Customer Acquisition and Customer Retention in a Monopolistically Competitive Industry

The concept of Customer Lifetime Value (CLV) that is, the present value of the stream of profits accruing to a firm over the whole period of its relationship with a customer, has gained wide acceptance as a concept in marketing science and business practice. Closely related to CLV are the concepts of Customer Acquisition (attracting new customers to a firm’s service) and Customer Retention (preventing existing customers from leaving for competitive suppliers of the service). A general feature of the literature on CLV has been the independence of a firm’s CLV strategies from aspects the market environment, such as the size of the market, number of firms in the industry, and rivals’ actions. In this paper we develop a dynamic model of a firm in a monopolistically competitive industry to examine how aspects of the market environment affect Customer-Acquisition and Customer- Retention optimal decisions.

We consider a market with a fixed set of customers and a fixed set of monopolistically competitive firms. Each customer chooses a single supplier of a product. There is a customer churn. A customer upon leaving a firm becomes a potential customer for all firms in the industry. Firms engage in costly retention effort to decrease their customer attrition and in costly acquisition in a contest for new customers from the set of potential customers. We find a number of theoretical results which can be tested with data at the firm’s and the industry’s level. With respect to industry dynamics we find that as firms grow over time, increasing their customer base, (a) the per-prospect acquisition expenditures and per-capita retention expenditures remain constant, (b) the firm level acquisition expenditure decreases, (c) the firm level of retention expenditure increases, and (d) the share of acquisition expenditures in the total marketing expenditures decreases. In the symmetric steady state equilibrium of the industry we find that higher customer profitability leads to higher per-capita acquisition and retention efforts and a larger size of firm, whereas a higher discount rate has opposite effects. Tougher competition decreases firm’s total acquisition and retention expenditures but it does not affect per-capita levels. We show that maximizing the value of the firm in the steady state equilibrium of the industry is tantamount to maximizing the individual CLV.