Julian Villanueva, Shijin Yoo, and Dominique M. Hanssens
Customers are valuable assets for firms, but they can be costly to acquire and retain. Customers’ differences in the course of their relationship with the firm are reflected in their contributions to the firm value throughout their tenure. To the extent that different acquisition strategies bring different “qualities” of customers, the acquisition effort has an important influence on the long-term profitability of the firm.
To grow their businesses, companies acquire customers in various ways, including marketing actions, such as broadcast media and direct mail (i.e., marketing-induced customer acquisition), and more spontaneous referrals (i.e., word-of-mouth customer acquisition). The purpose of this article is to investigate the impact of such marketing-induced versus word-of-mouth customer acquisition on the growth of customer equity—namely, the long-term firm value. Because customers acquired through different channels are expected to generate different value, the authors examine the difference of long-term contributions of customers gained through two distinctive acquisition methods: marketing induced and word of mouth.
Each time a customer is acquired, customer equity increases through several effects. First, the customer adds a stream of future cash flows generated through his or her relationship with the firm. Second, the customer may generate word of mouth (positive or negative) and act as a salesperson to the firm. Thus, it is possible for a firm to assign the profitability of future customers acquired through word of mouth (i.e., direct network effect). Finally, by contributing to the firm’s performance, a new customer may improve the future acquisition process in both channels (i.e., indirect network effect). Thus, the authors measure not only the expected customer’s value in and of itself but also his or her net contribution to the growth of customer equity. This customer equity contribution is not directly observable and should be captured by a statistical model that is capable of tackling the complex interactions among the variables of interest.
The authors propose and test an empirical model that captures these long-term effects. An application to a Web-hosting company reveals that marketing-induced customers add more short-term value but that word-of-mouth customers add nearly twice as much long-term value to the firm. The authors illustrate their findings with some dynamic simulations of the long-term impact of different resource allocations for acquisition marketing.
Julian Villanueva is a faculty member in the Marketing Department at IESE Business School. He holds a PhD in Management (Marketing) from University of California, Los Angeles; an MBA from IESE Business School; and a BA in Economics from Universidad Complutense de Madrid. His research interests are in the area of customer equity. He is also interested in customer relationship management, brand management and product positioning, price discrimination, customer segmentation and targeting, Internet marketing, sales force management, channels of distribution, and linking marketing spending to long-term performance.
Shijin Yoo is Assistant Professor of Marketing at Korea University Business School in Seoul. He holds a Bachelor of Business Administration and an MBA from Seoul National University (Korea); he received his PhD (major in Marketing) from the Anderson School of Management at the University of California, Los Angeles. His doctoral dissertation received an honorable mention in the 20th MSI Alden G. Clayton Doctoral Dissertation Proposal Competition in 2003. Before entering academia, Yoo worked at an automobile marketing company in Korea for five years, where he developed an interest in various issues of marketing. His expertise is in various quantitative modeling issues in marketing, including econometric time-series analysis. His current research interests are investigating the long-term effects of marketing, market dynamics, and customer equity.
Dominique M. Hanssens is Bud Knapp Professor of Marketing in the Anderson Graduate School of Management at the University of California, Los Angeles. He served as executive director of the Marketing Science Institute from 2005 to 2007. His research focuses on strategic marketing problems, in particular marketing productivity, to which he applies his expertise in econometrics and time-series analysis. His articles have appeared in the leading academic and professional journals in marketing, economics, and statistics. Four of these articles have won best-paper awards in Marketing Science (1995, 2001, 2002) and Journal of Marketing Research (1999, 2007), and three were award finalists. In 2007, Hanssens was the recipient of the Gilbert A. Churchill Lifetime Achievement Award of the American Marketing Association.
Journal of Marketing Research, Vol. XLV, No. 1, February 2008
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