Managing Customer Acquisition Risk Using Co-operative Databases.

Journal of Interactive Marketing, Volume 29, February 2015, Pages 39-56.

Authors: Hongju Liu and Joseph Pancras (Marketing). Co-author: Malcolm Houtz (Alliant Inc)

Firms typically have detailed information only about their own customers. In order to gain a broader view of customers across firms, several firms may pool their data together and engage an intermediary called a co-operative database firm to manage and analyze the pooled data to provide better targeting solutions for the firms. In this paper Professors Liu and Pancras study these interesting intermediaries by developing a framework for firms to manage customer acquisition risk using co-operative databases. Acquisition of new customers involves both opportunity and risk, and it is important for firms to predict and manage the risks involved in customer acquisition. Despite its importance, the management of customer acquisition risk has not been the subject of much academic research. They illustrate their framework in the context of the optimal selection of customers for direct mail with a ‘buy now, pay later’ payment option when the acquisition risk manifests as bad debt risk. Using data from a large scale direct marketing campaign, they show that their empirical model that incorporates bad debt risk substantially outperforms suboptimal targeting schemes that overlook bad debt risk. They thus demonstrate how alleviating bad debt risk is one beneficial outcome of a fairly recent trend in database marketing, namely the emergence of co-operative databases.

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