Money or Friendship? Winning over Customers

Most firms devote significant resources to direct marketing in an effort to maintain close relationships with their customers. Nonetheless, we have a limited understanding of when to deliver what type of message to which customer. Direct marketing generally offers either monetary or relational value. Firms can therefore benefit from understanding how customers evaluate the marketing communications that influence their buying behavior. We tracked the marketing and transaction data of a sample of customers from four firms and analyzed customer responses to marketing messages. We first applied our empirical approach to a single firm, a Fortune 500 business-to-business (B2B) service firm. We concluded that (i) customer purchase behavior is affected by both types of communications in ways that interact and vary over time, (ii) past experiences influence customer purchases, and (iii) by understanding customers’ preferences and spending accordingly, this firm could expect a revenue increase of 8.3 percent ($2.5 million) over four years. We then found that, by using this model, the other three firms could also expect an annual revenue increase of 2.1 to 3.2 percent. Moreover, by increasing their spending on marketing messages by 5 percent, they could increase revenue by more than 20 percent