Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
478915 | European Journal of Operational Research | 2008 | 14 Pages |
In recent years, more and more companies have adopted relationship marketing (RM). At the core of RM is the development and maintenance of long-term relationships with valuable customers. In RM, the customer lifetime value (CLV) is the discounted profit streams of a customer across the entire customer life cycle. The CLV plays a key role in customer acquisition and retention decisions. In this paper, we present a general mathematical framework for RM, and introduce a Markov chain model which is appropriate in modeling RM because of its flexibility and probabilistic nature. We also develop the life distribution of the customer relationship, which is a phase-type distribution since it is the distribution of the first arrival stopping state. And we obtain the expectation of the CLV, which is an important statistic for good decision-making. Finally, we illustrate how to find the optimal remarketing policy numerically. The framework developed for RM systems in this paper should be seen as a practical approach to RM where one can directly apply the results of phase-type distribution and expectation of CLV to marketing decisions.