Dynamic allocation of promotional budgets based on maximizing customer equity

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Marketing managers allocate extraordinary amounts of budgets for supporting their organization’s marketing plans. Choosing the right measure for allocation of promotional budgets to customers has always been a challenging issue and consequently has drawn considerable attention in the past few years. Related studies emphasize using Customer Lifetime Value or Customer Equity (CE) as a measure of customer’s profitability, based on which a firm can efficiently allocate its marketing budget to customers. In this study, the focus is on allocating the limited promotion budgets to customers to maximize CE. Using Markov decision process (MDP), the firm’s actions are linked to the customers’ behavior and the corresponding values. To solve MDP with a budget constraint, a heuristic method is proposed for finding the optimal or near-optimal policies for each customer segment. To confirm the validity of the method, the decision model is implemented in a business-to-business context to maximize CE by determining the optimal sales promotions to customers. The result of the proposed heuristic method is compared with a stochastic dynamic programming model. The result of experiments shows that the discount factor increases the difference between the obtained solutions becomes more significant. The difference approves the importance of accounting the optimal level of promotional budget for each customer segment. The average improvement gained by the optimal budget allocation ranges from 2 to 5.5%. The findings of this research indicate the essential of adopting different marketing policies for each customer segment.