A DEA-based approach to customer value analysis

Abstract

Firms have become increasingly customer-centric, implying that customers, rather than products, are treated as the most important asset of a firm. The switch to customer-centric strategies also implies that firms are collecting an enormous amount of customer-related data. The purpose of this paper is to propose a DEA-based methodology to determine the contribution of customer segments to firm value. We show the practical usefulness of our methodology through an application to Activity Based Costing (ABC) data collected from a large European telecom provider, which offers fixed telephone, mobile telephone, digital television and internet subscriptions. Our analysis reveals that the average cost reduction potential across all customer segments amounts to 1.26% of the total controllable costs, which represents approximately EUR 5 million when expressed in monetary terms. We also document substantial variation in the cost reduction potential across customer segments