can marketing lift stock prices - mit

8/3/2019 Can Marketing Lift Stock Prices - MIT

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Can Marketing Lift

Stock Prices?

S U M M E R 2 0 1 1 V O L . 5 2 N O . 4

R E P R I N T N U M B E R 5 2 4 0 5

Intelligence

A brief look at research findings that suggest that marketing

strategies based on increasing customer lifetime value can have a

positive impact on shareholder value and influence stock prices in

a predictable fashion by V. Kumar and Denish Shah


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24 MIT SLOAN MANAGEMENT REVIEWSUMMER 2011 SLOANREVIEW.MIT.EDU

I N T E L L I G ENCE

Traditional marketing practices are increasingly viewed with skepticism. In many organi-

zations, marketers struggle to document the return on investment for marketing

expenditures; as a result, the marketing function is poorly aligned with the strategic goals

of the company, marketing has less influence in the boardroom and the marketing

budget allocation is viewed as a questionable cost rather than a worthyinvestment.

To negate such criticisms, marketers need to realign their role and redefine the scope of

marketing so that it can directly relate to strategic outcomes for the company. One way toachieve this goal is through extensive application of predictive analytics, in both the for-

mulation of marketing strategies and customer management. Along these lines, a study

we conducted suggests that certain types of marketing efforts those developed using

analytics to identify customers lifetime value to a company can create shareholder

value and influence stock prices in a predictable fashion.

We began our research by analyzing more than five years of customer information from

two Fortune 1000 companies, one selling to businesses and the other selling directly to con-

sumers. The customer databases of both companies contained rich information related to

customer transactions, marketing communications and customer-level characteristics that

could potentially influence the customer lifetime value of each customer to the company.

However, neither of the two companies had employed the CLV metric, which is defined as

the discounted net present value of expected future cash flows from a customer.

As a result, one of our first steps with each of the two companies entailed developing a

model to compute the lifetime value of that companys customers, using as much customer-

level information as possible from the companys

customer database. The lifetime value for each

customer in this study was calculated as the net

present value of the expected cash flows from that

customer over the next three years. (Although the

time horizon of three years may not reflect the

lifetime duration of the customer, it captures

the majority of the customers true lifetime value

given the fact that the computation is based onthe discounted cash flow approach. As a result, it

is a common practice to compute CLV at the indi-

vidual customer level based on the expected cash

flows over the next three years.) We then com-

puted the sum of all customers CLV, which

represented the net present value of expected fu-

ture cash flow streams from existing customers,

plus some estimates of projected discounted cash

flow streams from future customers that the com-

pany expected to acquire during that time.

(The detailed results of our study, including

computation details, were reported in the

November 2009 issue of theJournal of Mar-

keting. See Related Research.)

We then developed a link function to re-

late this sum of all the customers lifetimevalue to the market capitalization of the

company, as indicated by the stock price. If

customers are the fundamental drivers of

cash flow for a business, the sum of the CLV

metric should relate well with the businesss

value as indicated by its stock price. In prac-

tice, however, the relationship is weak at

best, because the company valuation based

on the stock price is risk-adjusted, but the

customer valuation typically is not.

In other words, the CLV model esti-

mates the timing and value of future cash

flows but does not account for the inherent

risks associated with the future stream of

[MARKETING]

Can Marketing Lift Stock Prices?

A study finds that certain marketing techniques can influence a companysstock market valuation if the techniques increase customer lifetime value.BY V. KUMAR AND DENISH SHAH
http://www.sloanreview.mit.edu/http://www.sloanreview.mit.edu/


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26 MIT SLOAN MANAGEMENT REVIEWSUMMER 2011 SLOANREVIEW.MIT.EDU

I N T E L L I G ENCE

relationship-building initiatives such as

special rewards and shopping privileges.

