BALANCING MARKET SHARE GROWTH AND CUSTOMER PROFITABILITY: BUDGET ALLOCATION FOR CUSTOMER ACQUISITION AND RETENTION

. This study adds to the knowledge of budget allocation for customer acquisition and retention spending in an inertia segment. The results indicate that when retention spending surpassed the optimal budget allocation, increased spending did not grow the expected value of customer equity. Since the inertia segment is comprised of loyal customers, an examination of brand equity and its role in customer loyalty and its influence on customer equity are discussed.


Introduction
It is the goal of every organization to increase shareholder value. Determining exactly how to undertake such a task is the primary objective of strategic planning and the subsequent managerial decision making and budgeting that derive from planning e orts. Brands are essential components of this strategic development, and the rm's marketing strategy relies heavily on choices related to brand strategies since the possible damage to brand value, brand equity, and customer equity has enduring implications for shareholder value (Cri enden, 2010). erefore, an in-depth understanding of both brand equity and customer equity are necessary when determining how to budget for customer acquisition and retention spending. e purpose of this article is to o er a decision-calculus model that balances the objectives of short-term market share growth and long-term customer equity. e results of the proposed model and its subsequent testing o er evidence contrary to the commonly accepted thought that it costs more to acquire a new customer than to retain a customer (Bla berg & Deighton, 1996). In fact, the results show that additional spending does not increase the expected value of customer equity when retention spending exceeds the optimal budget allocation.
Brand Equity e di erence between a good brand and a great brand lies in the depth of importance of the brand to the consumer, as well as the constant pursuit to understand the consumer (Cri enden, Keo, & McCarty, 2011). Strong brands have an advantage when consumers initiate their search with familiar and respected brands that have the potential to ful ll their needs (Hoe er & Keller, 2003). As such, the most robust brands, those with tremendously high brand equity, will have a large number of loyal customers (Aaker, 1991).
As de ned by Aaker (1991), brand equity is "a set of brand assets and liabilities linked to a brand, its name and symbol, that add to or detract from the value provided by a product or service to a rm and/or to that rm's customers" (p. 15). ese brand assets are of ve general types: brand loyalty, brand awareness, perceived quality, brand associations, and other proprietary brand assets. Loyalty and awareness are considered the cornerstones of brand equity and, thus, have a substantial impact on customer equity.

Measurement of Brand Equity
In order to manage brand equity, a marketer must be able to measure it. e measurements can be categorized into three diverse levels: consumer-based, product-market, and nancial-market (Keller & Lehmann, 2006). e consumer-based level is contingent upon consumer perception of brand knowledge structures. is level is comprised principally of hierarchy of awareness, association, a itude, a achment, and activity. e value of the brand is, thus, a consequence of the actions of the consumers. It is this customer-based brand equity structure that recognizes the presence of marketing bene ts for strong brands (Hoe er & Keller, 2003). e product-market measurement looks at activities related to the traditional marketing mix (Hoe er & Keller, 2003). Extension-related activity is the ability of the brand to extend the product lines o ered by the parent brand. Price-related activity encompasses the consumer's reaction to price changes, as well as the role of advertising on price sensitivity. Communication-related activities address the varying ways that consumers process information. Finally, the channel-related activity is the method in which the consumer is able to obtain the brand. Taken together, these activities capture the price premium a ributed to the brand. e nancial-market level of measuring brand equity allocates a monetary value to the brand. Various studies have reported a positive relationship between stock prices/ return and brand value (Aaker & Jacobson, 1994;Barth, Clement, Foster & Kasznik, 1998). For example, Lindenberg and Ross (1981) studied the connection among accounting data and nancial market data by using Tobin's q ratio as a measure of the monopoly rents of a rm. e ndings indicated that the areas of the economy that have q ratios on the high side of the range are typically those with somewhat unique products or unique elements of production that augment monopoly and/or quasi-rents. When examining nancial market performance, the market value that is not explained by the nancial assets is a ributable to the value of the brand (Bick, 2009).

