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Executive Summary
Portfolio methods are well-established techniques in managerial practice, appreciated for their visual appeal and clear suggestion of norm strategies. Customer portfolio analysis enables managers and researchers to capture a customer’s value contribution to a firm’s portfolio of relationships rather than analyzing a customer’s value to the firm in isolation. Most of these approaches are static in nature. However, customer relationships are dynamic. Customers evolve over time and, consequently, become more or less valuable in future periods. There is only a small body of literature considering customer value dynamics in portfolios. Managers are virtually without guidance with respect to dynamic customer portfolio management strategies.

Against this background, the authors identify and address three neglected key issues relevant for a dynamic customer portfolio management: (1) Does a static versus a dynamic valuation lead to a different prioritization of customer segments in a portfolio? (2) How does offensive or defensive management of segment dynamics affect portfolio value? (3) Do reliable predictors for dynamics of a customer’s position in the portfolio exist? To address these issues, the authors develop a tool for dynamic customer portfolio analysis that is of moderate complexity and can be implemented in different industries. In particular, a segment-based customer-lifetime-value model is presented in which customer dynamics are captured by analyzing how customers switch between segments of different values across time. The authors apply their tool with data from four major firms in the European banking, telecommunications, pharmaceutical, and chemical industries with up to 300,000 customers. The results from the analyses provide answers to the three key issues raised.

With respect to the first issue, the results show that patterns of dynamics in the customer portfolio exist, which affect the expected value a customer segment contributes to the firm over time. However, a static approach leads to an erroneous prioritization of customer segments. More specifically, compared with a dynamic analysis, a static approach overestimates the value of top-tier customers and underestimates the value of bottom-tier customers. With respect to the second issue, the authors show that, in general, neither defensive management (i.e., keeping customers from switching into segments of lower value) nor offensive management (i.e., promoting customers to switch into segments of higher value) of customer value dynamics is superior. The relative appropriateness of offensive versus defensive management varies from segment to segment. Firms can increase customer equity essentially by strengthening middle segments (i.e., by increasing the probability of lower segments to switch into middle segments) through an offensive management of dynamics and by keeping middle segments from deteriorating through defensive management. With respect to the third issue, transaction characteristics related to a customer’s usage or purchase of particular products differentiate between segments of different present customer value. However, the future switching of customers between segments of different values is better indicated by customer characteristics and general (aggregate) transaction characteristics, such as share of wallet.

Biography
Christian Homburg is Professor of Marketing, Chair of the Marketing Department, and Director of the Institute for Market-Oriented Management at the University of Mannheim, Germany. Furthermore, Christian Homburg is Professorial Fellow in the Department of Management and Marketing at the University of Melbourne, Australia. He holds a master’s degree in Business Administration and Mathematics and a PhD in Business Administration from the University of Karlsruhe, Germany, a PhD honoris causa from the Copenhagen Business School, Denmark, and from the Technische Universität Bergakademie Freiberg, Germany. He also holds a habilitation degree from the University of Mainz, Germany. His research interests include market-oriented management, buyer–seller relationships, and business-to-business marketing. He has published in outlets such as Journal of Marketing, Journal of Marketing Research, Strategic Management Journal, and Journal of the Academy of Marketing Science. He is also the founder of Professor Homburg & Partners, an internationally operating management consulting firm.

Viviana V. Steiner is a marketing manager in the Evonik Industries group, Germany—a leading international chemical company. She holds a PhD in Business Administration from the University of Mannheim, where she was a doctoral student between 2005 and 2008. Her research interests include customer relationship management, customer valuation, and data mining.

Dirk Totzek is a doctoral student in the Marketing Department at the University of Mannheim, Germany. He holds master’s degrees in Business Administration from the University of Mannheim, Germany, and from ESSEC Business School, Paris. His research interests include customer relationship management, pricing, and business-to-business marketing. He has published in Journal of Marketing and Journal of the Academy of Marketing.

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