Models Linking Marketing Expenditures and Price to Retention

	where: exp = the universal constant which is approximately equal to 2.7 ri,t = the retention probability kr = the maximum retention reached x= the retention price sensitivity Pi,r,t= the retention price offered to segment i at time t Bi,r,t = the retention spending level for segment i at time t g = the rate at which retention spending affects the retention rate

In the retention probability model, x coefficient captures the impact that the retention price will have on a customer’s repeat-purchase decision. Larger values of x imply that customers are more sensitive to price.

g represents the effectiveness of the retention expenditure level BI_,r,t on the retention rate. The higher the value of g, the faster RI_,t reaches the value of Kr Much of what is written about in database marketing is designed to increase the value of g.

Efficiency of the marketing system, efficiency in servicing customers, advertising effectiveness and efficiency in reaching customers through the use of databases all affect the magnitude of g.

Kr can be industry specific and represents the maximum retention rate the firm can reach. For certain industries, such as used car sales, the maximum may be relatively low. For others, such as traditional banking, it can be very high.