Marketing Investment Allocation: A Portfolio Theoretic Model

Marketing is turning simple ideas into strategy. Marketing makes the difference between competing ‘Companies’ fortunes as working smarter becomes more effective than working harder. Marketing investment allocation becomes crucial to these differences. The customer base can be split up into the “current” or extant retained customers and those customers newly acquired called the “referrals”. Given the customer lifetime values of the “current” and the “referrals” segments, the risk-return trade-offs would considerably differ between these two segments. The optimal allocation of marketing investment to a customer segment depends not only on riskiness of the returns but also on the extent of correlation of returns between the two customer segments. Markowitz’s portfolio model helps in this optimal allocation of marketing investment. Earlier studies did not explore the applicability of this model to marketing investment allocation between customer segments. Several interesting special cases follow from different assumptions and permissible values of the correlation coefficient. These include the specific case where one of the two broad customer segments is a relatively risk-free one.