Wharton-SMU Research Center To Pester or Leave Alone: Lifetime Value Maximization through Optimal Communication Timing

The marketing literature has long acknowledged the importance of a customer’s lifetime value in customer relationship management. More recently, researchers have turned their attention to the links between satisfaction and both customer acquisition and retention strategies. In this paper, we study how to best communicate with a database of customers, taking into account that customers are able to remove themselves from this database. In particular, we are interested in understanding the impacts of communication frequency on customer retention and ultimately on lifetime value. In doing so, we develop a theoretical framework for managing a customer database and addressing the tradeoffs between value extraction and customer retention. An empirical application of this framework is conducted for email marketing in the entertainment industry. This empirical application recognizes the customization ability underlying one-to-one marketing, and yields decision rules for how a firm should interacts with individual customers. We find that inter-communication time has a dramatic impact on customer behavior. It affects both attrition and customer surplus and thus has a critical impact on Name Value. This impact is highly asymmetrical. Managers are advised to err on the side of longer rather than shorted inter-communication times. We further find that retention benefits Name Value in two aspects. First, one can only derive revenue from customers who are active. Second, the larger a firm’s customer base is, the lower its percustomer contact costs. These findings are supported by our empirical analysis.