How Much Should You Invest in Each Customer Relationship? A Competitive Strategic Approach

Abstract

We analyze firms' decisions to invest in customer relationship management (CRM) initiatives such as acquisition and retention in a competitive context, a topic largely ignored in past CRM research. We characterize each customer by her intrinsic preference towards each firm, the contribution margin she generates for each firm, and her responsiveness to each firm's retention and acquisition efforts. We show that a firm should invest most heavily in retaining those customers that exhibit moderate responsiveness to its CRM efforts. Further, a firm should most aggressively seek to attract those customers that exhibit moderate responsiveness to their provider's CRM efforts, and those that are moderately profitable for their current provider. Investing more in customers that are more responsive does not always lead to higher firm profits, as stronger competition for such customers tends to erode the effects of higher CRM efforts of an individual firm. When firms develop a customer relationship over time to generate higher contribution margin or customer responsiveness, we show that such developments may not always be desirable, as sometimes these future benefits may lead to more intense competition and hence lower profits for both firms.

Keywords: Customer relationship management, competitive strategy, game theory, customer lifetime value, customer equity, customer acquisition, customer development, customer retention, services marketing, relationship marketing