Managing Customer Relationships Under Competition: Punish Or Reward Current Customers?

Companies spend enormous resources on customer relationship management (CRM), but there is no clear understanding on two seemingly simple, but critical questions: (1) Should firms reward or punish their current customers? (2) Can CRM be profitable in a competitive setting? While CRM practitioners are enthusiastic about its win-win potential for firms and customers, the extant theoretical literature on CRM-based pricing is not so sanguine. Much of the theoretical literature finds that CRM-based pricing “punishes ” existing customers by giving better deals to the competitors ’ customers; worse CRM-based pricing leads to lower firm profits. In this paper, we present a unified model of CRM-based pricing that helps identify conditions under which to reward/punish current customers and when CRM can increase/decrease profits. We thus bridge the gap between the practitioner’s optimism and the theorist’s skepticism about CRM. Key Words: CRM, behavior-based price discrimination, competitive strategy, game theory