IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

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

  • Julian Villanueva

    ()

  • Pradeep Bhardwaj

    ()

  • Sridhar Balasubramanian

    ()

  • Yuxin Chen

    ()

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

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://hdl.handle.net/10.1007/s11129-007-9022-8
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Springer in its journal Quantitative Marketing and Economics.

Volume (Year): 5 (2007)
Issue (Month): 2 (June)
Pages: 99-129

as
in new window

Handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:99-129
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=111240

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
  2. repec:ner:tilbur:urn:nbn:nl:ui:12-358916 is not listed on IDEAS
  3. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
  4. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  5. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Individual Marketing with Imperfect Targetability," Marketing Science, INFORMS, vol. 20(1), pages 23-41, November.
  7. Padilla A. Jorge, 1995. "Revisiting Dynamic Duopoly with Consumer Switching Costs," Journal of Economic Theory, Elsevier, vol. 67(2), pages 520-530, December.
  8. Taylor, Curtis R, 2003. " Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 223-46, Summer.
  9. Jagmohan S. Raju & V. Srinivasan & Rajiv Lal, 1990. "The Effects of Brand Loyalty on Competitive Price Promotional Strategies," Management Science, INFORMS, vol. 36(3), pages 276-304, March.
  10. Kopalle Praveen K & Neslin Scott A, 2003. "The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment," Review of Marketing Science, De Gruyter, vol. 1(1), pages 1-41, August.
  11. Fershtman, Chaim & Judd, Kenneth L, 1987. "Equilibrium Incentives in Oligopoly," American Economic Review, American Economic Association, vol. 77(5), pages 927-40, December.
  12. Padilla, A. Jorge, 1992. "Mixed pricing in oligopoly with consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 393-411, September.
  13. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
  14. Greg Shaffer & Z. John Zhang, 2002. "Competitive One-to-One Promotions," Management Science, INFORMS, vol. 48(9), pages 1143-1160, September.
  15. A. M. McGahan & Pankaj Ghemawat, 1994. "Competition to Retain Customers," Marketing Science, INFORMS, vol. 13(2), pages 165-176.
  16. Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
  17. J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
  18. Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
  19. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kap:qmktec:v:5:y:2007:i:2:p:99-129. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.