Customer Equity
While brand value has long been a critical aspect of strategic planning e orts, customer equity has only recently joined the strategic arena. While brand value is focused on the rm's product(s), customer equity is focused on the rm's customers. erefore, customer equity is the total of all (both existing and future) of the "customer lifetime values" (Bla berg & Deighton, 1996). According to Gupta, Lehmann and Stuart (2004), customer lifetime value (CLV) is "the discounted future income stream derived from acquisition, retention, and expansion projections and their associated costs" (p. 7).
Firms can grow customer equity by increasing the CLV, which is composed of three components: customer acquisition, customer retention, and pro t margin (Stahl, Heitmann, Lehmann & Neslin, 2012). e growth, therefore, is a natural progression from the three components of CLV. A rm can increase CLV by increasing the lifetime of the customer, increasing the sales to a customer, or by reducing the costs to serve a customer (Pi , Ewing & Berthon, 2000). In conjunction with clarity on organizational goals, a clear understanding of the drivers of customer equity is necessary in order to determine both a strategic path and budgeting allocation.

Drivers of Customer Equity
Brand equity and customer equity are not segregated. In fact, brand equity is one of three drivers of customer equity (Lemon, Rust & Zeithaml, 2001). e brand is vital in two ways for growing the value of the customer asset (Hogan, Lemon & Rust, 2002). First, brands provide the opportunity to increase sales to current customers through supplemental purchases of the brand or through sales of brand extensions. Second, the power of a brand's image can enable the company to acquire new customers.
A second driver of customer equity is value equity, which is the customer's unbiased evaluation of the e ectiveness of a brand, substantiated by what is o ered versus what is received.
ere are three primary aspects of value equity: quality, price and convenience (Lemon et al., 2001). Value equity is critical when apparent di erences occur among rival products. us, rms can grow customer equity through value equity by enhancing their products and services via new features or product revitalizations. e nal driver of customer equity, relationship (retention) equity is: (1) the perceived bene ts the customer links with the rm's loyalty program, (2) the motivator for the customer to return to ful ll future product needs from the rm, (3) the driver for community association related to the product or service, and (4) the bond between the rm and the customer (Lemon et al., 2001). As evident in its name, this nal driver is instrumental in the retention aspect of customer asset management. us, not only is brand equity critical for customer acquisition purposes, relationship equity is equally important in retaining customers.
Reasoned Actions yet Double Jeopardy e theory of reasoned action states that a itudes and subjective norms are the precursors of outcome behavior (Ajzen & Fishbein, 2008). Within this theory, it is the normative in uence that explains the unpredictability between a itude and intention (Ha, 1998). By examining a itudes and subjective norms, an understanding of customer loyalty and purchase behavior can be obtained and aid in increasing a rm's customer equity. Yet, according to the Double Jeopardy theory, high share brands enjoy the double bene t of higher market penetration and higher buying frequency and loyalty, whereas less popular brands are disadvantaged not only because of fewer buyers but also because the customers are less loyal to the brand (McPhee, 1963). is theory also argues that marketing activities are not likely to enhance loyalty toward a brand unless the brand's market share increases (Ehrenberg et al., 2004). e question of how short-term acquisition and long-term retention programming can achieve an increase in a brand's market share poses a considerable problem (Lee ang & Wi ink 2000; Tsao et al., 2010). at is, while the net short-term e ect of customer acquisition can be positive in market share or acquisition rate, its long-term e ect on brand market share can be negative because of the possible adverse e ects on brand equity. erefore, among the various types of promotional budgets, only those budgets with models that quantify the long-term e ects of retention programming and the variables of acquisition (pricing, coupons, and shipping fees) are promising to rms wishing to make wise choices Lewis, 2004).
O en referred to as loyal, potential switcher, and switcher, customers with repeat purchase behaviors are critical to both short-and long-term success (McCarthy et al., 1992). e three elementary customer a itudes of emotive, inertial, and deliberative provide the foundation for a brand's loyalty pro le among its customers (Coyles & Gokey, 2005). Emotive customers (i.e., loyal customers) have the greatest loyalty and feel strongly that their purchase is the right choice for them. e emotive customer is a primary target, as research has shown that emotive customers normally spend more on their product purchases and are less likely to migrate to another product or brand. Inertial customers, similar to emotive customers, seldom reevaluate their purchases ei-ther due to high substitution costs or a lack of connection with the product and, as such are considered loyal. Customers with the deliberator a itude, however, review their purchase standards regularly and base choice on factors such as price, performance, and ease of doing business with the company and comprise the switcher and potential switcher purchase behaviors.

