Vol. 28, No. 3, May–June 2009, pp. 555–565 issn 0732-2399  eissn 1526-548X  09  2803  0555 inf orms ® doi 10.1287/mksc.1080.0424 © 2009 INFORMS Research Note How Much Should You Invest in Each Customer Relationship? A Competitive Strategic Approach Andrés Musalem Fuqua School of Business, Duke University, Durham, North Carolina 27708, amusalem@duke.edu Yogesh V. Joshi Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742, yjoshi@rhsmith.umd.edu W e analyze firms’ decisions to invest in customer relationship management (CRM) initiatives such as acqui- sition and retention in a competitive context, a topic largely ignored in past CRM research. We characterize each customer by her intrinsic preference towards each firm, the contribution margin she generates for each firm, and her responsiveness to each firm’s retention and acquisition efforts. We show that a firm should invest most heavily in retaining those customers that exhibit moderate responsiveness to its CRM efforts. Further, a firm should most aggressively seek to attract those customers that exhibit moderate responsiveness to their provider’s CRM efforts and those that are moderately profitable for their current provider. Investing more in customers that are more responsive does not always lead to higher firm profits, because stronger competition for such customers tends to erode the effects of higher CRM efforts of an individual firm. When firms develop a customer relationship over time to generate higher contribution margin or customer responsiveness, we show that such developments may not always be desirable, because sometimes these future benefits may lead to more intense competition and hence lower profits for both firms. Key words : customer relationship management; competitive strategy; game theory; customer lifetime value; customer equity; customer acquisition; customer development; customer retention; services marketing; relationship marketing History : Received: August 24, 2004; accepted: March 19, 2008; processed by Roland Rust. Published online in Articles in Advance October 7, 2008. 1. Introduction Customer relationship management (CRM) has become an important topic in the industry today, with Forrester Research (Band et al. 2007) projecting global CRM revenue growth from $8.6 billion in 2007 to $10.9 billion in 2010. Academic interest in CRM is also on the rise, as reflected in recent work on service quality and customer satisfaction (e.g., Boulding et al. 1993, Zeithaml et al. 1996, Bolton 1998, Bolton and Myers 2003, Seiders et al. 2005, Bolton et al. 2006, Gupta and Zeithaml 2006), management of customer relationships (e.g., Lemon et al. 2002, Reinartz and Kumar 2003, Johnson and Selnes 2004, Rust et al. 2004, Gupta et al. 2004, Payne and Frow 2005, Rust and Verhoef 2005, Rust and Chung 2006, Sun 2006) and development and estimation of probabilistic models of customer relationships (Schmittlein and Peterson 1994, Kamakura et al. 2004, Lewis 2004, Neslin et al. 2006). Strategically, a firm’s CRM initia- tives can be organized along the customer life cycle as customer acquisition, development, and retention (Kamakura et al. 2005). The goal of acquisition is to obtain profitable customers, the goal of development is to grow revenues from existing customers, and the goal of retention is to minimize “churn” of customers. Current literature offers few normative recommenda- tions for firms’ CRM decisions along this life cycle. A decision calculus tool developed by Blattberg and Deighton (1996) maximizes a single firm’s customer equity to determine an optimal mix of retention and acquisition spending. Ho et al. (2006) generalized a version of the Schmittlein et al. (1987) model that incorporates investments in customer satisfaction as a decision variable for a single firm, to show that a firm pursuing a high customer satisfaction strategy may overinvest if it ignores changes in customer behavior due to variation in customer satisfaction. Drèze and Bonfrer (2008) evaluate the consequences of using alternative CRM objectives (maximizing customer equity versus customer lifetime value) to show that a firm maximizing customer equity does not invest enough in customer acquisition if it relies only on 555 Copyright: INFORMS holds copyright to this Articles in Advance version, which is made available to institutional subscribers. The file may not be posted on any other website, including the author’s site. Please send any questions regarding this policy to permissions@informs.org. INFORMS holds copyright to this article and distributed this copy as a courtesy to the author(s). Additional information, including rights and permission policies, is available at http://journals.informs.org/.