FashInc also differentiated its promotion

strategies by offering High CLV customers

unconditional incentives to purchase a newproduct category, while some Medium to

Low CLV customers and all Negative CLV

customers were offered such cross-buying

incentives only contingent on spending a

minimum of a certain amount. Both

TechInc and FashInc redesigned their chan-

nel strategy by offering special incentives to

the High CLV and the Medium to Low CLV

customers to shop from more than one

channel, while Negative CLV customers

were encouraged to interact only throughthe online channel for both purchases and

customer service. Several other marketing

strategies were similarly redesigned, differ-

entiated and implemented based on the

lifetime value of the customers involved.

The differentiated marketing strategies

were directed toward increasing the pro-

jected lifetime value of the customers or

lowering the cash-flow-related risks by re-

ducing the volatility and vulnerability of

cash flow streams from customers.

We measured the net outcome in terms

of the overall lift in the lifetime value of all

customers of each company. The results in-

dicated that using the CLV metric to allocate

the marketing budget and differentiate

marketing strategy helped both companies

maximize their return on their marketing

spending. In particular, both companiesHigh CLV customers showed the strongest

percentage increase in lifetime value. Fail-

ure to differentiate marketing budgets and

strategies would have led to wasting mar-

keting resources on Medium to Low and

Negative CLV customers who had an inher-

ently low potential for increased CLV.

Then, we applied the link function to

predict the lift in stock price (or market

capitalization) of the company based on

the increase in the lifetime value of its cus-tomers. We repeated this procedure to

predict the stock price of the company for

nine months from the time of implemen-

tation of the marketing strategies. We then

compared the predicted values with the ac-

tual stock prices and found that during the

nine-month observation period, the mar-

keting strategy outcomes (as indicated by

the increase in CLV) corresponded to the

actual stock price movement for both

companies within an error range of 12% to

13%. An important implication of this re-

sult was that the marketing department

was actually able to quantify the increase

in stock price based on the performance

outcomes of marketing strategies.

Furthermore, nine months after imple-

menting the strategies to increase CLV, we

found that while TechIncs stock had gone upby 33%, its top three competitors stock had

increased by an average of 12% over the same

period. Similarly, while FashIncs stock price

had increased by 58%, the stock price of its

top three competitors had risen only 15% on

an average. (See Higher Customer Lifetime

Value, Higher Stock Prices.) The stock price

movement of both TechInc and FashInc also

substantially outperformed the Standard &

Poors 500 index (in terms of percentage in-

creases) over the time period studied.In summary, implementation of market-

ing strategies based on CLV enabled the

marketing organization in each of the two

companies studied not only to outperform

the competition but also to create share-

holder value. Conventional wisdom dictates

that marketing is an art, that the marketing

function is a cost center and that the mar-

keter is a tactician primarily concerned with

creative areas such as image and branding.

In reality, the current business environment

drives marketing to be more of a science

than an art, the marketing function to be

a critical profit center and the marketer to

be a strategist capable of increasing the com-

panys market value. The CLV framework

we describe offers businesses the means to

achieve this transformation successfully.

V. Kumaris the Richard and Susan Lenny Dis-

tinguished Chair, professor of marketing and

executive director of the Center for Excel-

lence in Brand and Customer Management at

the J. Mack Robinson College of Business at

Georgia State University in Atlanta, Georgia.

Denish Shahis an assistant professor of mar-

keting and the assistant director of the Center

for Excellence in Brand and Customer Man-

agement at the J. Mack Robinson College of

Business. Comment on this article at http://

sloanreview.mit.edu/x/52405, or contact the

authors at [email protected].

Reprint 52405.

Copyright Massachusetts Institute of Technology,

2011. All rights reserved.

HIGHER CUSTOMER LIFETIME VALUE,HIGHER STOCK PRICES

Nine months after implementing marketing strategies designed to increase

customer lifetime value, the two companies studied had seen percentage

increases in their stock price that were substantially greater than those

averaged by their top competitors and by the Standard & Poors 500 index.

Stock Price Increase

Over Nine Months

FashInc Average forTop Three

Competitors

TechInc Average forTop Three

Competitors

S&P 500Index

58%

15%

33%

12%17%

Can Marketing Lift Stock Prices? (Continued from page 25)
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