Social relationship and transactional marketing policies-maximizing customer lifetime value

We present an analytic approach to address the problem of how sellers can establish and maintain a long-lasting relationship with a buyer and, at the same time, maximize customer lifetime value (CLV). To model the evolution of a relational exchange between a seller and a buyer, we extend a well-known mathematical model of "love dynamics." The growth of each partner's commitment to the relationship is a sum of negative and positive terms. The negative term describes each partner's propensities for opportunism, while the positive terms describe each partner's trust in the commitment of the other, and the reaction to marketing efforts. The seller controls the evolution of the relationship through social relationships and transactional marketing efforts. The main findings are as follows: (1) Loyal (committed) customers and long-term relationships do not always generate better cash flows, especially when buyers either look for superior current value in each purchase opportunity or are short-term oriented. (2) Without mutual trust between partners, the seller should treat old customers over time as new ones, making the reduction of retention costs impossible. (3) It is only cheaper to retain current customers rather than acquiring new ones if mutual trust between partners overcomes propensities for opportunism and the seller slightly discounts future cash flows.