BUDGET ALLOCATION BUDGET ALLOCATION FOR CUSTOMER FOR CUSTOMER

ACQUISITIONACQUISITION ANDAND RETENTIONRETENTION TO BALANCE TO BALANCE

MARKET SHARE GROWTH MARKET SHARE GROWTH AND AND CUSTOMER EQUITY CUSTOMER EQUITY

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國立中興大學行銷系 國立中興大學行銷系 2013.01.162013.01.16

Hsiu-Yuan TsaoHsiu-Yuan Tsao

ABSTRACTABSTRACT• 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.

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the BD model the BD model (Blattberg and Deighton (Blattberg and Deighton

1996)1996) 1-expr rr CR k R ( 1/ )*ln(( ) / )r r rR k CR r CR

1-expa aa CR k A ( 1/ )*ln(( ) / )a a aA k CR a CR

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Where r=Retention rate R=Retention 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.

Where a=Acquisition rate A=Acquisition spending CR=Ceiling rate k= Accelerating rate

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CRa=Ceiling rate

CRr=Ceiling rate

ka= Accelerating ratekr= Accelerating rate

the BD model the BD model (Blattberg and Deighton (Blattberg and Deighton

1996)1996)

Where CE=Customer Equity a= acquisition rate M=margin R=Retention spending r=Retention rate d=discounted rate A=Acquisition spending

[ ( / )*( / (1 ))]CE a M M R r r d r A

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[ ]CE a CLV A

segment-based market share segment-based market share modelmodel

• 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.

1 *it itMks Mks g

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1 11

* * , ( )N

it it it jt itj

Mks Mks r Mks a i j

1 1[ ( * )] / (1 )it it it it ita Mks Mks r Mks

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

[ ( / )*( / (1 ))]CE a M M R r r d r A

The preset objective of market share is 0.10 because of the assumed growth rate of g=1.15.

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R->r->a->A

g->Market Share

The optimization process The optimization process

The Differential Costs of The Differential Costs of Marginal EffectMarginal Effect

Pfeifer, P. (2005). The optimal ratio of acquisition and retention costs. Journal of Targeting, Measurement and Analysis for Marketing, 13(2), 179–188.

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 rarerare.

1

*( )mcr r

Rk CR r

1

*( )mcr r

Ak CR r

For details, please refer to Pfeifer (2005).

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Data & MethodData & 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

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ResultResult

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Complete results for the numerical example of BD

Model

Item # 　 Acquisition Retention Common

1CR 0.4 0.7  

2K 0.13863 0.08473  

3M     50

4d     0.1

5g     1.5

6Mksit–1     0.1

7Mksit     0.15

8Optimal Spending

(A,R)

2.6161661

2

10.19492

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9Optimal Rate (a,r)0.1216761

3

0.404914

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10CLV     64.459829

11CE     5.22705645.2270564

R->r->a->A

g->Market Share

ResultResult

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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 0.12 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 0.52 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

 

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ConclusionConclusion

Amc=Rmc=CLV

Optimal Budget to Maximized CE

ConclusionConclusion

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g

Market Share Growth

 

MC

Marginal Cost

High

High

low Customer Equity low

Low

High

Acquisition Rate (a)low high

low highRetention Rate(r)

Figure 2. Optimal budget allocation.

Appreciate for Appreciate for your kind attention your kind attention

and Q & AQ & A

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