S. Sriram

Modeling Customer Lifetime Value

As modern economies become predominantly service-based, companies increasingly derive revenue from the creation and sustenance of long-term relationships with their customers. In such an environment, marketing serves the purpose of maximizing customer lifetime value (CLV) and customer equity, which is the sum of the lifetime values of the company’s customers. This article reviews a number of implementable CLV models that are useful for market segmentation and the allocation of marketing resources for acquisition, retention, and cross-selling. The authors review several empirical insights that were obtained from these models and conclude with an agenda of areas that are in need of further research.

Assessing the Effect of Marketing Investments in a Business Marketing Context

Recent research has empirically characterized the buyer--seller relationship as dynamically evolving from one discrete state to another. Conventional wisdom would suggest that a customer in a higher relationship state that has a higher transaction value would also have greater lifetime value to the firm. However, recent evidence suggests that higher relationship states can be ephemeral. Hence, the link between transaction value and lifetime value is not obvious. In this study, we seek to understand, within a specific empirical context, i the relationship between a customers transaction value and that customers lifetime value and ii the relationship between the lifetime value of a customer and the optimal level of marketing activity that needs to be directed at that customer. To this end, we develop a trivariate Tobit hidden Markov model that allows for a transitions among relationship states, b possible synergies between the various products that the supplier firm offers, c endogeneity in marketing activity, d heterogeneity in model parameters, and e the presence of the no-purchase option. Our results reinforce recent findings by Schweidel et al. [Schweidel, D. A., E. T. Bradlow, P. S. Fader. 2011. Portfolio dynamics for customers of a multiservice provider. Management Sci.573 471--486] that higher relationship states can be short-lived. Importantly for the supplier firm, a customer in the highest relationship state in a given period does not yield the highest lifetime value to the firm. Hence, the relationship between transaction value i.e., relationship state and lifetime value can be nonmonotonic. At the same time, we also find a nonmonotonic relationship between the optimal expenditures that should be directed at a customer and that customers lifetime value; i.e., the optimal level of marketing contacts is not the highest for customers with the highest lifetime value. Furthermore, we find that the optimal marketing expenditures for myopic agents are 14%--33% lower than the corresponding values for forward-looking agents. Therefore, not accounting for the long-term effects of marketing contacts would lead to suboptimal marketing budgets. Moreover, a comparison with the current marketing expenditures suggests that the current practice is closer to the myopic policy than to the forward-looking one.

Service Quality Variability and Termination Behavior

We investigate the roles of the level and variability in quality in driving customer retention for a new service. We present model-free evidence that whereas high average quality helps in retaining customers, high variability leads to higher termination rates. Apart from these main effects, we use model-free evidence to document the presence of a an interaction effect between average service quality and its variability on termination rates, b customer learning about service quality over time, and c a slower rate of learning among households that experience high variability. We postulate a mechanism involving risk aversion and learning, which can induce this interaction effect, and test this against several alternative explanations. We show that it is important to consider variability in quality while inferring the impact of improvements to average quality-ignoring the interaction effect between average quality and variability leads to an 18%-64% 5%-31% overestimation underestimation of quality improvement elasticities among high-variability low-variability households. Given that responsiveness to quality decreases with variability, it is better for the firm to focus quality improvement efforts on customers experiencing low variability; increasing average quality by 1% lowers termination by 1.1% for low-variability households, but only by 0.41% for high-variability households. This paper was accepted by Gerard Cachon, marketing.

Is Online Newspaper Advertising Cannibalizing Print Advertising

During the past decade, the newspaper industry experienced significant erosion of revenues, predominantly in print advertising. The concomitant increase in the less rewarding online advertising has been unable to make up for this loss. As a result, for every

Paywalls: Monetizing Online Content

1 increase in online advertising between 2005 and 2011, newspapers lost

Rising Prices under Declining Preferences: The Case of the U.S. Print Newspaper Industry

