Numeric decision support to find optimal balance between customer acquisition and retention spending.

Abstract

This paper focuses on optimisation procedures for customer acquisition and retention costs. It compares a recent contribution by Pfeifer (2005) to the original Blattberg and Deighton (1996) model and gives generic formulations for both optimisation procedures. It extends the model and the optimisation procedures from the rather narrow ‘lost for good’ customer dynamic behaviour scheme to the more general ‘always a share’ behaviour model. Numeric optimisation algorithms used to build iso-curves help prove that the ratio between optimal retention and acquisition costs is fundamentally a matter of customer versus prospect responsiveness to marketing efforts, and produce decision support to find the optimal ratio between customer retention and acquisition spending. Empirical data adapted from existing literature on the subject are used to test and illustrate the optimisation models and methods that are introduced.