Robust Optimization for Maximizing Customer Equity under Uncertainty: The Impact of Discounts

The allocation of marketing budgets has always been one of the main issues in marketing as well asbudgeting. In fact, executives are looking how to divide marketing budgets between customeracquisition and retention activities, such that the profit created by the customer is maximized. To dothis, we require a mathematical modeling. Unfortunately, any model which is not consider uncertaintymay arise questions in its applicability. Here, we have proposed a robust optimization model to copewith the uncertainty in the model parameters. This research tries to provide a rigor model in allocatingcustomer relationship budgets to customer acquisition and retention activities, taking into account theuncertainty in the estimation of uncertain parameters, in order to maximize the customer equity. In fact,taking into account the conditions of the real world, which is unstable in practice, and due to uncertaintyin the estimation of some parameters, a robust optimization approach is proposed. By using Malvey'sscenario-based approach, the budget allocation model is presented. The comparison of the resultsobtained from the use of deterministic and robust models shows that the solution of the robust modelremains stable in all examined conditions. Also, in the comparison of all the examined scenarios, therobust optimal solution is better than the deterministic optimal solution. The findings of this researchcan be used by organizations to increase long-term profits, increase the rate of customer acquisition andretention, target marketing programs and ultimately increase market share.

Keywords:

robust optimization , robust solution , customer equity , marketing budget