Customer relationship management in competitive environments: The positive implications of a short-term focus |
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Authors: | Julian Villanueva Pradeep Bhardwaj Sridhar Balasubramanian Yuxin Chen |
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Institution: | (1) Department of Marketing, IESE Business School, University of Navarra, Avda. Pearson, 21, 08034 Barcelona, Spain;(2) Department of Marketing, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Campus Box 3490, McColl Building, Chapel Hill, NC 27599, USA;(3) Department of Marketing, Leonard N. Stern School of Business, New York University, 40 West 4th Steet, Suite 906, New York, NY 10012, USA |
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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.
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Keywords: | Customer relationship management Game theory Short-term strategy Long-term strategy Competition |
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