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Customer relationship management in competitive environments: The positive implications of a short-term focus

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  • Julian Villanueva

    ()

  • Pradeep Bhardwaj

    ()

  • Sridhar Balasubramanian

    ()

  • Yuxin Chen

    ()

Abstract

Researchers and business thought leaders have emphasized that firms must think and act with a long-term horizon when managing customer relationships. We demonstrate that, in contrast to this widely held view, profits in competitive environments may be maximized when firms ignore the future and instead maximize period-by-period profits from customers. Intuitively, while a long-term focus yields more loyal customers, it greatly increases short-term price competition to gain and keep customers. Consequently, overall firm profits and customer lifetime value may be lower when firms directly maximize multi-period profits from customers. Specifically, we analyze a model with segment-level pricing where firms in a duopoly can choose between period-by-period and multi-period profit maximization and demonstrate that, in many cases, a symmetric focus on period-by-period profit maximization emerges as the Pareto-dominant Nash equilibrium. We extend the model in two directions. First, we demonstrate that this superiority of the short-term focus endures even when a revenue expansion effect applies—that is, when customer loyalty leads to enhanced revenues. Second, we examine the case where customers are strategic and incorporate the long-term implications of their choices into their decision-making. Here we demonstrate that it may pay for firms to be myopic even when customers are strategic. The focus on multi-period surplus makes customers less price sensitive to price variations at the early stage of the game. Consequently, the focus on maximizing period-by-period profits enables the firms to charge higher upfront prices and leverage this lower price sensitivity into higher profits. Overall, our results highlight the paradox that, when it comes to managing customer relationships in competitive environments, a short-term focus may constitute the optimal long-term strategy. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • Julian Villanueva & Pradeep Bhardwaj & Sridhar Balasubramanian & Yuxin Chen, 2007. "Customer relationship management in competitive environments: The positive implications of a short-term focus," Quantitative Marketing and Economics (QME), Springer, vol. 5(2), pages 99-129, June.
  • Handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:99-129
    DOI: 10.1007/s11129-007-9022-8
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Siddharth S. Singh & Dipak C. Jain & Trichy V. Krishnan, 2008. "Research Note--Customer Loyalty Programs: Are They Profitable?," Management Science, INFORMS, vol. 54(6), pages 1205-1211, June.
    2. Simona Mina & Felicia Surugiu & Ioana Surugiu & Viorela Georgiana Cristea, 2014. "Generating competitive intelligence within higher education institutions. Case study in Constanta Maritime University," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 7(1), pages 84-93, June.
    3. Yan Dong & Yuliang Yao & Tony Haitao Cui, 2011. "When Acquisition Spoils Retention: Direct Selling vs. Delegation Under CRM," Management Science, INFORMS, vol. 57(7), pages 1288-1299, July.

    More about this item

    Keywords

    Customer relationship management; Game theory; Short-term strategy; Long-term strategy; Competition; C72; D11; D92; M31;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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