IDEAS home Printed from https://ideas.repec.org/a/spr/joptap/v142y2009i3d10.1007_s10957-009-9536-1.html
   My bibliography  Save this article

Social Relationship and Transactional Marketing Policies—Maximizing Customer Lifetime Value

Author

Listed:
  • G. E. Fruchter

    (Bar-Ilan University)

  • S. P. Sigué

    (Athabasca University)

Abstract

We present an analytic approach to address the problem of how sellers can establish and maintain a long-lasting relationship with a buyer and, at the same time, maximize customer lifetime value (CLV). To model the evolution of a relational exchange between a seller and a buyer, we extend a well-known mathematical model of “love dynamics.” The growth of each partner’s commitment to the relationship is a sum of negative and positive terms. The negative term describes each partner’s propensities for opportunism, while the positive terms describe each partner’s trust in the commitment of the other, and the reaction to marketing efforts. The seller controls the evolution of the relationship through social relationships and transactional marketing efforts. The main findings are as follows: (1) Loyal (committed) customers and long-term relationships do not always generate better cash flows, especially when buyers either look for superior current value in each purchase opportunity or are short-term oriented. (2) Without mutual trust between partners, the seller should treat old customers over time as new ones, making the reduction of retention costs impossible. (3) It is only cheaper to retain current customers rather than acquiring new ones if mutual trust between partners overcomes propensities for opportunism and the seller slightly discounts future cash flows.

