Managing Customer Relationships: Should Managers Really Focus on the Long Term?

37 Pages Posted: 27 Feb 2005

See all articles by Julian Villanueva

Julian Villanueva

Assistant Professor of Marketing

Pradeep Bhardwaj

University of California, Los Angeles (UCLA) - Marketing Area

Yuxin Chen

New York University (NYU) - Department of Marketing

Sridhar Balasubramanian

University of North Carolina Kenan-Flagler Business School

Abstract

Researchers and business thought leaders have emphasized that, towards maximizing the lifetime value of customers, firms must manage customer relationships for the long term. In contrast to this recommendation, we demonstrate that firm profits in competitive environments are maximized when managers focus on the short term with respect to their customers. Intuitively, while a long term focus yields more loyal customers, it sharpens short term competition to gain and keep customers to such an extent that overall firm profits are lower than when managers focus on the short term. Further, a short term focus continues to deliver higher profits even when customer loyalty yields a higher share-of-wallet or reduced costs of service from the perspective of the firm. Intuitively, while such revenue enhancement or cost reduction effects enhance the proverbial pot of gold at the end of the rainbow, they lead to even more intense competition to gain and keep customers in the short term. These findings suggest that the competitive implications of a switch to a long term customer focus must be carefully examined before such a switch is advocated or implemented. Paradoxically, customer lifetime value may be maximized when managers focus on the short term.

Keywords: targeted pricing, customer equity, price discrimination, customer relationship marketing, customer acquistion, customer retention

Suggested Citation

Villanueva, Julian and Bhardwaj, Pradeep and Chen, Yuxin and Balasubramanian, Sridhar, Managing Customer Relationships: Should Managers Really Focus on the Long Term?. IESE Business School Working Paper No. 560. Available at SSRN: https://ssrn.com/abstract=673321 or http://dx.doi.org/10.2139/ssrn.673321

Julian Villanueva (Contact Author)

Assistant Professor of Marketing ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Pradeep Bhardwaj

University of California, Los Angeles (UCLA) - Marketing Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Yuxin Chen

New York University (NYU) - Department of Marketing ( email )

Henry Kaufman Ctr
44 W 4 St.
New York, NY
United States
212-995-0511 (Phone)
212-995-4006 (Fax)

Sridhar Balasubramanian

University of North Carolina Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599
United States
919-962-3194 (Phone)
919-962-7186 (Fax)

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