John Z. Zhang - room A13 - 13:30-15:00

Many firms today manage their existing customers differentially based on profit potential, providing fewer incentives to less profitable customers and firing unprofitable customers. While researchers and industry experts advocate this practice, results have been mixed. We examine this practice explicitly accounting for competition and find that some conventional prescriptions may not always hold. We analyze a setting where customers differ in their cost-to-serve. We find that when a firm is better informed about its customers than its rival, customer base composition influences the rival's poaching behavior. Therefore, even though a low-cost customer is more profitable when viewed in isolation, a high-cost customer may be strategically more valuable by discouraging poaching and increasing a firm's profits from its other customers. Consequently, we find that it can be profitable for a firm to "poison" its own customer base by retaining unprofitable customers. We further show that, in competitive settings, traditional customer lifetime value metrics may lead to poor retention decisions because they do not account for the competitive externality that actions towards some customers impose on the cash flows from other customers. Our results suggest that firms may need to evolve from a segmentation mindset, which views each customer in isolation, to a customer portfolio mindset, which recognizes that the value of different customers is interlinked.