Measuring the Return on Investing in Customer Acquisition and Retention

50 Pages Posted: 6 Feb 2019

See all articles by Neil Thomas Bendle

Neil Thomas Bendle

University of Western Ontario - Marketing Area Group

Paul Farris

University of Virginia - Darden School of Business

Rajkumar Venkatesan

University of Virginia - Darden School of Business

Date Written: October 12, 2018

Abstract

Marketers often compare the lifetime value of a customer (CLV) to the spending necessary to acquire the customer to project Return on Investment. This approach, CLV minus acquisition costs all divided by acquisition costs, which we call simple marketing ROI (SMROI), is incorrect wherever retention spending occurs. By omitting retention spend (in its investment portion) SMROI understates the commitment, overstating ROI. We detail two main problems arising with SMROI:

• Firstly, acquisition campaigns with relatively high retention costs may be funded at the expense of more profitable investments.

• Secondly, the same formula cannot assess both investments in acquisition and retention and switching formulas creates inconsistency. A firm may acquire customers then immediately decide not to retain them using the same information.

This research shows how to correctly combine CLV with acquisition and retention spending: MROI equals CLV minus acquisition costs all divided by the sum of acquisition costs and discounted retention spend.

We detail the implications in complex business models – e.g., when a marketer assesses cross-selling and referral values showing that SMROI leads to incorrect marketing decisions.

Keywords: CLV, ROI, Acquisition, Retention, Marketing Strategy

JEL Classification: M31

Suggested Citation

Bendle, Neil Thomas and Farris, Paul and Venkatesan, Rajkumar, Measuring the Return on Investing in Customer Acquisition and Retention (October 12, 2018). Available at SSRN: https://ssrn.com/abstract=3265243 or http://dx.doi.org/10.2139/ssrn.3265243

Neil Thomas Bendle (Contact Author)

University of Western Ontario - Marketing Area Group ( email )

1151 Richmond Street, Suite 2
London, Ontario N6A 5B8
Canada

Paul Farris

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-0524 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/farris.htm

Rajkumar Venkatesan

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/html/direc_detail.aspx?styleid=2&id=5808

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