The Allocation of Promotion Budget to Maximize Customer Equity

Since the early 1980s, the concept of relationship marketing has gained increased acceptance in the field of general marketing, and particularly that of direct and interactive marketing. One of the major benefits of relationship marketing is the ability to make decisions based on their impact on customer equity. In this paper, we offer a general approach to the organization of promotion budget allocation, where the objective function is to maximize customer equity. A cornerstone in our study is the use of decision calculus in which managers' judgments and/or estimates serve as some of the inputs to formal modeling. A series of applications of our approach to promotion budget allocation are offered under different market conditions. These applications focus on promotional expenditure allocation decisions between acquisition and retention, as well as among different promotional options for each category of expenditure. The paper also treats potential cases of synergy, or interaction, between promotional vehicles when applied to the same market segment.