Assessing the Effect of Marketing Investments in a Business Marketing Context

V. Kumar (), S. Sriram (), Anita Luo () and Pradeep Chintagunta
Additional contact information
V. Kumar: J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303
S. Sriram: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Anita Luo: J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303

Marketing Science, 2011, vol. 30, issue 5, 924-940

Abstract: Recent research has empirically characterized the buyer-seller relationship as dynamically evolving from one discrete state to another. Conventional wisdom would suggest that a customer in a higher relationship state that has a higher transaction value would also have greater lifetime value to the firm. However, recent evidence suggests that higher relationship states can be ephemeral. Hence, the link between transaction value and lifetime value is not obvious. In this study, we seek to understand, within a specific empirical context, (i) the relationship between a customer's transaction value and that customer's lifetime value and (ii) the relationship between the lifetime value of a customer and the optimal level of marketing activity that needs to be directed at that customer. To this end, we develop a trivariate Tobit hidden Markov model that allows for (a) transitions among relationship states, (b) possible synergies between the various products that the supplier firm offers, (c) endogeneity in marketing activity, (d) heterogeneity in model parameters, and (e) the presence of the no-purchase option. Our results reinforce recent findings by Schweidel et al. [Schweidel, D. A., E. T. Bradlow, P. S. Fader. 2011. Portfolio dynamics for customers of a multiservice provider. Management Sci. 57 (3) 471-486] that higher relationship states can be short-lived. Importantly for the supplier firm, a customer in the highest relationship state in a given period does not yield the highest lifetime value to the firm. Hence, the relationship between transaction value (i.e., relationship state) and lifetime value can be nonmonotonic. At the same time, we also find a nonmonotonic relationship between the optimal expenditures that should be directed at a customer and that customer's lifetime value; i.e., the optimal level of marketing contacts is not the highest for customers with the highest lifetime value. Furthermore, we find that the optimal marketing expenditures for myopic agents are 14%-33% lower than the corresponding values for forward-looking agents. Therefore, not accounting for the long-term effects of marketing contacts would lead to suboptimal marketing budgets. Moreover, a comparison with the current marketing expenditures suggests that the current practice is closer to the myopic policy than to the forward-looking one.

Keywords: business-to-business marketing; hidden Markov model; optimal resource allocation (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://dx.doi.org/10.1287/mksc.1110.0661 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:30:y:2011:i:5:p:924-940

Access Statistics for this article

More articles in Marketing Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().