Maximizing customer equity subject to capacity constraints

This paper considers a firm that wants to optimally allocate limited capacity to heterogeneous customer segments in order to maximize its customer equity. The decision whether to accept or to reject a customer׳s request in a current period influences his repurchase behavior in later periods. The allocation process becomes complex, when demand exceeds capacity, because the isolated determination and optimization of a single customer׳s lifetime value is no longer feasible. Using a Markov decision process formulation, we study how to trade off short-term attainable revenues and long-term customer relationships. Furthermore, we analyze when and how intertemporal customer behavior influences capacity allocation. Finally, we investigate the impact of limited capacity on the customer lifetime value by introducing an opportunity cost-based approach that understands customer profitability as a customer׳s contribution to customer equity.