Capital Ideas Blog

A relationship equation that adds up

By Chelsea Vail
February 12, 2014

From: Blog


We've all seen the XKCD comic for quantifying love (and if you haven't, it's conveniently embedded below). The math just doesn't add up for the poet-quant. Google, for its part, has managed to put our warm fuzzy feelings in a graph

XKCD useless comic

While we at Capital Ideas won't purport to know how to solve for X where X = love, we do know of an equation that can help you allocate limited resources to relationships (business relationships, that is). 

Relationships equation

Suppliers can't keep everyone happy all the time, but Chicago Booth's Dan Adelman and UNC Kenan-Flagler's Adam Mersereau have come up with a model that can help firms manage multiple customers when there is excess demand. 

Firms shouldn't necessarily focus on their most profitable customers, according to the researchers. By encoding behaviors that people understand and perform intuitively, their equation looks to maximize profits—just not at the expense of losing future business from existing clients. It takes into account demand, profitability, and—perhaps surprisingly from an operations perspective—customers' memories. 

Watch Adelman explain the equation (and the relevance of memory) in detail. Suppliers, get more relationship advice from Adelman and Mersereau in this article from the Summer 2013 issue of Capital Ideas. 

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