When Acquisition Spoils Retention: Direct Selling vs. Delegation Under CRM

Yan Dong (), Yuliang Yao () and Haitao Cui
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Yan Dong: Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20850
Yuliang Yao: College of Business and Economics, Lehigh University, Bethlehem, Pennsylvania 18015

Management Science, 2011, vol. 57, issue 7, 1288-1299

Abstract: The widespread implementation of customer relationship management technologies in business has allowed companies to increasingly focus on both acquiring and retaining customers. The challenge of designing incentive mechanisms that simultaneously focus on customer acquisition and customer retention comes from the fact that customer acquisition and customer retention are usually separate but intertwined tasks that make providing proper incentives more difficult. The present study develops incentive mechanisms that simultaneously address acquisition and retention of customers with an emphasis on the interactions between them. The main focus of this study is to examine the impact of the negative effect of acquisition on retention, i.e., the spoiling effect, on firm performance under direct selling and delegation of customer acquisition. Our main finding is that the negative effect of acquisition on retention has a significant impact on acquisition and retention efforts and firm profit. In particular, when the customer acquisition and retention are independent, the firm's profit is higher under direct selling than under delegation; however, when acquisition spoils retention, interestingly, the firm's profit may be higher under delegation. Our analysis also finds that the spoiling effect not only reduces the optimal acquisition effort but may also reduce retention effort under both direct selling and delegation. Comparing the optimal efforts under direct selling and delegation, the acquisition effort is always lower under delegation regardless of the spoiling effect, but the retention effort may be higher under delegation with the spoiling effect. Furthermore, when the customer antagonism effect from price promotions is considered, our main results hold regarding the firm's preferences between direct selling and delegation, which demonstrates the robustness of our model. This paper was accepted by Pradeep Chintagunta, marketing.

Keywords: customer acquisition; customer retention; customer value; customer relationship management; incentive mechanism (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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