Managing Customer Acquisition Risk Using Co-Operative Databases
50 Pages Posted: 12 Aug 2014
Date Written: August 11, 2014
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: Suggested Citation