Competitive Customer Relationship
Management:
Acquisition versus Retention
Niladri B. Syam
Assistant Professor of Marketing
James D. Hess
C.T. Bauer Professor of Marketing Science
Under review for publication in
American Economic Review
Churn, Churn, Churn
The Byrds with Music by Pete Seeger
To every customer (churn, churn, churn)
There is a season (churn, churn, churn)
And a time for every purchase, in our theory.
A time to acquire, a time to retain,
A time to segment, a time to reap,
A time to prospect, a time to relate,
A time to compete, I swear its not too late.
To every customer (churn, churn, churn)
There is a season (churn, churn, churn)
And a time for every purchase, in our theory.
Extant literature on CRM
•A very rich conceptual and empirical literature on
Customer Relationship Management including: Morgan
and Hunt (1994); Reinartz and Kumar (2000 and 2003);
Verhoef (2003); Sharp and Sharp (1997) etc.
•A very large body of trade press articles: mainly
operational/tactical
•Rick Staelin’s 2005 overview paper in JM “A Customer
Relationship Management Roadmap: What is Known,
Potential Pitfalls, and Where to Go” said:
“We find it surprising that the CRM literature and the articles in
this special section are largely silent on the issue of competitive
reaction.”
What is CRM?
Some prospects have larger potential lifetime sales
than other prospects. For those better prospects
the firm does special things to transform them into
long-lived customers (that is, build a relationship).
Customers often have other suppliers to which
they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
What is CRM?
Some prospects have larger potential lifetime
sales than other prospects. For those better
prospects the firm does special things to transform
them into long-lived customers (that is, build a
relationship). Customers often have other suppliers
to which they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
What is CRM?
Some prospects have larger potential lifetime
sales than other prospects. For those better
prospects the firm does special things to transform
them into long-lived customers (that is, build a
relationship). Customers often have other suppliers
to which they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
What is CRM?
Some prospects have larger potential lifetime sales
than other prospects. For those better prospects
the firm does special things to transform them
into long-lived customers (that is, build a
relationship). Customers often have other suppliers
to which they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
What is CRM?
Some prospects have larger potential lifetime sales
than other prospects. For those better prospects
the firm does special things to transform them into
long-lived customers (that is, build a relationship).
Customers often have other suppliers to which
they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
What is CRM?
Some prospects have larger potential lifetime sales
than other prospects. For those better prospects
the firm does special things to transform them into
long-lived customers (that is, build a relationship).
Customers often have other suppliers to which
they could turn.
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
One other element
How many customers to have in the club and how to
reward them is distinct from the decision of when to
reward them.
Despite a firm’s best efforts, some consumers will still
‘churn’ in the future and makes the timing of rewards
another important strategic decision.
Research question 1
The motivation: If ‘special services’ are to be provided,
should it be now or in the future?
The effect: With early provision you can attract more
customers (Acquisition), with later provision you are
better able to keep them (Retention). Trade press is
ambiguous.
Alternate viewpoint: Up-front investments create
‘customer assets’. Promises of future investments
create ‘customer liabilities’ (Shugan, 2005).
The Question: Does a firm’s choice of acquisition or
retention depend on it’s rival’s choice? What is
equilibrium outcome?
Research question 2
The motivation: Consumers are fickle
The effect: ‘Customer churn’ can affect profitability of
CRM (A McKinsey study finds 32% churn in wireless mkt
in 2000)
Alternate viewpoint: Low intrinsic ‘retainability’ of
customers makes retention strategies ineffective
(Blattberg and Deighton 1996)
The Question: How does churn affect equilibrium
strategies? Are the effects on retention and acquisition
different?
Research question 3
The motivation: What’s in it for the consumers?
The effect: Viability of relationship marketing is
questionable since it may not be in consumers’ interest
to form exclusive relationships with firms (Day 2000;
Fournier, Dobscha, and Mick 1998)
Alternate viewpoint: When firms create customer
liabilities (retention), “…rather than showing trust in
customers, the firm asks customers to trust it.” (Shugan
2005)
The Question: If a firm adopts retention, are its interests
misaligned with those of its customers?
Now… for our choices on
Element
Element
Element
Element
Element
1: Heterogeneity
2: Multiperiod buying
3: Differential treatment
4: Addressability
5: Churn
Picture of CRM competition
•
.
Now
Club C
Basic C
Basic D
Club D
Seller
Seller
C
D
Future
Club C
Basic customers abandon the
category
Customer Churn
Club D
Model of CRM competition:
The basic product
• Firms C and D psychologically locate at
either end of a unit interval of attributes
• Customers are heterogeneous in
affiliation to the firms and are uniformly
distributed on the unit interval.
• The consumer’s surplus from C’s and D’s
basic product is U-x-PCb, and U-(1-x)-PDb
The augmented product determines
the Buyer Club
• When a firm implements CRM, it augments its
basic product by service S
• A consumer’s valuation of the service depends
on their affinity to the firm: for C it is S(1-x).
• A consumer that gets augmented product from
C has surplus U-x+S(1-x)-PCa.
• ‘Now’ and ‘future’ are captured by having two
time periods t=1, 2
Rewarding Buyer Club members
• When to reward: this determines Acquisition or
Retention strategy
• How to reward? Options include
1. Personalizing the product (our choice)
2. Add to utility: E
3. E valued according to location: E(1-x)
Acquisition strategy
• Personalization for club members occurs
in the first period.
• If firm C adopts acquisition, the first
and second period surpluses are
U+S-PC1, and U-x+S(1-x)-PC2
Retention strategy
• Personalization for club members occurs
in the second period.
