Publication Type

Working Paper

Publication Date

10-2003

Abstract

We demonstrate in this paper that firms should view customers in a database as a renewable resource when valuating them. Indeed, customer names flow in and out of the firm’s databases, and the goal of the firm is to optimize the overall customer acquisition/cultivation/attrition process. The renewable resource approach to the problem of maximizing the profits generated by a flow of customer names is more appropriate than the traditional Customer Lifetime Value (CLV) approach. We show that CLV underestimates the true value of names (by more than 400% in some cases) and leads to sub-optimal customer relationship management and acquisition strategies. For instance, while a firm should discount future profits when valuating its database, it should not discount these same profits when setting its acquisition policy. We derive the first-order condition, and perform comparative statics, for a firm trying to optimize its contact policy. Perhaps the most interesting result stemming from the comparative statics is the implication that start-up companies should contact their customers less frequently than established companies. Start-ups should resist the temptation of boosting short-term revenues in favor of accumulating names by spacing communications. We finish the paper with an analysis of customer heterogeneity.

Discipline

Management Information Systems

Research Areas

Operations Management

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

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