Z. John Zhang

Z. John Zhang and Gila E. Fruchter (Working), Dynamic Targeted Promotions: A Customer Retention and Acquisition Perspective.

Abstract: This research analyzes the strategic use of targeted promotions for customer retention and acquisition in a dynamic and competitive environment. We develop suitable differential games for both finite- and infinite-time problems and provide analytical solutions in each case for defensive and offensive Nash equilibrium closed-loop strategies. Our analysis shows that a firm's optimal targeting strategies, both offensive and defensive, in a dynamic setting depend on its actual market share, the relevant redemption rate of its targeted promotions, the value of its market share increase, and the effectiveness of its targeted promotions. Optimal targeting strategies call for a firm to increase its expenditure on defensive (offensive) targeting relative to offensive (defensive) targeting, thus focusing more on customer retention (customer switching), when its market share becomes larger (smaller). These optimal strategies have the attractive feature of being an adaptive control rule. A firm can operationalize these strategies by adjusting its planned promotional incentives on the basis of the observed differences between actual and planned market shares and between actual and planned redemption rates. In the long run, a focus on customer retention is not an optimal strategy for all firms. A firm with a sufficiently large market share should stress customer retention, whereas a firm with a small market share should stress customer acquisition. When market shares are more evenly divided in a market, firms are better off in the long run if they all focus on customer acquisition. Our analysis also suggests that to build a long-run market share advantage in the age of information-intensive marketing, a firm must strive to improve its targeting effectiveness and increase its unit profit margin. We illustrate the results through a numerical example and show the trajectories of a firm's market share, promotional expenditures, and profits as competing firms use targeted promotions optimally over time.

Vibhanshu Abhishek, Kinshuk Jerath, Z. John Zhang (Under Review), Platform Selling or Reselling? Channel Structures in Electronic Retailing (under review).

Yuxin Chen and Z. John Zhang (Working), Price-for-Information Effect and Benefit of Behavior-Based Targeted Pricing.

Yunchuan Liu and Z. John Zhang (Working), Pricing Implications of ‘Click-and-Mortar’ Combo.

Z. John Zhang, Yunchuan Liu, Sunil Gupta (Working), Sherlock Holmes’ Dog and Retail Online Expansion.

Z. John Zhang, Fred Feinberg, Aradhna krishna (Working), Should Price Increases Be Targeted?.

Abstract: Firms in many industries experience protracted periods of pricing power, the ability to successfully enact price increases. In these situations, firms must decide not only whether to raise prices, but to whom. Specifically, in a competitive context, they must determine whether it is more profitable to increase prices across-the-board or to a specific segment of their customer base. While selective price decreases are ubiquitous in practice (e.g., better deals to potential new customers by phone carriers; better deals to current customers by various magazines), to our knowledge selective price increases are relatively rare. We illustrate the benefits of targeted price increases, and, as such, we expand the repertoire of firms' promotional policies. To that end, we explore a scenario where two competing firms must decide whether to increase prices to the entire market or only to a specific segment. Targeted price increases (TPI), i.e., being offered an unchanged price (selectively) when others are subject to price increases, can be offered to Loyals (those who bought from the firm in the previous period) or Switchers (those who did not). The effects of TPIs are estimated through a laboratory experiment and an associated stochastic model, each allowing for both rational (Loyalty, Switching) and behaviorist (Betrayal, Jealousy) effects. We find that TPIs can indeed yield beneficial results (greater retention for Loyals or greater attraction of Switchers) and greater profits in certain circumstances. Results for TPI are additionally benchmarked against those for targeted price decreases and are found to differ. The range of effects stemming from the experiment can be used in a competitive analysis to yield equilibrium strategies for the two firms. In this case, we find that—depending on the magnitude of the price increase, market shares of the two firms, and price knowledge across consumer segments—a firm may wish to embrace targeted price increases in some situations, to institute across-the-board price increases in others, and to not enact any price increases in still others. We show that a firm can sacrifice considerable profit if it settles on a suboptimal pricing strategy (e.g., wrongly instituting an across-the-board increase), favors the wrong segment (e.g., Switchers instead of Loyals), or ignores "behaviorist" effects (Betrayal or Jealousy).

Yuxin Chen and Z. John Zhang (Working), Targeted Pricing and Channel Management.

Z. John Zhang and Dongsheng Zhou (Working), The Art of Price War: a Perspective from China.

Yunchuan Liu and Z. John Zhang (Working), The Benefit of Targeted Pricing in a Channel.

Yuxin Chen, Yogesh Joshi, Jagmohan Raju, Z. John Zhang (Forthcoming), A Theory of Combative Advertising, Marketing Science, 2006.