A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?

Jiwoong Shin () and K. Sudhir ()
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Jiwoong Shin: Yale School of Management, Yale University, New Haven, Connecticut 06520
K. Sudhir: Yale School of Management, Yale University, New Haven, Connecticut 06520

Marketing Science, 2010, vol. 29, issue 4, 671-689

Abstract: This study attempts to answer a basic customer management dilemma facing firms: when should the firm use behavior-based pricing (BBP) to discriminate between its own and competitors' customers in a competitive market? If BBP is profitable, when should the firm offer a lower price to its own customers rather than to the competitor's customers? This analysis considers two features of customer behavior up to now ignored in BBP literature: heterogeneity in customer value and changing preference (i.e., customer preferences are correlated but not fixed over time). In a model where both consumers and competing firms are forward-looking, we identify conditions when it is optimal to reward the firm's own or competitor's customers and when BBP increases or decreases profits. To the best of our knowledge, we are the first to identify conditions in which (1) it is optimal to reward one's own customers under symmetric competition and (2) BBP can increase profits with fully strategic and forward-looking consumers.

Keywords: behavior-based pricing; customer heterogeneity; stochastic preferences; forward-looking customers; forward-looking firms; customer relationship management; competitive strategy; game theory (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (115)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:29:y:2010:i:4:p:671-689

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