Customer relationship management in competitive environments: The positive implications of a short-term focus
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
Volume (Year): 5 (2007)
Issue (Month): 2 (June)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/business+%26+management/marketing/journal/11129/PS2|
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.:
- 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.
- Padilla A. Jorge, 1995. "Revisiting Dynamic Duopoly with Consumer Switching Costs," Journal of Economic Theory, Elsevier, vol. 67(2), pages 520-530, December.
- Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
- 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.
- Greg Shaffer & Z. John Zhang, 1995. "Competitive Coupon Targeting," Marketing Science, INFORMS, vol. 14(4), pages 395-416.
- Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
- 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.
- Taylor, Curtis R., 2000. "Supplier Surfing: Competition and Consumer Behavior in Subscription Markets," Working Papers 00-12, Duke University, Department of Economics.
- J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
- 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.
- Yuxin Chen & Chakravarthi Narasimhan & Z. John Zhang, 2001. "Individual Marketing with Imperfect Targetability," Marketing Science, INFORMS, vol. 20(1), pages 23-41, November.
- Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
- Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
- 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.
- Fershtman, Chaim & Judd, Kenneth L, 1987.
"Equilibrium Incentives in Oligopoly,"
American Economic Review,
American Economic Association, vol. 77(5), pages 927-40, December.
- J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
- 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.
- Greg Shaffer & Z. John Zhang, 2002. "Competitive One-to-One Promotions," Management Science, INFORMS, vol. 48(9), pages 1143-1160, September.
- A. M. McGahan & Pankaj Ghemawat, 1994. "Competition to Retain Customers," Marketing Science, INFORMS, vol. 13(2), pages 165-176.
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: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.