A Model for Spending between Acquisition and Retention
While several seemingly seminal works have addressed the question of optimizing customer equity by balancing customer acquisition and retention costs, li le explicit research has simultaneously addressed the question of dividing spending between acquisition and retention and balancing the objectives of market share growth and customer equity. Bla berg and Deighton (1996) used a decision-calculus approach to construct a simple model, the BD Model, which helps managers nd the optimal balance between spending on acquisition and retention. Using the BD model, Berger and Nasr-Bechwati (2001) later proposed a model for allocating a budget between acquisition and retention to optimize customer pro tability (i.e., customer lifetime value (CLV) or customer equity (CE)).
Continuing on this vein, the current study develops a model and methodology to analyze the relationship between an optimal spending budget that meets the short-term market share growth objective and the long-term customer pro tability objective. e segment-based market share model (SBMS) introduced here describes how spending on customer retention and customer acquisition a ects the size of three customer segments (inertia, potential switcher, and newly acquired) and how this spending and size e ect results in market share growth.
is work then combined the SBMS and the BD models to devise a method for conducting nonlinear programming and sensitivity analysis to balance the short-term objective of market share growth and the long-term objective of customer equity so as to arrive at the optimal spending allocation for customer acquisition and retention. e di erential unit costs of the marginal e ect for customer acquisition and retention and the size of the inertia segment on the focal brand were then manipulated to explore the allocation e ect on the two objectives.

Model Development
For the purposes of this study, emotive and inertial customers are classi ed as the inertia segment and the deliberators are classi ed as the potential switcher segment. e proportion of emotive and inertial customers is represented in the model by f i for the i th brand. Customers of this type are retained in the absence of retention spending. ey may be styled members of the inertia segment (Odin, Odin & Vale e-Florence, 2001). Deliberators are open to switching brands a er promotional exhortation but have a marked desire to stay loyal. is type of customer likely chooses to repeat purchase of a product but is always open to switching. Customers of this type may be styled members of the potential switcher segment (Kahn et al., 1986;McCarthy et al., 1992;Yim & Kannan, 1999;Tsao et al., 2009).
A related aspect of the program for customer retention spending is marketing mix activities to persuade consumers to repurchase the i th brand on the next occasion; this retention rate is represented in the model by r i for the i th brand. e spending program for acquisition aims to provide marketing mix activities to persuade consumers to switch from purchasing other brands to purchasing the i th brand; this acquisition rate is represented in the model by a i for the i th brand. us, the market share of the next period t for the i th brand Mks it is a compound of inertia, potential switcher, and newly acquired segments as follows: (1) Using the segment-based market share model (SBMS), the BD model, and the optimization approach proposed by Pfeifer (2005), we propose a method that uses a spreadsheet to conduct nonlinear programming and sensitivity analysis of the simultaneous e ects of the retention budget on the objectives of market share growth and customer equity. To examine the e ects of budget allocation between acquisition and retention programs on the balance between the short-term objective of market share growth and the long-term objective of customer equity, the current study rst assumes a preset objective of market share growth (g) during a speci c period, in this case a year. We adopt the following equation as the objective function:

