The impact of marketing-induced versus word-of-mouth customer acquisition on customer equity

Abstract

Companies can acquire customers through costly but fast-acting marketing investments or through slower but cheaper word-of-mouth processes. Their long-term success depends critically on the contribution of each acquired customer to overall customer equity. The authors propose and test an empirical model that captures these long-term effects. An application to a Web hosting company reveals that marketing induced customers add more short-term value, but word-of-mouth customers add nearly twice as much longterm value to the firm. The authors illustrate their findings with some dynamic simulations of the long-term impact of different resource allocations for acquisition marketing.