2008 October 6

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Jeanette Heiligenthal, E-Finance Lab]

Firms often use very appealing incentives to attract new customers. In
Retail Banking it is common to provide new customers with high interest
rates for saving products for a certain period.  Thereby, banks need to
determine the amount of incentives which they would like to provide. Very
small incentives lead only to a limited number of (most likely) loyal
customers, whereas high incentives lead to a high number of customers. Yet,
those customers are likely to suffer from "adverse selection" because they
tend to be rather non-loyal as they are primarily attracted by the incentive
and not by the product itself. Hence, the value of the incentive has two
effects: it determines the number of customers as well as the average
customer lifetime value, which means that an optimal value for the incentive
exists. In this presentation we address the problem of how to determine the
optimal value of the incentive for new customers. We develop a model and use
an empirical data-set to illustrate the application of the model and to
calculate a possible increase in long-term profitability. Based on those
results we derive managerial implications for customer acquisition
activities under adverse selection.