Economic analysis of the strategic use of and investment in customer relationship management (CRM) Systems under network effects and digital divides

Abstract

In accessing the value of customers and CRM systems, researchers mostly emphasize the value directly measurable by typical measurement methods. In measuring customer value, LTV, which is the present value of the sum of the expected margins over time less the cost of serving the customer, has been typically utilized. Also, the value of CRM systems has been determined by the direct improvement in customer profitability. In this thesis, with three distinct studies, I have shown that there exists strategic value of customers and CRM systems – which is incurred by their indirect effect on other customers in the market and market competition – other than value directly measurable for firms in markets where network effects and digital divides exist. First, I have investigated the impact of network effects, which make up the major market characteristic of firms offering IT products/services and e-commerce, on the value of customers and a firm’s intention to invest in CRM. In the digital economy, there are many IT products/services (or “electronic commerce”) for which the utility that a user derives from the consumption of the good or service increases with the number of other people also using it. Economists say that these products or services exhibit network externalities, or, more broadly, network effects. I have found that in a market where network effects exist, unprofitable customers who directly cause a firm to incur a loss can even become valuable due to their contribution to network size (i.e. size of customer base). Also, it is shown that a firm’s customer leveraging effort not only improves the direct profitability of customers, but also allows the firm to further explore the strategic network value of unprofitable customers. Therefore, firms whose products or services exhibit network externalities are encouraged to invest more in CRM. Second, in the context of duopoly market competition, I have investigated the value of unprofitable customers...