(An) economic analysis of customer network externalities on customer relationship management strategy

Abstract

With the industry wide interest in generating and maximizing profit, various efforts were made by companies to do so by implementing Customer Relationship Management (CRM) policy. The key strategy in such CRM policy is to serve the profitable few customers and disregard or do not offer services to the rest of the customers who are not profitable for the company. However, such strategy may be beneficial to the company in short term but in the long term it may not be the case. The present CRM policy had not taken into consideration that network externality might exist among customers. Or the fact that customer buying behavior has potential to change over time. The unprofitable customer could become the company’s most profitable customer, if the customer finds more value in the products or services offered by the company over time. In this paper, the existence of network externalities among customers and how it has effect on the profit of companies trying to exploit it or rejecting it is tested, by means of the simulation, implemented by REPAST and the statistical package SAS. For obtaining more realistic implications, the switching cost of customers and the quality or benefit of the product, and finding the optimal level of the customers that would ensure profit should be searched. It is suggested for future research.