22 in print advertising. While it is conceivable that the overall change in the advertising landscape (such as the growth of targeted search advertising), contributed to the decline in print advertising, it is not clear whether the growth in online newspaper advertising aggravated or alleviated this global trend. We investigate this concern by studying how advertisers reallocate their media budgets over time between the online and print media within a newspaper. We perform our empirical analysis using unique panel data on account-level advertising expenditures in a Top 50 US newspaper from 2005 through 2011. After accounting for cross-sectional heterogeneity among advertisers and some factors that possibly drove both print and online newspaper advertising, we find a negative relationship between the ad spending in these two media options. Therefore, advertisers exhibit a higher propensity to decrease print spending when they increase their online spending compared to the scenario when online spending either remains unchanged or even decreases. Since we do not rely on exclusion restrictions, we cannot rule out residual factors that drove both print and online advertising and thus contaminated this relationship. However, such potentially confounding factors (e.g., change in total media budget) are likely to have induced a positive correlation between print and online advertising. Therefore, the negative relationship that we recover is suggestive of advertisers perceiving print and online newspaper advertising as substitutes. This, in turn, implies that the growth in online newspaper advertising exacerbated the overall decline in print advertising. Overall, we attribute 7-17 % of the decline in print newspaper advertising revenues between 2005 and 2011 to the growth of online newspaper advertising. We conclude that cannibalization should be a credible consideration in the marketing decisions of the newspaper. However, since a large portion of print advertising revenue decline also occured for advertisers who never purchased online advertising from the newspaper, cannibalization within the newspaper is not solely responsible for the downward trajectory of print advertising. Copyright Springer Science+Business Media New York 2015

Investigating Consumer Purchase Behavior in Related Technology Product Categories

In recent years, many providers of news and entertainment have been exploring the possibility of monetizing online content. In the context of newspapers, the paywall instituted by the New York Times starting in March 2011 is a well-publicized case in point. While the premise behind paywalls is that the subscription revenue can potentially be a new source of income, the externalities that might arise as a consequence of this pricing change are unclear. We study two potential externalities of newspaper paywalls and compare them against the new direct subscription revenue generated. The first externality that we consider is the effect of a paywall on the engagement of its online reader base. The second externality is the spillover effect on the print version of the newspaper. If readers view print and online versions of a newspaper as substitutes, increasing the price of the latter is likely to increase the demand for the former. Moreover, many newspaper paywalls offer bundles wherein print subscribers are provided free access to the online newspaper. Therefore, the value that a reader derives from the print subscription could be higher subsequent to the erection of the paywall. As a result, paywalls are likely to have a positive spillover effect on print subscription, and consequently, circulation. We document the sizes of the two externalities for the New York Times paywall and compare them with the direct subscription revenue generated. We comment on implications for newspapers and online content providers who are seeking mechanisms to monetize digital content.

Empirical Investigation of Retail Expansion and Cannibalization in a Dynamic Environment

Between 2006 and 2011, daily print newspapers in the U.S. lost 20% of their paid subscribers, partly due to increasing availability of alternative sources of news, such as free content provided on newspaper websites and by news aggregators such as Yahoo. However, contrary to the expectation that firms respond to softening demand by lowering prices, newspapers increased subscription prices by 40-60% during this period. In this paper, we explain and quantify the factors responsible for these price increases. We calibrate models of readership and advertising demand using data from a top-50 U.S. regional print newspaper. Conditional on these demand models, we calibrate the newspaper’s optimal pricing equations, and assess whether the increase in subscription prices are mainly rationalized by: a) the decline in readers’ willingness to pay (WTP) in the presence of heterogeneity among subscribers, or b) the newspaper’s reduced incentive to subsidize readers at the expense of advertisers, due to softening demand for newspaper advertising. We find that the decline in the ability of the newspaper to subsidize readers by extracting surplus from advertisers explains most of the increase in subscription prices. Of the three available subscription options (Daily, Weekend, and Sunday only), subscription prices increased more steeply for the Daily option, a pattern consistent with the view that newspapers are driving away low valuation weekday readers while preserving Sunday readership and the corresponding ad revenues. Thus, our research augments theoretical propositions in two-sided markets by providing a formal empirical approach to unraveling the relative importance of the role played by agents on the subsidy and demand side in determining prices.