When Acquisition Spoils Retention: Selling Direct Vs. Delegation Under CRM

Abstract:     
The widespread implementation of customer relationship management (CRM) technologies in business has allowed companies to increasingly focus on allocating resources and motivating sales forces to both acquire and retain customers. The challenge of designing an incentive mechanism that simultaneously focuses on customer acquisition and customer retention comes from the fact that customer acquisition and customer retention activities are usually separate but intertwined tasks, which make providing proper incentives more difficult. The present study develops an incentive mechanism that simultaneously addresses acquisition and retention of customers, as well as how delegation could affect efforts of both acquisition and retention, retail price, firm’s profit, and compensations to agent. In addition, the study examines the effect of long-term customer value on the structure of the optimal mechanism and discusses the implications on strategies for customer acquisition and retention. The analysis shows that both performance level and cost level interactions can have a separate and joint impact on the design of the incentive contract. More specifically, the paper finds that 1) interestingly, when customer acquisition has a positive impact on customer retention performance, the optimal effort and compensation for customer acquisition and the optimal retail price decrease in longterm customer value while the optimal effort and compensation for customer retention increase in long-term customer value; 2) at the same time, delegation of customer acquisition tasks increases retail price when the optimal retail price under direct selling is sufficiently small but decreases the price otherwise, and delegation increases customer retention effort and compensation when the gross margin under delegation is small and reduces retention effort and compensation when the gross margin under delegation is sufficiently large; 3) when the acquisition tasks are delegated in direct selling, the optimal levels of compensation and effort for customer acquisition and retention are greater and the optimal retail price is higher when the tasks are complements than when the tasks are substitutes; 4) at the same time, the optimal compensation and effort for customer acquisition, as well as the optimal retail price, decrease in long-term customer value when the tasks are substitutes but increase when the tasks are complements; and 5) interestingly, when the customer acquisition and retention tasks are complements, delegation increases customer retention effort and compensation, and when customer acquisition and retention are substitutes at a sufficiently large degree, delegation increases the optimal customer acquisition effort and retail price. Otherwise, delegation reduces the optimal acquisition effort and retail price. The implications of the findings are that 1) managers should design integrated CRM programs that create synergy and coordinate tasks between customer acquisition and customer retention; 2) CRM design should be tailored on the basis of customer value with more delicate care toward customer acquisition; 3) that customer representatives may make less effort in both customer acquisition and customer retention, when facing customers with higher value, despite the higher compensations when customer acquisition and retentions are substitutes; and 4) delegation of customer acquisition may increase or decrease efforts for customer acquisition and retentions and/or retail price, depending on how customer acquisition and retention interact on both the performance and cost levels, which suggests that managers have to consider carefully about the intertwining of the tasks at both performance and cost levels when deciding to delegate or not.

Keywords: customer acquisition, customer retention, customer value, customer relationship

JEL Classifications: D01, D23, D86, J53, L14, M14, M31, M54

Working Paper Series