MAX
(2) or MAX ( 3) and then adopt R as the decision variable. We have M (the margin the rm earns) and d (the discount rate for a speci c period) as the constant variables. r is the function of R according to Equation (2). As advocated in Pfeifer's (2005) approach, we nd the A based on equation (7) when the optimal solution of ECLV is obtained. en a is the function of A according to Equation (3). However, in this study, the other preset objective of market share growth is constrained to a, that is: erefore, a it is as shown in the following equation: When the acquisition rate for focal brand i is determined, A is the reverse function of a it (please refer to Equation (3)). Hence, the optimal solution for the objective function of maximizing CE can be obtained by nonlinear programming provided by the Microso Excel Solver.
Research investigating the e ect of the unit cost of the marginal e ect for acquisition and retention programs on consumer pro tability and market share growth are rare. is study manipulates the di erential unit cost of the above-mentioned marginal e ect. e control variable m applied to the unit cost of the marginal e ect for customer retention (R mc ) and acquisition (A mc ), varies during sensitivity analysis from ve to one, and we let m where and (7) For details of Equation (13), please refer to Pfeifer (2005).

Model Testing
Consumer panel data on leading brands of fast-moving consumer products were analyzed to obtain brand loyalty and brand switching pa erns (Bha acharya et al., 1996;Buckinx & Van den Poel, 2005;Winer et al., 1994). e data came from TNS Global Taiwan and covered the 12 months of 2010. To simplify analysis of the relative e ect of acquisition and retention budgets on market share and consumer pro tability, data for a shampoo product was the focus of the analysis. Table 1 provides the market share and loyalty data for the two leading shampoo brands. is study adopts the proportion of loyalty as the size of the inertia segment for the focal brand (Pert) in this study. e preset objective of market share is 0.55 due to the assumed growth rate of 1.10. e rm's earned margin is assumed to be US$50, while the discount rate is 0.1 in this study.

Model Results
We take the SBMS and the BD model and use nonlinear programming and sensitivity analysis via the Microso Excel Solver to obtain the solution. We use spending on retention (R) as the decision variable and customer equity (CE) as the objective function. e control variable is the di erential unit cost of the marginal e ect of retention and acquisition (m), ranging from ve to one. e ratio of customer acquisition cost to customer retention cost and the simultaneous balancing of the objectives of market share growth and customer pro tability are shown in Table 2 and Figure 1. While the shaded row in Table 2 shows the optimal ratio of customer acquisition cost to customer retention cost and the balance between the preset market share growth objective and the customer equity objective, Figure 1 shows the optimal solution for CE, which is the percentage of spending on retention R% and acquisition A%. Figure 2 shows that the larger the size of inertia segment, the lower the ratio of retention cost. e smaller the di erential marginal e ect of retention and acquisition costs, the lower the ratio of retention cost. Figure 3 shows that the larger the size of inertia segment, the larger the ratio of acquisition cost. e smaller the di erential marginal e ect of retention and acquisition costs, the larger the ratio of acquisition cost. Conclusions e results for the focal brand in the shampoo category show that the value of CE increased when spending on retention increased. However, when the budgeted allocation for spending on retention exceeded 0.51, the greater the extra spending, the smaller the expected value of CE . at is, the value of CE increased when retention spending increased, yet this retention spending did not increase the expected value of CE when it exceeded the optimal budget allocation. ese results are interesting as they diverge from conventional wisdom that holds that "it costs ve times more to acquire a new customer than to retain a customer" (Bla berg & Deighton, 1996;Pfeifer, 2005). e results also present a situation in which allocating some of the marketing budget to retention does not provide be er customer equity.
at is, rms should not devote more of their marketing budget to loyalty programs if the ratio is less than ve. Hence, these ndings o er a boundary condition of the ratio of customer retention to acquisition costs, while maximizing customer equity and preserving the objective of market share growth. Critically, this study developed a criterion for rms to judge the budget that should be devoted to retaining customers or acquiring new customers while promoting the objectives of market share growth and customer pro tability.
In sum, the research con rms the relationship between inertia segment size   and the di erential marginal e ect of retention and acquisition and between maximization of customer equity and preservation of the objective of market share growth. As portrayed by the downward curving arrow in Figure 4, the smaller the inertia segment size and the larger the di erential, the greater the shi from acquisition spending to retention spending. In contrast, as portrayed by the upward curving arrow in Figure 4, the larger the inertia segment size and the smaller the di erential marginal e ect of acquisition and retention costs, the more the spending shi s from retention spending to acquisition spending.