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
1
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.
2
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
3
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
4
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
5
[ ]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
6
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.
7
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).
8
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
9
ResultResult
10
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
9
9Optimal Rate (a,r)0.1216761
3
0.404914
8
10CLV 64.459829
11CE 5.22705645.2270564
R->r->a->A
g->Market Share
ResultResult
11
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
12
ConclusionConclusion
Amc=Rmc=CLV
Optimal Budget to Maximized CE
ConclusionConclusion
13
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
14