The Impact of Brand Equity on Customer Acquisition, Retention, and Profit Margin

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1 The Impact of on Customer Acquisition, Retention, and Profit Margin Florian Stahl Mark Heitmann Donald R. Lehmann Scott A. Neslin UNC Next Generation Conference on Brands and Branding Chapel Hill, NC April 12-13

2 and Customer Lifetime Value Brand equity and CLV are two key marketing metrics... Marketing Actions Customer Mindset Awareness Associations Customer Behavior Acquisition Retention Customer Lifetime Value... But the relationship between them has received relatively little attention (Keller and Lehmann 2006; Rust, Lemon, and Zeithaml 2004)

3 Conceptual Framework Marketing Actions Behavior Advertising Innovation Promotions Market presence Price Differentiation Relevance Esteem Knowledge Acquisition Retention Profit Contribution CLV

4 Modeling CLV Two primary models of CLV (Berger & Nasr 1998; Blattberg, Kim, and Neslin 2008): Simple retention model Markov migration model Three components of the Markov migration model: Customer retention: probability the focal brand is bought in period t given the customer owns the focal brand in period t-1 and purchases a car in period t. Customer acquisition: probability the focal brand is bought in period t given the customer owns a competitive brand in period t-1 and purchases in period t. Customer profit contribution: profit contribution per purchase.

5 Data 39 automobile brands marketed in the U.S. between 1999 and 2008

6 Data Marketing Actions Advertising (TNS Media) Innovation (Wards Automobile) Promotions (Automotive News) Market Presence Number of dealers (Automotive News) Number of models offered (Wards Automobile) Retail Price (Power Information Network PIN) Young and Rubicam s Brand Asset Valuator (BAV) Differentiation, Relevance, Esteem, Knowledge Customer Behavior Total unit sales (PIN) Number of acquired customers (PIN) Number of retained customers (PIN) Profit margin (PIN and annual reports)

7 Conceptual Framework Marketing Actions Behavior Advertising Innovation Promotions Market presence Price Differentiation Relevance Esteem Knowledge Acquisition Retention Profit Contribution CLV

8 Analysis of Acquisition and Retention Differential Effects Multinomial Attraction Model (Cooper and Nakanishi 1988) S irt 39 A irt 2 j 1r 1 A jrt A irt 4 5 exp ifi r ARr kr kit k 1 m BE BE kt X X mt 1 mr mit irt S irt = Unconditional probability of acquisition (r=1) or retention (r=2) for brand i in period t. F i = Dummy coding for fixed effect for brand i. AR r = Dummy coding for acquisition (r=1) vs. retention (r=2). BE kit = Value of brand equity component k of brand i in period t. X mit = Marketing activity m for brand i in period t.

9 Results: Impact on Acquisition and Retention Acquisition Retention Variable Std. Coef. t-stat Std. Coef. t-stat Differentiation Relevance Esteem Knowledge Marketing Advertising Innovation Promotions Market Presence Price R

10 Conceptual Framework Marketing Actions Behavior Advertising Innovation Promotions Market presence Price Differentiation Relevance Esteem Knowledge Acquisition Retention Profit Contribution CLV

11 Results: Impact of of Profit Contribution Variable Std. Coef. t-stat. Differentiation Relevance Esteem Knowledge Marketing Advertising Innovation Promotions Market presence R

12 Conceptual Framework Marketing Actions Behavior Advertising Innovation Promotions Market presence Price Differentiation Relevance Esteem Knowledge Acquisition Retention Profit Contribution CLV

13 Results: Marketing s Impact on Brand Equity Advertising Innovation Promotions Market Presence Price Differentiation Relevance Esteem Knowledge Std. Coef. t-stat Std. Coef. t-stat Std. Coef. t-stat Std. Coef. t-stat R

14 Scenario Analysis: Impact of Increased Market Presence on and CLV Variable Base Case Increased Presence Marketing Advertising Innovation Promotions Market Presence Price Differentiation Relevance Esteem Knowledge Components of CLV Acquisition Retention Profit Contribution CLV ROI , $14, % 45.69% $19, , $14, % 48.61% $19,880 $29,036 $29,846 $0.78

15 Summary and Implications Summary Brand equity and CLV are inextricably linked. Differentiation is a double-edged sword. Brand knowledge has strong positive impact on all three elements of CLV. Marketing drives equity as well as CLV. The impact is managerially meaningful. Implications Brand management and customer management are inter-related and must be coordinated. Linking marketing, brand equity, and CLV helps diagnose as well as quantify return on marketing. Linking marketing, brand equity, and CLV enhances the brand planning process.

16 References Berger, Paul D., and Nada I. Nasr (1998), Customer Lifetime Value: Marketing Models and Applications, Journal of Interactive Marketing, 12 (1), Blattberg, Robert C., Byung-Do Kim, and Scott A. Neslin (2008), Database Marketing: Analyzing and Managing Customers, New York: Springer. Cooper, Lee G., and Masao Nakanishi (1988), Market Share Analysis: Evaluating Competitive Marketing Effectiveness, Boston: Kluwer Academic Publishers. Keller, Kevin L., and Donald R. Lehmann (2006), Brands and Branding: Research Findings and Future Priorities, Marketing Science, 25 (6), Rust, Roland T., Katherine N. Lemon, and Valerie Zeithaml (2004), Return on Marketing: Using Customer Equity to Focus Marketing Strategy, Journal of Marketing, 68 (1),

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