An economic analysis of customer selection and leveraging strategies in a market where network externalities exist

Abstract

When a firm implements analytical CRM, the value of a customer is assessed by profitability analysis. In a sense, a firm retains profitable customers but “fires” unprofitable ones. In this paper, we show that this typical customer selection strategy is not appropriate for a firm of goods and services that exhibit network externalities because of the strategic network value of unprofitable customers. In addition, we verify that this strategic value of customers also affects customer leveraging efforts through operational and collaborative CRM for such a firm. Under certain conditions, demarketing efforts based on simple profitability measures may prove counter-productive to the firm and even socially undesirable.