Advertising Directed Towards Existing and New Customers

Abstract

This paper considers a specific marketing problem based on a model by Gould (1970). The extension is that we have two kinds of advertising directed towards new customers and existing customers, respectively. We found that history dependent behavior occurs: if initial goodwill is small then it does not pay to spend a lot of money on advertising towards existing customers. Consequently convergence to a saddle point with low goodwill prevails where there is only advertising with the aim to attract new customers. On the other hand, for larger initial goodwill, eventually a steady state with a high goodwill level is reached where both types of advertising are used.