Customer Acquisition and Customer Retention in a Monopolistically Competitive Industry

Abstract

We study the optimal customer-acquisition and customer-retention decisions over an infinite planning horizon of the representative firm in a monopolistically competitive industry. Both the long-term and short-term equilibria of the industry are characterized by a constant optimal retention rate. We show that customer churn rate and the share of acquisition expenditures in the total marketing expenditures decrease with firm size. Stronger competition leads to lower firm's total acquisition and retention expenditures, but it does not change the per-capita levels. Larger market size increases the firm's total acquisition and retention expenditures, but it leaves the per-capita retention levels unchanged.

Keywords: market dynamics, customer acquisition, customer retention, customer lifetime value

JEL Classification: M20, M30, M31