|Ph.D Student||Marbach(Wolf) Naama|
|Subject||A Modeling Framework for the Allocation of the Promotional|
Budget between Existing Customers and New Ones
|Department||Department of Industrial Engineering and Management||Supervisors||Ms. Ayala Cohen (Deceased)|
|Professor Barak Libai|
The balance between investing in retaining and developing existing customers and acquiring new ones increasingly occupies marketing researchers and practitioners in recent years. However, most of the studies that deal with this issue are qualitative. The few reported attempts to quantify this balance are simplistic and have two major limitations: First, they are firm specific. Second, the potential customer is the center of the calculations, neglecting the value of customers that are already in the firm.
In this work we develop a general model for the allocation of a predetermined promotional budget between new and existing customers. Acknowledging that the optimal decision is contingent on specific market conditions, we utilize the Dirichlet model to simulate sets of individual level purchase data that differ according to several market characteristics. The simulated data sets provide unique market scenarios. In each market scenario we optimize a profitability function, known as the “customer equity”, to find the balance between investment in new and existing customers, where existing customers are further differentiated to account for "light" and "heavy" segments.
We form the model using classification trees that characterize market scenarios with similar allocation decisions. We also develop a tool for managers to enable an optimal budget allocation that fits specific market conditions.
Some key results include:
1. In durables markets, acquisition should be the salient strategy
2. When the retention rate is either very low or very high, acquisition should dominate. For moderate retention rates, retention is optimal.
3. Keeping a firm’s best customer is not always profitable. The decision whether to invest more in a “light” or in a “heavy” customer depends mainly on the firm’s ability to retain the “heavy” customers.