3 Drivers of Customer Equity: The Acquisition Effort Firms are enticed to grow by acquiring customers that are new to the market and by stealing customers from their competitors. Furthermore, since there is always a proportion of defectors, a company that does not acquire new customers will see its market share gradually declining over time. Depending on the industry characteristics and the product life cycle, decisions on customer acquisition have a larger or smaller impact on the firm’s CE. The following factors are suggested as enhancers of the importance of customer acquisition: (a) High switching costs. When firms realize that customers will present switching costs in the future, they compete more fiercely for acquisition before the customer has attached herself to a supplier (see our discussion about switching costs in Section 4.1 and Blattberg et al. 2001). This happens because, once a customer has been acquired, the company can benefit from the switching cost in later periods (e.g., Klemperer, 1987a, McGahan and Ghemawat, 1994). (b) Low switching costs with undifferentiated products. When switching costs are low and products are undifferentiated, it is relatively easy to induce customers to switch by small price cuts. In those scenarios, we would expect firms to compete aggressively both for customer acquisition and customer retention. (c) Early stages of the life cycle. There are two reasons why a firm may be motivated to emphasize customer acquisition in the early stages of its life cycle. First, the marginal CE contribution of a dollar spent on acquisition is usually higher than the same dollar spent on retention of existing customers (see discussion in Section 4.2). Second, for some businesses, category adoption depends heavily on imitation effects (Bass, 1969), and therefore the speed with which the firm acquires customers in its early stages of the life cycle will affect its future diffusion process. (d) Infrequently purchased products. For some products the purchase cycle is so large and the retention rates are so difficult to increase (e.g., housing market) that most of the marketing budget goes into customer acquisition, without making a distinction between new and existing customers (Blattberg et al., 2001). (e) New entrants. New entrants into a market have to steal customers from the incumbents. They have to manage their costs of acquisition very well and their future probability of retention, while at the same time considering the incumbents’ competitive reaction. Regardless of the relative importance of customer acquisition, a firm should not acquire just any customer, but the right kind of customers (e.g., Reichheld, 1993, Hansotia and Wang, 1997). That is, firms should acquire customers who contribute positively to the firm’s CE, after accounting for their acquisition costs. Moreover, the manager has to decide how much is spent on acquisition relative to how much is to be spent on retention or add-on selling (Blattberg and Deighton, 1996, Blattberg et al., 2001), and how to allocate that spending among different acquisition channels. In this section, we consider models that can help managers answer the following three questions: How much should be spent on acquisition? What are the characteristics of the best prospects? How to allocate the acquisition budget among different acquisition channels? Previous Next