A Renewable-Resource Approach to Database Valuation

We demonstrate in this paper that firms should view customers in a database as a renewable resource when valuating them. Indeed, customer names flow in and out of the firm’s databases, and the goal of the firm is to optimize the overall customer acquisition/cultivation/attrition process. The renewab...

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Main Authors: Dreze, Xavier, Bonfrer, Andre
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Language:English
Published: Institutional Knowledge at Singapore Management University 2003
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1913
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2912/viewcontent/1603paper1.pdf
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spelling sg-smu-ink.lkcsb_research-29122018-07-09T07:41:51Z A Renewable-Resource Approach to Database Valuation Dreze, Xavier Bonfrer, Andre We demonstrate in this paper that firms should view customers in a database as a renewable resource when valuating them. Indeed, customer names flow in and out of the firm’s databases, and the goal of the firm is to optimize the overall customer acquisition/cultivation/attrition process. The renewable resource approach to the problem of maximizing the profits generated by a flow of customer names is more appropriate than the traditional Customer Lifetime Value (CLV) approach. We show that CLV underestimates the true value of names (by more than 400% in some cases) and leads to sub-optimal customer relationship management and acquisition strategies. For instance, while a firm should discount future profits when valuating its database, it should not discount these same profits when setting its acquisition policy. We derive the first-order condition, and perform comparative statics, for a firm trying to optimize its contact policy. Perhaps the most interesting result stemming from the comparative statics is the implication that start-up companies should contact their customers less frequently than established companies. Start-ups should resist the temptation of boosting short-term revenues in favor of accumulating names by spacing communications. We finish the paper with an analysis of customer heterogeneity. 2003-10-01T07:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/1913 https://ink.library.smu.edu.sg/context/lkcsb_research/article/2912/viewcontent/1603paper1.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Management Information Systems
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Management Information Systems
spellingShingle Management Information Systems
Dreze, Xavier
Bonfrer, Andre
A Renewable-Resource Approach to Database Valuation
description We demonstrate in this paper that firms should view customers in a database as a renewable resource when valuating them. Indeed, customer names flow in and out of the firm’s databases, and the goal of the firm is to optimize the overall customer acquisition/cultivation/attrition process. The renewable resource approach to the problem of maximizing the profits generated by a flow of customer names is more appropriate than the traditional Customer Lifetime Value (CLV) approach. We show that CLV underestimates the true value of names (by more than 400% in some cases) and leads to sub-optimal customer relationship management and acquisition strategies. For instance, while a firm should discount future profits when valuating its database, it should not discount these same profits when setting its acquisition policy. We derive the first-order condition, and perform comparative statics, for a firm trying to optimize its contact policy. Perhaps the most interesting result stemming from the comparative statics is the implication that start-up companies should contact their customers less frequently than established companies. Start-ups should resist the temptation of boosting short-term revenues in favor of accumulating names by spacing communications. We finish the paper with an analysis of customer heterogeneity.
format text
author Dreze, Xavier
Bonfrer, Andre
author_facet Dreze, Xavier
Bonfrer, Andre
author_sort Dreze, Xavier
title A Renewable-Resource Approach to Database Valuation
title_short A Renewable-Resource Approach to Database Valuation
title_full A Renewable-Resource Approach to Database Valuation
title_fullStr A Renewable-Resource Approach to Database Valuation
title_full_unstemmed A Renewable-Resource Approach to Database Valuation
title_sort renewable-resource approach to database valuation
publisher Institutional Knowledge at Singapore Management University
publishDate 2003
url https://ink.library.smu.edu.sg/lkcsb_research/1913
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2912/viewcontent/1603paper1.pdf
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