Competitive Density and the Customer Acquisition–Retention Trade-Off

Abstract

The authors build on conceptual and analytic evidence to argue that firms can increase performance by shifting emphasis away from customer retention strategies toward customer acquisition strategies as competitive density (i.e., the number of competitors) increases and the marketplace becomes more dynamic. Empirical research using four data sources for a single artistic industry produces strong support for the moderation hypotheses. When competitive density is low, a customer retention strategy emphasizing close relationships with customers and adaptive learning enhances performance. When competitive density is high, a customer acquisition strategy emphasizing innovation and competitor learning enhances performance. Four key takeaways emerge. As competitive density increases, (1) the financial impact of choosing the right mix of resources and capabilities increases; (2) close customer relationships become liabilities, providing no revenue benefits and exerting a negative effect on net income; (3) close relationships with suppliers increase revenues but also expenses, so that net income decreases; and (4) adaptive learning lowers revenue and, even more so, expenses, so that net income increases. The authors discuss the implications of these findings and identify combinations of resources and capabilities that achieve different performance objectives.