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Working paper

Optimal Customer Acquisition and Customer Retention Over the Business Cycle

Sloev I., Lianos G.
We consider the problem of optimal allocation of the marketing budget between customer acquisition and customer retention by a firm over the trade cycle. In line with the Schumpeterian idea of creative destruction, we find that under perfect capital markets customer retention increases with the state of the trade cycle (pro-cyclical) and customer acquisition decreases with the state of the cycle (counter-cyclical). In the case of imperfect capital markets, however, customer retention may be decreasing and customer acquisition may be increasing with the cycle.