack Robinson College of Business, Georgia State University; Chang Jiang Scholar, Huazhong University of Science and Technology; and Lee Kong Chian Fellow, Singapore Management University (e-mail: firstname.lastname@example.org).
Kihyun Hannah Kim is Assistant Professor of Marketing, Rutgers Business School, Rutgers University (e-mail: email@example.com).
JeeWon Brianna Choi is a doctoral student in marketing, J. Mack Robinson College of Business, Georgia State University (e-mail: firstname.lastname@example.org).