Customer Value-Based Management: Competitive Implications

Abstract

Many …firms today quantify the value of individual customers and serve them differentially; providing better service, prices and other inducements to high value customers. We refer to this practice as Customer Value-based Management (CVM). While previous research and popular press has strongly advocated CVM, …firms have often met with mixed results. One possible reason why actual outcomes differ from anticipated results could be that …firms often implement CVM in a competitive environment. Our objective is to study CVM explicitly in a competitive setting. We find that while some recommendations and prescriptions from past research continue to apply in a competitive environment, some others do not. For example, we find that one of the benefits of CVM in a competitive setting is that it can discourage the rival from competing intensely, by increasing the rival’s chances of acquiring unprofitable customers. In this context, low-value customers can play an important strategic role by limiting the intensity of rival’s poaching. Consequently, …firing low value customers or even increasing their value may prove counter-productive.

Keywords: Competitive Strategy, Customer Relationship Management, Game Theory

JEL Classification: C72, D43, D82