Strategic Use of Analytical CRM in a Market with Network Effects and Switching Costs: Terminating Unprofitable Customer Relationships

Abstract

Analytical customer relationship management (CRM) systems make firms more informed than ever about their customers. This further gives firms the ability to serve customers selectively in a way that ensures retaining profitable customers and eliminating unprofitable ones. However, when firms of products/services with network effects decide to eliminate unprofitable customers, they may face the risk associated with firing them, which is user-based shrinkage. This risk incurred as a result of network effects has been widely neglected in CRM literature. In this study, considering this risk, we investigate when firms can eliminate unprofitable customers in the competitive market with network effects and consumer switching costs, which often co-exist with network effects, using a game-theoretic model of a duopoly. Our results show that it is not desirable for firms to fire unprofitable customers in the presence of strong network effects or sufficiently low consumer-switching costs. Otherwise, firms can fire unprofitable customers and benefit from the ability to eliminate them. An interesting point is that competing firms can be better off when both have the ability to eliminate unprofitable customers in the presence of moderate switching costs and small network effects.