Modeling Customer Relationships as Markov Chains
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چکیده
INTRODUCTION The lifetime value of a customer is an important and useful concept in interactive marketing. Courtheaux (1986) illustrates its usefulness for a number of managerial problems—the most obvious if not the most important being the budgeting of marketing expenditures for customer acquisition. It can also be used to help allocate spending across media (mail vs. telephone vs. television), vehicles (list A vs. list B), and programs (free gift vs. special price), as well as to inform decisions with respect to retaining existing customers (see, e.g., Hughes, 1997). Jackson (1996) even argues that its use helps firms to achieve a strategic competitive advantage. Dwyer (1989) helped to popularize the lifetime value (LTV) concept by illustrating the calculation of LTV for both a customer retention and a customer migration situation. Customer retention refers to situations in which customers who are not retained are considered lost for good. In a customer retention situation, nonresponse signals the end of the firm’s relationship with the customer. In contrast, customer migration situations are those in which nonresponse does not necessarily signal the end of the relationship. Besides articulating this distinction between customer retention and migration, Dwyer listed several impediments to the use of LTV. More recently, Berger and Nasr (1998) argue for the impor-
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