Metrics for Projecting the Return on Customer Acquisition Investments

55 Pages Posted: 6 Feb 2019 Last revised: 5 Sep 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: August 30, 2019

Abstract

We examine customer acquisition under budget constraints. Marketers often compare customer lifetime value (CLV) with acquisition spending to project returns but such simple marketing return on investment (SMROI) metrics are biased wherever retention spending occurs. Omitting retention understates marketing investments, overstating SMROI. We propose MROI, which equals CLV minus acquisition costs divided by the sum of acquisition and discounted retention spend.

Using analytic models we show that managers using SMROI will acquire customers with relatively high retention costs over more profitable investments. We map the competitive implications, specifically increased competitive intensity giving lower returns and market profits using SMROI. We note how retention spend can be planned for at acquisition, that MROI is more robust than SMROI to error in projecting retention rates and marketing effectiveness, and that SMROI overstates the value of customers providing access to further cash flows, e.g., referrals and cross-sales. Critically, when using SMROI for acquisition a firm may waste cash acquiring customers, then immediately refuse to retain them. MROI, therefore, also reduces the challenges related to firing customers.

Keywords: CLV, MROI, Acquisition, Retention, Marketing Strategy, Analytical Models

JEL Classification: M31

Suggested Citation

Bendle, Neil Thomas and Farris, Paul and Venkatesan, Rajkumar, Metrics for Projecting the Return on Customer Acquisition Investments (August 30, 2019). 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
94
Abstract Views
432
rank
315,445
PlumX Metrics