The Impact of Marketing on Customer Equity:From Relationship Marketing to Product MarketingShijin Yoo and Dominique M. Hanssens(January 2004AbstractIntroductionInsert Figure 1 about hereLiteratureAcquisition Rate and Retention RateThe Impact of Marketing Mix on Customer EquityModel DevelopmentModeling Acquisition Rate and Retention RateThe Long-Run Impact of Marketing Efforts on Acquisition and RetentionCE Model vs. Sales ModelEmpirical IllustrationDataInsert Table 1 about hereInsert Figure 3 about hereVAR Model SpecificationEndogenous VariablesExogenous VariablesImpulse Response FunctionsResultsUnit-root test resultsInsert Table 2 about hereThe Impact of Discounting on Customer EquityInsert Table 3 about hereInsert Figure 4 about hereThe Impact of Advertising on Customer EquityInsert Table 4 about hereA Numerical Simulation of Customer EquityInsert Table 5 about hereConclusionTable 1: Descriptive Statistics of DataTable 3: Impact of Discounting on Sales and Customer EquityTotal SalesSales from Retained Customers Sales from Acquired ProspectsSales from Lost Customers Sales from Lost ProspectsAppendix 1: IRF elasticityCase 1: log transformed response and log transformed shockCase 2: log transformed response and logit transformed shockCase 3: logit transformed response and log transformed shockCase 4: logit transformed response and logit transformed shockSecond, profit at time t (
) can be expressed as,whereThird, number of customers can be measured by,Fourth, customer equity under fixed retention and acquisition rate can be calculated as follows;The Impact of Marketing on Customer Equity: From Relationship Marketing to Product Marketing Shijin Yoo and Dominique M. Hanssens♦ January 2004 ♦ Shijin Yoo is a doctoral candidate and Dominique M. Hanssens is the Bud Knapp Professor of Marketing at the UCLA Anderson School of Management.Abstract The customer equity (CE) concept has been successfully applied to relationship businesses such as banking, insurance, and telecommunications. This paper takes the CE framework to product-marketing industries (e.g., consumer durables) by developing a model that can infer the impact of marketing mix efforts on CE. Each brand’s acquisition rates and retention rates, two core elements of CE, are measured by decomposing the source of product sales into two parts: existing customers and prospects. A vector-autoregressive (VAR) model is proposed to estimate the dynamic relationship between the marketing mix and CE. The model is applied to the automobile industry as an empirical illustration. By comparing the CE model to the conventional sales response model, we find that the impact of the marketing mix on CE is different from its impact on sales. While both discounting and advertising increase product sales, this sales-effectiveness is not directly translated to the development of CE in the long-run. Brands differ in the impact of discounting on acquisition vs. retention rates. Higher quality brands are more acquisition-effective while lower quality brands are more retention-effective. Only one brand increases its long-term acquisition rate by advertising, and none of the brands increase long-run retention through advertising. Advertising’s short-term impact on acquisition rate differs across brands. While advertisements by small-share and cheaper brands have a negative impact on acquisition rate, large-share and more expensive brands increase their acquisition rates by advertising efforts. The managerial implications of the model are shown by simulating the changes induced by an incremental marketing investment in the number of customers, profits and ultimately, customer equity over time.Introduction Customer equity (CE) has emerged as a new paradigm for guiding managers to build strong and profitable relationships between the customer and the firm. The framework regards customers as a valuable asset that should be managed like any other financial assets (Blattberg and Deighton 1996). Given its emphasis on a customer-centered marketing strategy, it is not surprising that the CE paradigm has been applied primarily to the relationship-marketing domain. Examples include insurance (Jackson 1989), newspapers (Keane and Wang 1995), magazines (Dwyer 1997), cellular phones (Bolton 1998), airline pilot memberships (Thomas 2001), and interactive television entertainment services (Lemon, White, and Winer 2002).1 However, in most industries managers make their marketing decisions based on product-based metrics such as sales and market share. As noted by Rust, Lemon, and Zeithaml (2001), “Business success is based on customer relationships; however, because customer equity is difficult to measure, many companies continue to focus on metrics that capture product-based strategies rather than metrics that capture customer-based strategies.” For example, managers dealing with frequently purchased consumer goods (FPCG) or consumer durables have difficulty applying the CE paradigm to their marketing decisions since the metric is not easy to measure when only product performance data are readily available. However, we argue that ignoring CE-related metrics in the product-marketing domain may mislead managers in allocating marketing 1 Since most studies define CE as a summation of customer lifetime values (CLV), we include the studies on CLV in the CE literature. 1resources since the product-based metrics typically fail to capture the long-run profitability impact on which the CE framework is based. For example, promotion campaigns that are known to be sales effective and therefore heavily utilized could erode the quality of the customer relationship over time in such a way that long-term profitability is declining (Jedidi, Mela, and Gupta 1999). To make the distinction between relationship and product marketing clearer, we categorize various business situations in terms of (1) the type of relationship between the customer and the firm and (2) the type of marketing efforts mainly used by the firm (see Figure 1).2 Contractual relationship means there exists a finite-period (e.g., one year) contract between the customer and the firm for the usage of products or services. The inter-purchase time is pre-determined based on the contract, and thus the firm can explicitly observe customer retention or defection. However, if the relationship is non-contractual, it is harder to measure the