Customer Profitability and Optimal CLV-Based Strategies in a Model of Dynamic Competition

26 Pages Posted: 8 Nov 2014

See all articles by Gerasimos Lianos

Gerasimos Lianos

Southwestern University of Finance and Economics

Igor Sloev

National Research University Higher School of Economics

Date Written: April 3, 2014

Abstract

We study the optimal customer-acquisition and customer-retention decisions of the representative firm in a dynamic competitive industry. We find that the optimal per-customer retention effort depends positively on customer profitability and is constant over time. The endogenous effective retention rate is higher for more profitable customers, so their proportion in the customer base increases over time. Larger market size and lower competition strength result in higher acquisition and retention expenditures at the firm level, but they do not change per-capita values. The retention effort that maximize a firm's value also maximize individual Customer Lifetime Value, whereas the equilibrium acquisition expenditure maximize the expected average customer value in the corresponding cohort.

Keywords: Customer Lifetime Value, Customer Retention, Customer acquisition

JEL Classification: M21, M31, M37

Suggested Citation

Lianos, Gerasimos and Sloev, Igor, Customer Profitability and Optimal CLV-Based Strategies in a Model of Dynamic Competition (April 3, 2014). Available at SSRN: https://ssrn.com/abstract=2520328 or http://dx.doi.org/10.2139/ssrn.2520328

Gerasimos Lianos (Contact Author)

Southwestern University of Finance and Economics ( email )

Chengdu, 610074
China

Igor Sloev

National Research University Higher School of Economics ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

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