Designing two-period decentralized service chain incentives with the consideration of customer acquisition and retention

Abstract

PurposeThe authors address a two-dimensional (both customer acquisition and retention) incentive in a decentralized service chain consisting of a risk-neutral brand and agent (or averse). Design/methodology/approachThe authors focus on the relationship between acquisition and retention, that is, retained customers (repeated purchases) are based on and come from the acquired (new) customers in the former period. The authors also design a two-period separate incentive on both dimensions.FindingsThe authors found that a targeted incentive strategy should be applied for achieving more revenue when the incentive intensities are relatively small. Otherwise, the brand needs to adjust the targeted incentive strategy into incentivizing the opposite dimension, particularly on acquisition. Under the optimal contract, the brand needs to be very careful with deciding the fixed part of the incentive salary and the incentive intensities on both dimensions. For example, the fixed salary initially decreases and then increases in the incentive intensities. For the optimal incentive policies, the brand should incentivize acquisition but outsource retention if the agent is risk-neutral. When the agent is becoming risk-averse, the brand should lower its incentive intensity as the risk degree and variances become larger. Interestingly, the brand may benefit from introducing risks.Originality/valueThe study contributes to the literature by considering the following points. First, the authors extend the principal-agent incentive model by considering two-period decisions of customer acquisition and retention. Second, based on the two-period principal-agent problem, the authors design separate incentive intensities on acquisition and retention, respectively. While, most of the literature focused on acquisition incentives. Third, different from other works focusing on either risk-neutral or risk-averse environments, the authors consider both and compare the cases of risk-neutral and risk-averse to analyze the impact of risk on the optimal decisions and the brand's expected profit.