Customer Acquisition and Customer Retention in a Competitive Industry

P. 541–552.

Lianos G., Sloev I.

 We  study  optimal  customer  acquisition  and  retention  strategies  in  an infinite-horizon model of dynamic competition. We find that acquisition expenditures constitute the larger share of the marketing budget, when the customer profit margin is either low or large, but for intermediate profit margin values, firms spend more resources for customer retention. If customer profit margins rise for exogenous  reasons,  we  find  that  the  share  of  customer  acquisition  expenditures  in  the marketing budget increases in markets with high profit margins, whereas it decreases in markets with low profit margins. The impact of entry of new firms in the market on the optimal strategy depends on the effect of the entry on profit margins and absolute levels of profit margins. A similar phenomenon may also appear in a single segmented  market:  the  impact  of  higher  competition  on  the  luxury  and  mass-consumption segments of a market would be different.

Keywords: competition, customer lifetime value, customer retention, customer acquisition

In book

Rediscovering the Essentiality of Marketing. Proceedings of the 2015 Academy of Marketing Science (AMS) World Marketing Congress

Switzerland: Springer, 2016.