When Acquisition Spoils Retention: Selling Direct vs. Delegation under CRM

Management Science, 2011

34 Pages Posted: 16 Jun 2009 Last revised: 18 Apr 2013

See all articles by Yan Dong

Yan Dong

University of South Carolina; University of Maryland - College Park

Yuliang Oliver Yao

Lehigh University

Tony Haitao Cui

University of Minnesota - Twin Cities

Date Written: February 3, 2011

Abstract

The widespread implementation of customer relationship management (CRM) technologies in business has allowed companies to increasingly focus on both acquiring and retaining customers. The challenge of designing incentive mechanisms that simultaneously focus on customer acquisition and customer retention comes from the fact that customer acquisition and customer retention are usually separate but intertwined tasks that make providing proper incentives more difficult. The present study develops incentive mechanisms that simultaneously address acquisition and retention of customers with an emphasis on the interactions between them. The main focus of this study is to examine the impact of the negative effect of acquisition on retention, i.e., the spoiling effect, on firm performance under direct selling and delegation of customer acquisition.

Our main finding is that the negative effect of acquisition on retention has a significant impact on acquisition and retention efforts and firm profit. In particular, when customer acquisition and retention are independent, the firm’s profit is higher under direct selling than under delegation; however, when acquisition spoils retention, interestingly, the firm’s profit may be higher under delegation. Our analysis also finds that the spoiling effect not only reduces the optimal acquisition effort but may also reduce retention effort under both direct selling and delegation. Comparing the optimal efforts under direct selling and delegation, the acquisition effort is always lower under delegation regardless of the spoiling effect, but the retention effort may be higher under delegation with the spoiling effect. Furthermore, when customer antagonism effect from price promotions is considered, our main results hold regarding the firm’s preferences between direct selling and delegation, which demonstrates the robustness of our model.

Keywords: customer acquisition, customer retention, customer value, customer relationship management, incentive mechanism

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

Suggested Citation

Dong, Yan and Yao, Yuliang and Cui, Tony Haitao, When Acquisition Spoils Retention: Selling Direct vs. Delegation under CRM (February 3, 2011). Management Science, 2011. Available at SSRN: https://ssrn.com/abstract=1419163

Yan Dong

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

University of Maryland - College Park ( email )

College Park, MD 20742
United States

Yuliang Yao

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Tony Haitao Cui (Contact Author)

University of Minnesota - Twin Cities ( email )

321 19th Ave S
Suite 3-150
Minneapolis, MN 55455
United States

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