Acquisition channels and price discrimination in a customer equity framework

This dissertation contains three essays that seek to increase our understanding of customer equity modeling. First, I provide an extensive review of current models of customer equity and introduce twelve propositions and several research priorities with the objective of guiding future research in this area. For the first time in the literature, I identify the elements that customer equity models need to include in order to be complete on important issues. Second, I develop a new metric that measures the contribution of a newly acquired customer to the dynamic customer equity of the firm. This metric captures not only the expected lifetime value of a customer, but also all the indirect effects that impact the firm's future performance by means of the acquisition process (e.g., word-of-mouth). This metric is estimated using time-series techniques with a database from an Internet firm. In addition, I study the optimal acquisition spending and its allocation among different acquisition channels. The results show that naively maximizing the short-term and/or not accounting for differences in the customer equity contribution of different cohorts of customers will result in suboptimal allocation. Finally, I study price discrimination when firms can follow either a long-term or a short-term (i.e., myopic) maximization strategy. My objective is to study different conditions under which: (1) a long-term maximization strategy is optimal, and (2) a firm should reward switchers with lower prices than those for loyals. I develop a two-period analytical model of behavior-based price discrimination. The model is unique in that it is the first analytical model to explicitly incorporate the notion of Customer Lifetime Value (CLV) vs. short-term maximization. The results show that as long-life customers become more valuable than first-time customers, a firm finds it optimal to reduce the price difference between loyals and switchers. Moreover, when long-life customers are sufficiently more profitable than first-time customers, firms offer prices to their loyal customers such that nobody switches in the market. In addition, it is shown that in some scenarios, pursuing a short-term maximization strategy is optimal for both firms in the market, while in other scenarios a CLV maximization strategy is better.