The Strategic Value of High-Cost Customers

dc.contributor.authorSubramanian, Upenderen_US
dc.contributor.authorRaju, Jagmohan S.en_US
dc.contributor.authorZhang, Z. Johnen_US
dc.date.accessioned2014-08-25T19:36:56Z
dc.date.available2014-08-25T19:36:56Z
dc.date.created2014-02-01en_US
dc.description.abstractMany firms today manage their existing customers differentially based on profit potential, providing fewer incentives to less profitable customers and firing unprofitable customers. Although researchers and industry experts advocate this practice, results have been mixed. We examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold. We analyze a setting where customers differ in their cost to serve. We find that when a firm can discriminate among its customers but the rival cannot, customer base composition influences the rival's poaching behavior. Consequently, even though a low-cost customer is more profitable when viewed in isolation, a high-cost customer may be strategically more valuable by discouraging poaching. Therefore, contrary to conventional advice, it can be profitable for a firm to retain unprofitable customers. Moreover, some customers may become more valuable to retain and receive better incentives when they are less profitable. We further show that, in competitive settings, traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions toward some customers impose on the cash flows from other customers. Our results suggest that firms may need to evolve from a segmentation mindset, which views each customer in isolation, to a customer portfolio mindset, which recognizes that the value of different customers is interlinked.en_US
dc.identifier.bibliographicCitationSubramanian, Upender, Jagmohan S. Raju, and Z. John Zhang. 2014. "The strategic value of high-cost customers." Management Science 60(2): 494-507.en_US
dc.identifier.issn0025-1909en_US
dc.identifier.issue2en_US
dc.identifier.startpage494en_US
dc.identifier.urihttp://hdl.handle.net/10735.1/3922
dc.identifier.volume60en_US
dc.language.isoenen_US
dc.publisherInformsen_US
dc.relation.urihttp://dx.doi.org/10.1287/mnsc.2013.1771en_US
dc.rights© 2014 INFORMSen_US
dc.source.journalManagement Scienceen_US
dc.subjectPrice discriminationen_US
dc.subjectGame theoryen_US
dc.subjectConsumersen_US
dc.subjectPricingen_US
dc.subjectCorporate profitsen_US
dc.titleThe Strategic Value of High-Cost Customersen_US
dc.type.genrearticleen_US

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