• If firm C adopts retention the first and
second period surpluses are
U-x+S(1-x)-PC1 and U+S-PC2
Analysis of competition
• Firms C and D can each pursue acquisition or
retention
• This creates four distinct subgames: <r, r>,
<a, a>, <a, r>, and <r, a>.
• Game structure:
Stage 1: Firms simultaneously choose
CRM strategies
Stage 2: All six prices are chosen
conditional on first stage choice
The <r, r> subgame
• Consumer surplus for two-period club
membership: CSC12={U-x+S(1-x)– PC1}+{U+S-PC2}
• Consumer surplus for basic product: CSCb=U-x–PCb
• Join club rather than buy basic product if
U  2S  ( PC1  PC 2  PCb )
• CSC12> CSCb  x<
≡XC12
S
Join Club C
Buy Basic
C
0
X
C12
X
b
.
The <r, r> subgame
• The market segmentation
Consumer Surpluses
CSD12
CSC12
CSDb
CSCb
Seller
C 0
XC12
Join Club
C
Buy Basic
C
Xb
XD12
Buy Basic
Join Club
D
D
Seller
1 D
x, Ideal Points
The <a, a> subgame
• Acquisition-oriented firm is vulnerable to opportunism
• People will sign up for club if CSC12> CSCb . This gives XC12
as in retention case.
• Second-period marginal consumer, CS2=U-x+S(1-x) –
PC2=0, is at
U  S  PC 2
XC2 ≡ 1  S
• Firm will set prices to eliminate opportunism
C
XC2
Opportunistic
customers
XC12
How to deal with opportunism?
• Firm C should increase PC1 till XC12 equals XC2
• Note that increasing PC1 has no effect on XC2
• Is this optimal for firm C?
-Yes
• Can this constitute a Nash Equilibrium in prices?
-Yes
How does ‘churn rate’ enter?
• Churn only occurs in the second period
• Consumers leave a firm’s club to join the rival’s club
• C’s profit function with churn rate c is
Out Churn In Churn
 C  ( PC1  Cb  Cs ) X C12  ( PC 2  Cb  Cs )[(1  c ) X C12  c (1  X D12 )]
 ( PCb  Cb )[ X b  X C12 ]
Nash Equilibrium Prices
• Prices in <r, r> subgame:
PCb  PDb  1  Cb
r, r
r, r
PC2  PD2  U  S
r, r
r, r
PC1  PD1  1  Cb  Cs  12 (1  χ)(U  Cb )  χ(S  Cs )
r, r
r, r
• Prices in <a, a> subgame:
PCb  PDb  1  Cb
a,a
PC2  PD2  U  S a, a
a, a
a,a
(2 - c )(S - Cs )  (1  c )(U  Cb )
2
2c 
1 S
PC1  PD1  1  Cb  S 
a,a
a,a
(2 - c )(S - Cs )  (1  c )(U  Cb )
(1  S )( 2  c )  2
A comparison of churn volume
PROPOSITION 1:
a. In equilibrium, a firm will have a smaller club size with a retention
strategy than with an acquisition strategy, regardless of the strategy
adopted by its rival.
b. In equilibrium, a firm will have fewer churning customers with a
retention strategy than with an acquisition strategy, regardless of the
strategy adopted by its rival.
A comparison of prices
PROPOSITION 2:
a. A firm’s first-period price is higher with acquisition than with retention,
and its second-period price is higher with retention than with acquisition,
regardless of its rival’s strategy.
b. A firm’s ‘club price’ for the augmented products over two periods is higher
with a retention strategy than with an acquisition strategy, regardless of
its rival’s strategy.
Acquisition-Retention Profits
as a Function of Churn Rate
Profits
 C <r,a>
 C <a,r>
 C <a,a>
 C <r,r>
0.0
1.0
Figure 3
c
Churn
Rate
The Nash equilibrium
Theorem 1: The Nash equilibria of CRM competition with
customer churn are asymmetric: r, a or a, r.
D
Retention
Acquisition
Retention
100, 100
105, 101
Acquisition
101, 105
103, 103
C
Intuition for result
• The basic drivers for the asymmetric equilibrium are
1. Churn
2. Different strategic effects of
acquisition and retention
• Recall: In equilibrium we find that:
Club size of acquisition firm > Club size of retention
firm
Intuition (contd.)
• The retention strategy gains more customers than it
loses due to churn
• This windfall implies that the best response to
acquisition is retention
• This benefit is enormous enough that….
Some interesting profit comparisons
• Proposition 3: In equilibrium, the retention strategy is
more profitable than the acquisition strategy.
However…
• Proposition 4: Off-equilibrium
  a ,a     r ,r 
Consider a monopoly benchmark
Theorem 2 : In the presence of churn, the optimal
strategy for a monopolist is acquisition.
Rationale: Since retention strategy has higher second period price,
churn hurts it more
Two take-aways
1. A monopolist should pursue an acquisition strategy,
but when faced with competition it should switch to a
retention strategy.
2. Competition is the causal link to a retention
strategy.
A consumer surplus result
• Proposition 6: Suppose a firm adopts CRM with
a retention strategy. The customers’ surpluses
are higher when churn rate is lower. That is, it
pays to be loyal.
Standardized Rewards
THEOREM 3: There exists a critical churn rate threshold
such that:
a. If churn rate is low, one firm adopts retention CRM and
the other adopts acquisition CRM.
b. If churn rate is high, both firms adopt retention CRM.
Variations on the theme
• What if consumers are myopic?
• What if churn is not exogenous?
• Personalized pricing?
Summary
• Regardless of costs, retention is the best loyalty
program strategy when there are rival CRM
firms. It’s the competition, stupid. Make them
focus on acquisition!
• It is in the self-interest of the customer
population to reduce churn rate.