國立中興大學行銷系 2013.01.16 Hsiu-Yuan Tsao Budget Allocation for Customer Acquisition and Retention to Balance Market Share Growth and Customer Equity Hsiu-Yuan Tsao

ABSTRACT Blattberg and Deighton (1996) used a decision-calculus approach to construct a simple model, the BD Model, which helps managers find the optimal balance between spending on acquisition and retention to maximize the customer equity. Customer Equity v.s Market Value Optimal Budget Allocation to Maximized Customer Equity Drivers of Customer Equity However, little explicit research has simultaneously addressed the question of dividing spending between acquisition and retention and balancing the objectives of short-term market share growth and long-term customer equity. . Blattberg, R. C. and Deighton, J. (1996), “Manage Marketing by the Customer Equity Test,” Harvard Business Review, 74(4), 136–144.

the BD model (Blattberg and Deighton 1996) Where r=Retention rate R=Retention spending CR=Ceiling rate k= Accelerating rate Where a=Acquisition rate A=Acquisition spending CR=Ceiling rate k= Accelerating rate Parameter CR (acquisition or retention ceiling rate) is the manager’s direct assessment of the maximum proportion of targeted prospects converted on condition that there is no limit to spending. In addition, k and can be determined once the manager decides the spending levels and rates for retention and acquisition. 3

CRr=Ceiling rate CRa=Ceiling rate kr= Accelerating rate ka= Accelerating rate

the BD model (Blattberg and Deighton 1996) Where CE=Customer Equity a= acquisition rate M=margin R=Retention spending r=Retention rate d=discounted rate A=Acquisition spending

segment-based market share model Thomas (2001) claimed that the BD model ignores the fact that spending on acquisition may affect the relationship between spending on retention and the retention rate. Thus, the market share of the next period for the th brand is a compound of retainer, and newly acquired segments as follows: Thomas, J. (2001), “A Methodology for Linking Customer Acquisition to Customer Retention,” Journal of Marketing Research, 38 (May), 262–268. 6

The optimization process Where CE=Customer Equity -> Objective Function (MAX) a= acquisition rate -> the function of SBMS M=margin -> Constant (assumed M=$50) R=Retention spending -> Decision Variable r=Retention rate -> the function of R d=discounted rate -> Constant (assumed 1.10) A=Acquisition spending -> the function of a The preset objective of market share is 0.10 because of the assumed growth rate of g=1.15. R->r->a->A g->Market Share

The Differential Costs of Marginal Effect A common business theory suggests, It costs five times more to acquire a new customer than to retain a customer” (Blattberg & Deighton, 1996; Pfeifer, 2005). Research investigating the effect of the unit cost of marginal effect for acquisition and retention programs on consumer profitability and market share growth are rare. For details, please refer to Pfeifer (2005). Pfeifer, P. (2005). The optimal ratio of acquisition and retention costs. Journal of Targeting, Measurement and Analysis for Marketing, 13(2), 179–188.

Data & Method We test the model and method developed in this study on the numerical example found in the paper in which the BD model was originally proposed. the optimal solution for the objective function to maximize CE can be obtained by the nonlinear programming of an evolutionary algorithm provided by Microsoft Excel Solver 2011

Result R->r->a->A g->Market Share Complete results for the numerical example of BD Model Item # Acquisition Retention Common 1 CR 0.4 0.7   2 K 0.13863 0.08473 3 M 50 4 d 0.1 5 g 1.5 6 Mksit–1 7 Mksit 0.15 8 Optimal Spending (A,R) 2.61616612 10.194929 9 Optimal Rate (a,r) 0.12167613 0.4049148 10 CLV 64.459829 11 CE 5.2270564 R->r->a->A g->Market Share

Result The ratio of marginal cost, market share growth and CLV at optimality g a r Amc Rmc m CLV CE 1 0.10 0.12 23.85 20.42 1.17 53.93 3.24 1.5 0.40 25.92 40.00 0.65 64.46 5.23 2 0.17 0.47 31.31 52.07 0.60 66.53 7.31 2.5 0.22 0.50 40.57 59.09 0.69 67.03 9.04 3 0.28 0.52 58.04 65.04 0.89 67.19 10.09 3.16 0.29 67.32 67.22 1.00 67.20 10.18 3.5 0.33 0.54 101.49 73.62 1.38 67.11 9.61 4 0.38 0.59 342.86 106.66 3.21 65.07 3.42  

Conclusion Amc=Rmc=CLV Optimal Budget to Maximized CE

Conclusion g Market Share Growth MC Marginal Cost High   MC Marginal Cost High low Customer Equity low Ceiling Rate CR Low Acquisition Rate (a) low high Retention Rate(r) Figure 2. Optimal budget allocation.

Appreciate for your kind attention and Q & A