Correspondence: Jonathan Lee, College of Business Administration California State University Long Beach 1250 Bellflower Blvd. Long Beach, CA 90840-8503, USA Tel: +1 562 985 4562; Fax: +1 562 985 5543; e-mail: jlee6@csulb.edu

¹is Associate Professor of Marketing in College of Business Administration at California State University, Long Beach. He has also been a faculty at Indiana University and the University of Southern California. He teaches in the areas of marketing research, decision models in marketing, and customer relationships management and his research interest is in the areas of consumer choice models, B2B marketing, and customer equity management. He has published articles in the Management Science, Marketing Science, and Journal of Consumer Research.

²is an assistant professor of Marketing at Korea University, Business School. His research interests are in customer lifetime value management and internet marketing. He has published articles in Marketing Science, Journal of Services Marketing and Seoul Journal of Business. Before joining Korea University, he worked for Samsung Electronics Europe as a senior marketing analyst from 1999 to 2001 and taught at HEC School of Management, Paris from 2001 to 2005.

³is Professor of Business Administration at the Joseph M. Katz Graduate School of Business at the University of Pittsburgh where he has been a faculty member since 1982. He has published articles in the Journal of Consumer Research, International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, Psychological Bulletin, and Public Opinion Quarterly. He has served as a consultant to a number of profit and non-profit firms, including Eastman Kodak, General Motors, and Newsweek. He has been a visiting professor at the University of Augsburg (Germany), Czech Management Center (Czech Republic), International Management Center (Hungary), Comenius University (Slovak Republic), and Universidad Santa Maria (Ecuador).

Received 13 September 2006; Revised 13 September 2006.

Abstract

The benefit of managing customer relationship by inputs (acquisition and retention costs) and outputs (revenues) for each customer is that marketing managers can better prioritise their efforts by examining the return on marketing investment and thus better differentiate customers by their relative benefits and costs. Valuing customers and measuring marketing effect using only direct financial contributions, however, carries a potential risk of misleading marketing managers since much of the relationship-based indicators are latent such as word of mouth (WOM) but still contribute substantially to customer lifetime value (CLV). In this paper, based on the company data and simulation, we empirically investigate the effect of WOM in estimating CLV. Managerial implications and future research directions are discussed.