Suggested Citation

  • G. E. Fruchter & S. P. Sigué, 2009. "Social Relationship and Transactional Marketing Policies—Maximizing Customer Lifetime Value," Journal of Optimization Theory and Applications, Springer, vol. 142(3), pages 469-492, September.
    • Handle: RePEc:spr:joptap:v:142:y:2009:i:3:d:10.1007_s10957-009-9536-1
    DOI: 10.1007/s10957-009-9536-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10957-009-9536-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10957-009-9536-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kamel Jedidi & Carl F. Mela & Sunil Gupta, 1999. "Managing Advertising and Promotion for Long-Run Profitability," Marketing Science, INFORMS, vol. 18(1), pages 1-22.
    2. Berger, Paul D. & Bechwati, Nada Nasr, 2001. "The allocation of promotion budget to maximize customer equity," Omega, Elsevier, vol. 29(1), pages 49-61, February.
    3. B. P. S. Murthi & Sumit Sarkar, 2003. "The Role of the Management Sciences in Research on Personalization," Management Science, INFORMS, vol. 49(10), pages 1344-1362, October.
    4. Sheth, Jagdish N. & Parvatiyar, Atul, 1995. "The evolution of relationship marketing," International Business Review, Elsevier, vol. 4(4), pages 397-418.
    5. Gabriel R. Bitran & Susana V. Mondschein, 1996. "Mailing Decisions in the Catalog Sales Industry," Management Science, INFORMS, vol. 42(9), pages 1364-1381, September.
    6. Michael Lewis, 2005. "Research Note: A Dynamic Programming Approach to Customer Relationship Pricing," Management Science, INFORMS, vol. 51(6), pages 986-994, June.
    7. Suresh P. Sethi, 2021. "Optimal Control Theory," Springer Texts in Business and Economics, Springer, edition 4, number 978-3-030-91745-6, August.
    8. Arthur M. Geoffrion & Ramayya Krishnan, 2003. "E-Business and Management Science: Mutual Impacts (Part 1 of 2)," Management Science, INFORMS, vol. 49(10), pages 1275-1286, October.
    9. Venky Nagar & Madhav V. Rajan, 2005. "Measuring Customer Relationships: The Case of the Retail Banking Industry," Management Science, INFORMS, vol. 51(6), pages 904-919, June.
    10. Fruchter, Gila E. & Messinger, Paul R., 2003. "Optimal management of fringe entry over time," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 445-466, December.
    11. Arthur M. Geoffrion & Ramayya Krishnan, 2003. "E-Business and Management Science: Mutual Impacts (Part 2 of 2)," Management Science, INFORMS, vol. 49(11), pages 1445-1456, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nuttall, Peter & Arnold, Sally & Carless, Luke & Crockford, Lily & Finnamore, Katie & Frazier, Richard & Hill, Alicia, 2011. "Understanding music consumption through a tribal lens," Journal of Retailing and Consumer Services, Elsevier, vol. 18(2), pages 152-159.
    2. Martín-Herrán, Guiomar & McQuitty, Shaun & Sigué, Simon Pierre, 2012. "Offensive versus defensive marketing: What is the optimal spending allocation?," International Journal of Research in Marketing, Elsevier, vol. 29(2), pages 210-219.
    3. Ainhoa Rodriguez Oromendía & María Dolores Reina Paz & Ramón Rufín, 2015. "Research Note: Relationship versus Transactional Marketing in Travel and Tourism Trade Shows," Tourism Economics, , vol. 21(2), pages 427-434, April.
    4. Azeem, Muhammad Masood & Baker, Derek & Villano, Renato A. & Mounter, Stuart & Griffith, Garry, 2018. "Food shoppers’ share of wallet: A small city case in a changing competitive environment," Journal of Retailing and Consumer Services, Elsevier, vol. 43(C), pages 119-130.
    5. Mariusz Górajski & Dominika Machowska, 2019. "How do loyalty programs affect goodwill? An optimal control approach," 4OR, Springer, vol. 17(3), pages 297-316, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roland T. Rust & Ming-Hui Huang, 2014. "The Service Revolution and the Transformation of Marketing Science," Marketing Science, INFORMS, vol. 33(2), pages 206-221, March.
    2. H-V Seow, 2010. "Question selection responding to information on customers from heterogeneous populations to select offers that maximize expected profit," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(3), pages 443-454, March.
    3. Doukidis, Georgios I. & Pramatari, Katerina & Lekakos, Georgios, 2008. "OR and the management of electronic services," European Journal of Operational Research, Elsevier, vol. 187(3), pages 1296-1309, June.
    4. Seow, Hsin-Vonn & Thomas, Lyn C., 2006. "Using adaptive learning in credit scoring to estimate take-up probability distribution," European Journal of Operational Research, Elsevier, vol. 173(3), pages 880-892, September.
    5. 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.
    6. Blattberg, Robert C. & Malthouse, Edward C. & Neslin, Scott A., 2009. "Customer Lifetime Value: Empirical Generalizations and Some Conceptual Questions," Journal of Interactive Marketing, Elsevier, vol. 23(2), pages 157-168.
    7. Mercedes Esteban-Bravo & Jose M. Vidal-Sanz & Gökhan Yildirim, 2014. "Valuing Customer Portfolios with Endogenous Mass and Direct Marketing Interventions Using a Stochastic Dynamic Programming Decomposition," Marketing Science, INFORMS, vol. 33(5), pages 621-640, September.
    8. Arthur M. Geoffrion & Ramayya Krishnan, 2003. "E-Business and Management Science: Mutual Impacts (Part 1 of 2)," Management Science, INFORMS, vol. 49(10), pages 1275-1286, October.
    9. Roland T. Rust & Tuck Siong Chung, 2006. "Marketing Models of Service and Relationships," Marketing Science, INFORMS, vol. 25(6), pages 560-580, 11-12.
    10. Ronald M. Harstad & Aleksandar Saša Pekeč, 2008. "Relevance to Practice and Auction Theory: A Memorial Essay for Michael Rothkopf," Interfaces, INFORMS, vol. 38(5), pages 367-380, October.
    11. Hans Buhl & Robert Klein & Johannes Kolb & Andrea Landherr, 2011. "CR 2 M—an approach for capacity control considering long-term effects on the value of a customer for the company," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(2), pages 187-204, December.
    12. Amit V. Deokar & Omar F. El-Gayar, 2011. "Decision-enabled dynamic process management for networked enterprises," Information Systems Frontiers, Springer, vol. 13(5), pages 655-668, November.
    13. Hans Buhl & Martin Gneiser & Julia Heidemann, 2009. "Ein modelltheoretischer Ansatz zur Planung von Investitionen in Kundenbeziehungen," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 20(2), pages 175-195, October.
    14. Ricardo Montoya & Oded Netzer & Kamel Jedidi, 2010. "Dynamic Allocation of Pharmaceutical Detailing and Sampling for Long-Term Profitability," Marketing Science, INFORMS, vol. 29(5), pages 909-924, 09-10.
    15. Tarek Ben Rhouma & Georges Zaccour, 2018. "Optimal Marketing Strategies for the Acquisition and Retention of Service Subscriber," Management Science, INFORMS, vol. 64(6), pages 2609-2627, June.
    16. Ming-Hui Huang & Roland T. Rust, 2017. "Technology-driven service strategy," Journal of the Academy of Marketing Science, Springer, vol. 45(6), pages 906-924, November.
    17. David A. Schweidel & Peter S. Fader & Eric T. Bradlow, 2008. "A Bivariate Timing Model of Customer Acquisition and Retention," Marketing Science, INFORMS, vol. 27(5), pages 829-843, 09-10.
    18. Eriksson, Kent & Hermansson, Cecilia & Jonsson, Sara, 2019. "The viability of the bank advisory service business model - effects of customers' trust, satisfaction and loyalty on client-level performance," Working Paper Series 19/4, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    19. Kevin Zhu & Kenneth L. Kraemer & Sean Xu, 2006. "The Process of Innovation Assimilation by Firms in Different Countries: A Technology Diffusion Perspective on E-Business," Management Science, INFORMS, vol. 52(10), pages 1557-1576, October.
    20. Jonathan Z. Zhang & Oded Netzer & Asim Ansari, 2014. "Dynamic Targeted Pricing in B2B Relationships," Marketing Science, INFORMS, vol. 33(3), pages 317-337, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joptap:v:142:y:2009:i:3:d:10.1007_s10957-009-9536-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.