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Balancing Acquisition and Retention Spending for Firms with Limited Capacity


  • Anton Ovchinnikov

    () (Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22903)

  • Béatrice Boulu-Reshef

    () (Darden Graduate School of Business and Department of Economics, University of Virginia, Charlottesville, Virginia 22903)

  • Phillip E. Pfeifer

    () (Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22903)


This paper discusses the interaction between revenue management and customer relationship management for a firm that operates in a customer retention situation but faces limited capacity. We present a dynamic programming model for how the firm balances investments in customer acquisition and retention, as well as retention across multiple customer types. We characterize the optimal policy and discuss how the policy changes depending on capacity limitations. We then contrast the modeling results with those of a behavioral experiment in which subjects acted as managers making acquisition and retention decisions. In the modeling part of the paper, we introduce a concept of the value of an incremental customer (VIC), and show that when capacity is unlimited, VIC equals customer lifetime value (CLV), but when capacity is limited, VIC is much smaller and changes dynamically depending on the number of customers and their mix. As a result, the optimal spending is constant and depends on CLV for the firms with unlimited capacity, but changes dynamically and is generally unrelated to CLV when capacity is limited. In the experimental part, we introduce a concept of conditional optimality for the analysis of state-dependent decisions. Applying this concept to our data, we document a number of decision biases, specifically the subjects' tendency to overspend on retaining high-value customers and underspend on lower-value customers retention and acquisition. We show that providing CLV information exacerbates these biases and leads to a loss of net revenue when capacity is limited, but providing information about the marginal costs of acquisition and retention eliminated these biases and increases net revenue.Data, as supplemental material, are available at . This paper was accepted by Yossi Aviv, operations management.

Suggested Citation

  • Anton Ovchinnikov & Béatrice Boulu-Reshef & Phillip E. Pfeifer, 2014. "Balancing Acquisition and Retention Spending for Firms with Limited Capacity," Management Science, INFORMS, vol. 60(8), pages 2002-2019, August.
  • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:8:p:2002-2019
    DOI: 10.1287/mnsc.2013.1842

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    References listed on IDEAS

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    Cited by:

    1. So Yeon Chun & Dan A. Iancu & Nikolaos Trichakis, 2020. "Loyalty Program Liabilities and Point Values," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 257-272, March.
    2. Philipp Afèche & Mojtaba Araghi & Opher Baron, 2017. "Customer Acquisition, Retention, and Service Access Quality: Optimal Advertising, Capacity Level, and Capacity Allocation," Manufacturing & Service Operations Management, INFORMS, vol. 19(4), pages 674-691, October.
    3. Ascarza, & Neslin, & Netzer, & Lemmens, Aurélie & Anderson, Zachery & Fader, Peter S. & Gupta, S. & Hardie, B.G.S. & Libai, Barak & Neal, David & Provost, Foster, 2018. "In pursuit of enhanced customer retention management : Review, key issues, and future directions," Other publications TiSEM 28a90d28-6daf-42f1-bd8e-e, Tilburg University, School of Economics and Management.
    4. Ben Ali, M. & D’Amours, S. & Gaudreault, J. & Carle, M-A., 2018. "Configuration and evaluation of an integrated demand management process using a space-filling design and Kriging metamodeling," Operations Research Perspectives, Elsevier, vol. 5(C), pages 45-58.
    5. So Yeon Chun & Anton Ovchinnikov, 2019. "Strategic Consumers, Revenue Management, and the Design of Loyalty Programs," Management Science, INFORMS, vol. 65(9), pages 3969-3987, September.
    6. Eva Ascarza & Scott A. Neslin & Oded Netzer & Zachery Anderson & Peter S. Fader & Sunil Gupta & Bruce G. S. Hardie & Aurélie Lemmens & Barak Libai & David Neal & Foster Provost & Rom Schrift, 2018. "In Pursuit of Enhanced Customer Retention Management: Review, Key Issues, and Future Directions," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 5(1), pages 65-81, March.


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