IESE Research Papers,
IESE Business School

Abstract: Researchers and business thought leaders have emphasized that, towards maximizing the lifetime value of customers, firms must manage customer relationships for the long term. In contrast to this recommendation, we demonstrate that firm profits in competitive environments are maximized when managers focus on the short term with respect to their customers. Intuitively, while a long term focus yields more loyal customers, it sharpens short term competition to gain and keep customers to such an extent that overall firm profits are lower than when managers focus on the short term. Further, a short term focus continues to deliver higher profits even when customer loyalty yields a higher share-of-wallet or reduced costs of service from the perspective of the firm. Intuitively, while such revenue enhancement or cost reduction effects enhance the proverbial pot of gold at the end of the rainbow, they lead to even more intense competition to gain and keep customers in the short term. These findings suggest that the competitive implications of a switch to a long term customer focus must be carefully examined before such a switch is advocated or implemented. Paradoxically, customer lifetime value may be maximized when managers focus on the short term.

Keywords: target pricing; customer equity; price discrimination; customer relationship marketing; customer acquisition; customer retention

37 pages, May 24, 2004

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