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Balancing Risk and Return in a Customer Portfolio

Crina Tarasi, Central Michigan University
Ruth Bolton, Marketing Science Institute
Michael D. Hutt, Arizona State University
Beth A. Walker, Arizona State University

Marketing managers can increase shareholder value by structuring a customer portfolio to reduce the vulnerability and volatility of case flows. This article demonstrates how financial portfolio theory provides an organizing framework for (1) diagnosing the variability in a customer portfolio, (2) assessing the complementarity/similarity of market segments, (3) exploring market segment weights in an optimized portfolio, and (4) isolating the reward-on-variability that individual customers or segments provide. Using a 7-year series of customer data from a large business-to- business firm, the authors demonstrate how market segments can be characterized in terms of risk as well as return. Next, they identify the firm’s efficient portfolio and test it against (1) its current portfolio and (2) a hypothetical profit-maximization portfolio. Then, using forward- and back-testing, the authors show that the efficient portfolio has consistently lower variability than the current customer mix or the profit-maximization portfolio. Guidelines are provided for incorporating a risk overlay into established customer management frameworks. The approach is especially well-suited for business-to-business firms that serve market segments drawn from diverse sectors of the economy.


This paper is published in Journal of Marketing: May 2011, Vol. 75, No. 3, pp. 1-17.