The Impact of Marketing-Induced versus Word-of-Mouth Customer Acquisition on Customer Equity Growth

Abstract Companies can acquire customers through costly but fast-acting marketing investments or through slower but cheaper word-of-mouth processes. Their long-term success depends critically on the contribution of each acquired customer to overall customer equity. The authors propose and test an empirical model that captures these long-term effects. An application to a Web hosting company reveals that marketing-induced customers add more short-term value, but word-of-mouth customers add nearly twice as much long-term value to the firm. The authors illustrate their findings with some dynamic simulations of the long-term impact of different resource allocations for acquisition marketing.

[1]  Steven R. Lerman,et al.  The Estimation of Choice Probabilities from Choice Based Samples , 1977 .

[2]  Peter H. Reingen,et al.  Social Ties and Word-of-Mouth Referral Behavior , 1987 .

[3]  P. Herr,et al.  Effects of Word-of-Mouth and Product-Attribute Information on Persuasion: An Accessibility-Diagnosticity Perspective , 1991 .

[4]  P. Phillips,et al.  Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root? , 1992 .

[5]  G. C. Tiao,et al.  An introduction to multiple time series analysis. , 1993, Medical care.

[6]  F. Reichheld.  Loyalty-based management. , 1993, Harvard business review.

[7]  Swapping business skills for oil , 1993 .

[8]  Peter Wright,et al.  Persuasion Knowledge , 2022 .

[9]  Peter Wright,et al.  Persuasion Knowledge: Lay People's and Researchers' Beliefs about the Psychology of Advertising , 1995 .

[10]  Dominique M. Hanssens,et al.  Empirical Generalizations About Market Evolution and Stationarity , 1995 .

[11]  Robert C. Blattberg,et al.  Manage marketing by the customer equity test. , 1996, Harvard business review.

[12]  Behram J. Hansotia,et al.  Analytical challenges in customer acquisition , 1997 .

[13]  Michel Bierlaire,et al.  DISCRETE CHOICE MODELS , 1998 .

[14]  Improving advertising budgeting : insights from the MAX program of managing advertising expenditures for financial performance : conference report of the MAX conference Novemver 19-20, 1998 New York City , 1999 .

[15]  K. Hadri.  Testing The Null Hypothesis Of Stationarity Against The Alternative Of A Unit Root In Panel Data With Serially Correlated Errors , 1999 .

[16]  Bart J. Bronnenberg,et al.  The Emergence of Market Structure in New Repeat-Purchase Categories: The Interplay of Market Share and Retailer Distribution , 2000 .

[17]  W. Reinartz,et al.  On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implications for Marketing , 2000 .

[18]  Dominique M. Hanssens,et al.  The Category-Demand Effects of Price Promotions , 2000 .

[19]  Robert C. Blattberg,et al.  Customer Equity: Building and Man-aging Relationships as Valuable Assets , 2001 .

[20]  Jacquelyn S. Thomas.  A Methodology for Linking Customer Acquisition to Customer Retention , 2001 .

[21]  Sunil Gupta,et al.  Valuing customers , 2007 .

[22]  Peter C. Verhoef,et al.  Customer Equity: Building and Managing Relationships as Valuable Assets , 2002 .

[23]  David Godes,et al.  Using Online Conversations to Study Word-of-Mouth Communication , 2004 .

[24]  Dominique M. Hanssens,et al.  Persistence Modeling for Assessing Marketing Strategy Performance , 2003 .

[25]  G. Zauberman.  The Intertemporal Dynamics of Consumer Lock-in , 2003 .

[26]  Rajkumar Venkatesan,et al.  A Customer Lifetime Value Framework for Customer Selection and Resource Allocation Strategy , 2004 .

[27]  Katherine N. Lemon,et al.  Return on Marketing: Using Customer Equity to Focus Marketing Strategy , 2004 .

[28]  C. W. Park,et al.  The Ties That Bind: Measuring the Strength of Consumers’ Emotional Attachments to Brands , 2005 .

[29]  D. Collings,et al.  Valuing customers , 2005 .

[30]  Peter S. Fader,et al.  Counting Your Customers the Easy Way: An Alternative to the Pareto/NBD Model , 2005 .

[31]  W. Reinartz,et al.  Balancing Acquisition and Retention Resources to Maximize Customer Profitability , 2005 .

[32]  Michael Lewis.  Customer Acquisition Promotions and Customer Asset Value , 2006 .

[33]  K. Pauwels,et al.  Effects of Word-of-Mouth versus Traditional Marketing: Findings from an Internet Social Networking Site , 2009 .

[34]  Kapil R. Tuli,et al.  Customer Satisfaction and Stock Returns Risk , 2009 .

[35]  Christian Homburg,et al.  Managing Dynamics in a Customer Portfolio , 2009 .