Customer Equity Consider the allocation decision between acquisition and retention. A marketing manager for a firm has a budget of $ 50 to be spent on a given customer. Lets assume that the consumer generates a margin of $200 for the firm annually. Using the idea of customer equity, calculate customer equity under the following two scenarios and make a recommendation on which of the two allocation scenario is more profitable:

1. $20 on Acquisition and $30 on retention
2. $30 on Acquisition and $20 on retention

Assume that we are considering an infinite time horizon and that first year cash flows (from the prospect) are not to be discounted but the future cash flows from the customer are discounted with a discount rate of 10% (i.e. d = 0.1).

Hint: Use CE = m*a A + a*(m R/r)*(r / (1-r)) where r=r / (1.1) because the discount rate is 10%.

Note that you do not need to use the spreadsheet as you are not optimizing; you are only calculating which of the two scenarios leads to greater customer equity.

Acquisition rate (a) at $20 Acquisition spending/prospect	0.2
Acquisition rate (a) at $30 Acquisition spending/prospect	0.3
Retention rate (r) at $20 Retention spending/customer	0.5
Retention rate (r) at $30 Retention spending/customer	0.6