Managing Customer Acquisition Risk Using Co-Operative Databases

50 Pages Posted: 12 Aug 2014

See all articles by Hongju Liu

Hongju Liu

University of Connecticut

Joseph Pancras

University of Connecticut - Department of Marketing

Malcolm Houtz

Alliant Inc.

Date Written: August 11, 2014

Abstract

Acquisition of new customers involves both opportunity and risk, and it is important for firms to predict and manage the risks involved in customer acquisition. Despite its importance, the management of risk in customer acquisition has not been the subject of much academic research. This paper develops a framework for firms to manage customer acquisition risk using co-operative databases. We illustrate this framework in context of the optimal selection of customers for direct mail with a ‘buy now, pay later’ payment option when the acquisition risk manifests as bad debt risk. Using data from a large scale direct marketing campaign, we show that our empirical model that incorporates bad debt risks substantially outperforms suboptimal targeting schemes that overlook bad debt risks. We also illustrate how alleviating bad debt risks is one beneficial outcome of a fairly recent trend in database marketing, namely the emergence of co-operative databases.

Keywords: customer acquisition, bad debt risk, co-operative database, direct mail, direct marketing, targeting

JEL Classification: M31, M41

Suggested Citation

Liu, Hongju and Pancras, Joseph and Houtz, Malcolm, Managing Customer Acquisition Risk Using Co-Operative Databases (August 11, 2014). Available at SSRN: https://ssrn.com/abstract=2478824 or http://dx.doi.org/10.2139/ssrn.2478824

Hongju Liu

University of Connecticut ( email )

2100 Hillside Rd, U-1041
Storrs, CT 06269-1063
United States

Joseph Pancras (Contact Author)

University of Connecticut - Department of Marketing ( email )

Storrs, CT 06269
United States

Malcolm Houtz

Alliant Inc. ( email )

301 Fields Lane
North Center
Brewster, 10509-2621
United States
845-276-2600( ext: 238) (Phone)

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