Strategies to outsource acquisition and retention: the impact of effort comparison and risk preference

Abstract This paper analyzes how the brand company chooses to outsource customer acquisition and retention to the service supplier who is either risk neutral or averse when the customers can not only compare the marketing efforts on acquisition and retention but also have a probability not to respond to any effort. We examine four outsourcing strategies: Acquisition Outsource, Retention Outsource, Two-Service Combined Outsource and Two-Service Separated Outsource. For each outsourcing strategy, we establish the incentive contracts, determine the resulted marketing efforts, and evaluate the optimal expected profit for the brand company. Our main results reveal the significant impacts of both the customer effort comparison and the service provider’s risk preference. Customer effort comparison may help the brand company to offer better incentives to the service supplier without hurting his own profitability. The service supplier’s risk preference impacts on the brand company’s choice of outsourcing strategy. Through numerical study, we also examine how ignoring customer efforts comparison affects the brand company's profitability and the service supplier's utility, as well as the combined influence of cost efficiency and customer comparison efforts on the brand company.