Dynamic Targeted Promotions

Abstract

This research analyzes the strategic use of targeted promotions for customer retention and acquisition in a dynamic and competitive environment. The normative analysis shows that a firm’s optimal targeting strategies, both offensive and defensive, depend on its actual market share, the relevant redemption rate of its targeted promotions, customer profitability, and the effectiveness of its targeted promotions. These strategies have the attractive feature of being an adaptive control rule. A firm can operationalize these strategies by adjusting its planned promotional incentives on the basis of the observed differences between actual and planned market shares and between actual and planned redemption rates. In the long run, a focus on customer retention is not an optimal strategy for all firms.

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