Efficient Allocation of Marketing Resources using Dynamic Programming

In this paper we address the following question: how to estimate a Markov Decision Process modeling the dynamics of customer relationships. Once the model is estimated, we discuss how to efficiently allocate marketing resources and instruments in order to maximize the long-term value generated by customers in a given future time horizon using dynamic programming. Our methodology allows us both to predict and to optimize the future value generated by customers. We show our approach using a case study involving a major European airline.