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Managing customer relationships: Should managers really focus on the long term?

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Author Info

  • Villanueva, Julian

    ()
    (IESE Business School)

  • Bhardwaj, Pradeep

    (The Anderson School , UCLA)

  • Chen, Yuxin

    (New York University)

  • Balasubramanian, Sridhar

    (University of North Carolina at Chapel Hill)

Registered author(s):

    Abstract

    Researchers and business thought leaders have emphasized that, towards maximizing the lifetime value of customers, firms must manage customer relationships for the long term. In contrast to this recommendation, we demonstrate that firm profits in competitive environments are maximized when managers focus on the short term with respect to their customers. Intuitively, while a long term focus yields more loyal customers, it sharpens short term competition to gain and keep customers to such an extent that overall firm profits are lower than when managers focus on the short term. Further, a short term focus continues to deliver higher profits even when customer loyalty yields a higher share-of-wallet or reduced costs of service from the perspective of the firm. Intuitively, while such revenue enhancement or cost reduction effects enhance the proverbial pot of gold at the end of the rainbow, they lead to even more intense competition to gain and keep customers in the short term. These findings suggest that the competitive implications of a switch to a long term customer focus must be carefully examined before such a switch is advocated or implemented. Paradoxically, customer lifetime value may be maximized when managers focus on the short term.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/560.

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    Length: 37 pages
    Date of creation: 24 May 2004
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0560

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Related research

    Keywords: target pricing; customer equity; price discrimination; customer relationship marketing; customer acquisition; customer retention;

    This paper has been announced in the following NEP Reports:

    References

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    1. Greg Shaffer & Z. John Zhang, 2002. "Competitive One-to-One Promotions," Management Science, INFORMS, vol. 48(9), pages 1143-1160, September.
    2. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
    3. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
    4. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    5. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Individual Marketing with Imperfect Targetability," Marketing Science, INFORMS, vol. 20(1), pages 23-41, November.
    6. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
    7. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    8. A. M. McGahan & Pankaj Ghemawat, 1994. "Competition to Retain Customers," Marketing Science, INFORMS, vol. 13(2), pages 165-176.
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