Customer Acquisition Promotions and Customer Asset Value
Published 5/1/2006
Author: Michael Lewis
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Executive Summary
In recent years, several researchers have noted that a firm’s value and future prospects can be understood through an analysis of its customer base. This article addresses the question of how a firm’s acquisition efforts influence the composition of the customer portfolio. The first part of the research is a conceptual model that illustrates how customer uncertainty provides an explanation for why promotionally acquired customers have lower repurchase rates and smaller lifetime values.
The second part of the research involves empirical analyses of customer-level data from a newspaper and an online grocer. In both data sets, the author finds that acquisition discount depth is negatively related to repeat-buying rates and customer asset value. For example, for the newspaper subscribers, a 35% acquisition discount results in customers with about one-half the long-term value of non–promotionally acquired customers. For the online grocer, a discount of $10 off a customer’s first order results in customers with expected customer lifetime values of less than one-half of that of non–promotionally acquired customers.
Furthermore, when the lifetime value analyses are performed with the subset of repeat-buying customers, the analyses indicate that the effects of acquisition discounts are not limited to differences in initial repurchase rates. However, the magnitude of the continuing effects varies dramatically across the two categories. In the newspaper subscriber data, a small negative relationship exists between acquisition discount and customer value in the repeat-buying population. In contrast, when the analysis of the online grocer customer data is limited to repeat buyers, a substantial negative relationship persists between acquisition discount and customer value. These disparate results are not surprising, given the differences in the two firms’ pricing policies.
Biography
Michael Lewis is Assistant Professor of Marketing at the University of Florida. His research focuses on issues such as consumer response to loyalty programs, methods for customer valuation, and dynamic pricing. His previous research has appeared in Journal of Marketing Research, Journal of Marketing, and Management Science. Before obtaining a PhD in Marketing from Northwestern, he earned an MBA from the University of Chicago and a master’s degree in Industrial Engineering from the University of Illinois. His professional background also includes experience at Northwest Airlines.
J Marketing Research, Volume 43, Number 2, May 2006
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