Customer Relationship Termination Problem for Beta-Geometric/Beta-Binomial Model of Customer Behavior

We deal with the relationship termination problem in the context of individual-level customer relationship management (CRM) and use a Markov decision process to determine the most appropriate occasion for termination of the relationship with a seemingly unprofitable customer. As a particular case, the beta-geometric/beta-binomial model is considered as the basis to define customer behavior and it is explained how to compute customer lifetime value when one needs to take account of the firm’s choice as to whether to continue or terminate relationship with unprofitable customers. By numerical examples provided by simulation, it is shown how a stochastic dynamic programming approach can be adopted in order to obtain a more precise estimation of the customer lifetime value as a key criterion for resource allocation in CRM.