First Impressions Count: Leveraging Acquisition Data for Customer Management
55 Pages Posted: 17 Mar 2017 Last revised: 12 Apr 2017
Date Written: February 1, 2017
Firms increasingly have access to richer customer data. What a decade ago was merely a transaction added to a customer database, nowadays is a collection of behaviors that a customer engages in while she is making a purchase (e.g., whether her purchase was online or offline, whether she used a tablet or computer, whether she bought a new product or an old best-seller). These data can be used to form a “first impression” of a customer based on her initial transaction. In this paper we posit that a customer's first impression carries valuable information for the firm as it explains a large proportion of the heterogeneity in future behavior, both in terms of what the customer is expected to do (i.e., her lifetime value) and how responsive she will be to marketing actions. The latter point is especially relevant for contexts in which firms do not observe many purchases per individual (e.g., retail) or where targeting occurs soon after customer acquisition. In these contexts, models that only rely on unobserved sources of heterogeneity are unable to help the marketer target newly acquired customers with precision.
We develop a latent attrition model of purchase incidence and amount that incorporates observed heterogeneity—capturing the effect of first impressions—both in individual propensity to buy as well as responsiveness to the firm's marketing actions. Applying the model to data from a retail context, we demonstrate that first impressions are very informative for the firm. For example, customers who purchase a newly introduced product at the moment of acquisition not only tend to buy more frequently in the future than customers who bought existing products at acquisition, but they also tend to spend more money in those (future) transactions. Interestingly, these customers are less responsive to email marketing campaigns and more responsive to direct marketing. Overall, we show that the focal firm would improve the return on their marketing actions by 148% if it targeted just-acquired customers based on their first impressions.
Keywords: Customer base analysis, latent attrition models, probability models, customer heterogeneity, acquisition
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