Customer Lifetime Value in a Model of Dynamic Competition

Abstract

We study the structure of optimal customer acquisition and customer retention strategies in an infinite horizon model of a firm in a competitive industry. We examine the effects of changes in customer profitability, density of competition, and discount rate on the optimal allocation of marketing budget. We obtain a number of normative propositions and testable hypotheses at the level of the individual firm and the industry. We establish the connections between the problem of maximizing Customer Equity and the problem of maximizing the Value of the Firm.

Keywords: Customer Lifetime Value, Customer Acquisition, Customer Retention, Customer Equity

JEL Classification: M20. M30, M31