Why do banks retain unprofitable customers? A customer lifetime value real options approach

摘要

This article investigates why banks maintain unprofitable customers by applying real options theory to determine their customer lifetime value (CLV) and assessing threshold values above which it is economically desirable to abandon those customers. The proposed valuation method is designed to enable a better understanding of the appraisal process, ensure greater transparency and account for the incremental value added by reputation as a summary of positive perceptions and recommendations about a brand. Using data on customers of a Spanish leading retail bank, the results show that banks act according to real options theory in their decisions to maintain apparently unprofitable customers, that optimal divesting points exist and that the incremental value of repu-tation may be isolated. The proposed methodology can help better elucidate banks' decisions on customer management.