Statistical Methods in Customer Relationship Management

5.1 Introduction

The previous two chapters have discussed the integrated frameworks and key modeling issues with regard to customer acquisition and customer retention. In both cases the chapters looked at these two phenomena in the customer life cycle independently. Each chapter did this because it is critical to understand these phenomena in great depth to understand the drivers of the different aspects of customer acquisition and customer retention. However, it is myopic for a marketing manager to ignore the fact that these two processes are inherently linked together. All customers of a firm must first be acquired before effort can be placed on retention. And, eventually, all customers will churn from the firm at some point in time in the future. Ideally a firm wants to manage this process such that new customers are replacing those current customers who churn at an acquisition rate that is greater than or equal to the rate of churn. This way, the size of the customer base of the firm continues to grow (or at least does not shrink). In addition, once a customer is acquired the firm wants to build the relationship with the customer to extend the customer's life and profitability with the firm. Thus, a firm needs to ‘balance’ the marketing effort between acquisition and retention in order to maximize the profitability of the customer base over time.

There are often several key questions that need to be answered with regard to customer acquisition and retention (see Figure 5.1 ...