Customer Value-Based Management: Competitive Implications

Abstract

Many …rms today quantify the value of individual customers and serve them di¤erentially; providing better priviliges, discounts or other inducements to high value customers. We refer to this practice as Customer Value-based Management (CVM). Previous research in this area and popular press recommend numerous prescriptions that are research-based and intuitively sound. However, …rms that have adopted CVM have often met with mixed results. For example, only a third of leading U.S. retail banks indicate that they have gained a competitive advantage from CVM. One possible factor that might account for the di¤erence between actual outcomes and anticipated results could be that real …rms implement CVM in a competitive environment. Our objective is to study CVM explicitly in a competitive setting. Our results suggest that while some recommendations and prescriptions from past research continue to hold in a competitive environment, some others do not. For example, …ring low-value customers decreases …rm pro…ts, and even improving their value may prove counter-productive. Also as the cost of CVM technology decreases, …rms adopting CVM in a competitive environment do not necessarily bene…t. Many …rms today quantify the value of individual customers and serve them di¤eren-tially; providing better privileges, discounts or other inducements to high value customers.We refer to this practice as Customer Value-based Management (CVM). Previous research in this area and popular press o¤er numerous prescriptions that are research-based and intuitively sound. However, …rms that have adopted CVM have often met with mixed results.For example, only a third of leading U.S. retail banks indicate that they have gained a competitive advantage from CVM. One possible factor that might account for the di¤erence between actual outcomes and anticipated results could be that real …rms implement CVM in a competitive environment. Our objective is to study CVM explicitly in a competitive setting. Our results suggest that while some recommendations and prescriptions from past research continue to hold in a competitive environment, some others do not. For example, …ring low-value customers decreases …rm pro…ts, and even improving their value may prove counter-productive. Also as the cost of CVM technology decreases, …rms adopting CVM in a competitive environment do not necessarily bene…t.

"Mind the gaps" between the marketing theory train and the marketing practice platform: the case of Egg Card

“…Although that piece of advice has become widely accepted in recent years as companies have sought to manage their relationships with customers in more sophisticated ways for a clear-cut rationale -firing bad customers might be unhealthy for firms: The notion that "firing unprofitable customers" is a smart thing to do, has emerged out of the broad acceptance of a practice of CRM, where firms often used information technology to quantify the value of individual customers in order to provide better privileges or other inducements to customers identified as having high-value. In their study, Subramanian, Raju and Zhang (2007) added value to the mix and came up with CVM in order to enhance the need for moving CRM to the next level. These customer analyses have often shown that a small proportion of customers contributed to a large percentage of profits, and that many customers were actually unprofitable.…”

“…Citing Fidelity Investments were lowvalue customers are made to wait longer in queues to have their calls taken by call centres, they argued that financial institutions were best known for treating low-value customers differently from good ones. However, while acknowledging that firing bad customers may make some sense in industries where there is little or no competition, Subramanian, Raju and Zhang (2007) make it clear that:…”

“…This is contrary to the commonly observed CVM practice of treating high value customers better, which may suggest that there are instances where differences in customer value are driven by factors other than loyalty. Subramanian, Raju and Zhang's (2007) model sought to address such settings, and found that the nature of competitive interaction was qualitatively different. Building on previous research (Broecker 1990; Banerjee 2005) on credit market competition, when lenders ration credit by screening borrowers based on their repayment ability.…”

“…So, unlike in skimming, lenders are not deterred from competing by the prospect of acquiring less attractive borrowers. Consequently (Subramanian, Raju and Zhang 2007). Banerjee (2005) also suggested that an improvement in a lender's screening accuracy never benefits a rival, but such competitor may benefit if skimming sufficiently moderates competition.…”

Customer Value Controlling – Combining Different Value Perspectives

“…Other authors rather focus on the profitability of individual customers and state that "many firms today quantify the value of individual customers and serve them differentially; providing better privileges, discounts or other inducements to high value customers" (Subramanian, Raju and Zhang, 2007).…”