Individual marketing with imperfect targetability

Yx. Chen et al., Individual marketing with imperfect targetability, MARKET SCI, 20(1), 2001, pp. 23-41
Citations number
Categorie Soggetti
Journal title
ISSN journal
0732-2399 → ACNP
Year of publication
23 - 41
SICI code
Our research investigates the competitive ramifications of individual marke ting and information management in today's information-intensive marketing environments. The specific managerial issues we address are as follows. Fir st, what kinds of incentive environments do competing firms face when they can only target individual customers imperfectly? Second, does the improvem ent in an industry's targetability intensify price competition in the indus try such that all competing firms become worse off? Third, should a firm sh are its customer knowledge so as to improve its rival's targetability? Four th, how should an information vendor sell its information that can improve a firm's targetability? Finally, do competing firms have the same incentive s to invest in their own targetability? To answer those questions, we develop a simple model a la Narasimhan (1988) , in which each of the two competing firms have their own loyal customers a nd compete for common switchers. We assume that each firm can classify its own loyal customers and switchers correctly only with a less-than-perfect p robability. This means that each firm's perceived customer segmentation dif fers from the actual customer segmentation. Based on their perceived realit y, these two competing firms engage in price competition. As an extension, we also allow the competing firms to make their investment decisions to acq uire targetability. We show that when individual marketing is feasible, but imperfect, improvem ents in targetability by either or both competing firms can lead to win-win competition for both even if both players behave noncooperatively and the market does not expand. Win-win competition results from the fact that as a firm becomes better at distinguishing its price-insensitive loyal customer s from the switchers, it is motivated to charge a higher price to the forme r. However, due to imperfect targetability, each firm mistakenly perceives some price-sensitive switchers as price-insensitive loyal customers and cha rges them all a higher price. These misperceptions thus allow its competito rs to acquire those mistargeted customers without lowering their prices and ,hence, reduce the rival firm's incentive to cut prices. This effect soften s price competition in the market and qualitatively changes the incentive e nvironment for competing firms engaged in individual marketing. A "prisoner 's dilemma" occurs only when targetability in a market reaches a sufficient ly high level. This win-win perspective on individual marketing has many managerial implic ations. First, we show that superior knowledge of individual customers can be a competitive advantage. However, this does not mean that a firm should always protect its customer information from its competitors. To the contra ry, we find that competing firms can all benefit from exchanging individual customer information with each other at the nascent stage of individual ma rketing, when firms' targetability is low. Indeed, under certain circumstan ces, a firm may even find it profitable to give away this information unila terally. However, as individual marketing matures (as firms' targetability becomes sufficiently high), further improvements in targetability will inte nsify price competition and lead to prisoner's dilemma. Therefore, it is no t only prudent politics but also a business imperative for an industry to s eize the initiative on the issue of protecting customer privacy so as to en sure win-win competition in the industry. Second, we show that the firm with a larger number of loyal customers tends to invest more in targetability when the cost of acquiring targetability i s high. However, the firm with a smaller loyal base can, through informatio n investment, acquire a higher level of targetability than the firm with a larger loyal base as long as the cost of acquiring targetability is not too high. As the cost further decreases, competing firms will all have more in centives to increase their investments in targetability until they achieve the highest feasible level. Third, an information vendor should make its information available nonexclu sively (exclusively) when its information is associated with a low (high) l evel of targetability. When the vendor does sell its information exclusivel y, it should target a firm with a small loyal following if it can impart a high level of targetability to that firm. Finally, our analysis shows that an information-intensive environment does not doom small firms. In fact, individual marketing may provide a good oppo rtunity for a small firm to leapfrog a large firm. The key to leapfrogging is a high level of targetability or customer knowledge.