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cost to retain an existing customer, should the firm necessarily spend more money on customer retention?To answer this last question, a model built specifically to determine the optimal mix of acquisition and retention spending is used. Blattberg and Deighton used a decision-calculus approach to construct a simple model that helps managers find the optimal balance between acquisition and retention spending. 3 This model is used to show that the implications of a 5X cost ratio depend on whether the 5X maxim refers to average or marginal costs. If the maxim refers to average costs, then a 5X ratio does not necessarily mean the firm should spend more on customer acquisition. It will be shown that a 5X ratio of average costs can be optimal. If, however, the maxim refers to marginal costs, a 5X ratio means the firm should either increase its Abstract It is often said that the cost to acquire a new customer is five times (5X) the cost of retaining an existing one, and therefore firms should spend more money on customer retention. The purpose of this paper is explore whether, in fact, a firm should spend more money on customer retention if its cost to acquire a new customer is 5X the cost of retaining an existing one. Under the assumptions of the Blattberg and Deighton model, 1 the answer depends on whether the costs in question are average or marginal. If the 5X ratio refers to average costs, then a 5X ratio does not necessarily imply the firm should spend more on retention. If the 5X ratio refers to marginal costs, the firm should either spend more on retention, less on acquisition or both. The optimality conditions of the Blattberg and Deighton model require that the marginal cost to acquire a customer equal the marginal cost to retain a customer and that both will equal the expected customer lifetime value.

This paper describes a useful extension of the well‐known, single‐period inventory or newsboy problem. Given a fixed number of identical seats available on a scheduled airline flight, what percentage should be offered for early sale at a predetermined discount fare and what percentage reserved for later sale at a higher full fare? This two‐tiered pricing strategy with early discount pricing might be appropriate in any situation in which the price sensitivity of the inventoried items decreases as the end of the period approaches. Similar to the newsboy problem solution, the decision rule that maximizes expected profit is expressed as a simple function of the percentage difference in the two fares and two carefully defined probabilities.

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