Acquisition versus Retention: Competitive Customer Relationship Management

Customer relationship management suggests that sellers identify their most valuable customers and provide special products/services to them, either immediately in an effort to build a sense of commitment to the firm (an acquisition strategy) or just as they are thinking of leaving (a retention strategy). While a monopolist profits most from an acquisition CRM strategy, assuming costs are held constant, the main result of our analytic model is that in a competitive marketplace one firm pursues an acquisition strategy and its rival uses a retention strategy. A critical ingredient in this finding is exogenous and identical customer churn rates. A retention strategy leads to a relatively smaller committed “buyer club,” so it leads to a net windfall gain from customer churn. While a monopolist should choose acquisition CRM, when there is competition a first mover should choose retention CRM. The rival firm is forced to differentiate by choosing the less profitable acquisition strategy. Further, a retention strategy asks the customers to trust that special services will be provided eventually. We find that both the firm pursuing a retention strategy and its customers are better off when the churn rate is lower, so this trust is rewarded. Finally, if acquisition CRM eliminates customer churn by creating early feelings of delight, then an all-acquisition outcome can be the competitive equilibrium.