A Behavioral Economics Approach to Customer Relationship Management

Can firms be competitive in a market when improving quality is not technically feasible, cost inefficient, or when quality parity is easily matched? Prior work has suggested customer relationship management (CRM) as a tool for horizontal differentiation. However, this use of CRM fails to address the fundamental issue of leveraging CRM for quality disadvantage. Drawing upon behavioral economics, we develop a set of propositions to explore this strategic use of CRM. Specifically, a customer relationship is proposed to increase competitiveness through (1) making the customer relationship available as a decision heuristic, (2) creating customer interactions from their reference dependence and loss aversion, and (3) competing on relational heuristic rather than on quality attribute. Our innovative approach to CRM adds to the literature in three respects. First, it shows that customers can temporarily tolerate a lower quality, because they do not typically engage in cognitive reasoning. Second, it establishes that a higher quality may leave no room for firms to interact with customers and cause a deterioration of subsequent quality evaluations. Finally, it suggests that it may not be cost efficient to over-invest in quality, if maintaining a relationship is more feasible to firms.