The Customer Manager's Dilemma

You can also download this report in PDF format. Download now!

Game theory is a branch of mathematics that looks at strategic choices where the aim of each player is to maximise their returns. It has been applied in many fields from economics to philosophy and computer science; it's an ideal way to evaluate the current state of your CRM strategy.

The Prisoner’s Dilemma

In this game two suspects are arrested, separated and interrogated. Each is offered the same deal: if they will testify against the other, whilst the other remains silent, they will go free and their colleague will get a full 10 year sentence. The dilemma is whether to betray their colleague or collaborate with them by staying silent.

Without sufficient evidence the maximum penalty the prisoners can receive for a minor charge is six months in jail – a likely outcome if they both stay silent. If they betray each other they will receive two years apiece. What to do? They cannot confer. Their choice is summarised as follows:-

(see Wikipedia http://en.wikipedia.org/wiki/Prisoner%27s_dilemma)

It is assumed that both will try and maximise their self interest. Each must ponder the best outcome alone. They have only the two choices, silence or betrayal - what will the other do?

The least risk, rational answer is betrayal; the worst that could happen would be a 2 year sentence and the best would be to walk free: but what would betrayal of the relationship mean to them? How much satisfaction would they get from the other going to jail for 10 years? What price their longer term relationship?

The best outcome, to co-operate and maintain the relationship, is more risky: but can they both trust each other enough to stay silent?

The Customer Manager’s Dilemma

In this game we have ‘an organisation’ playing ‘the customers’. The organisation’s aim is to increase value: to deliver value to the customers, who will return value through revenue, recommendation and commitment. To give customers value the company has to know and understand the customers; it has to have personal, as well as transactional, information.

However, the customers don’t know whether to trust the company with their personal information. If they give it will it be used to solve their problems, increase their returns and make life more convenient? Or will it be used to cut the organisation’s costs, bombard them with unwanted communication and tie them into an ‘abusive’ relationship they cannot easily escape?

The dilemma for the customers’ is whether to collaborate and give the information, or choose the ‘betray option’ and withhold it. The company’s dilemma is whether to collaborate and use the information to create real value for the customer, or betray and use it for short-term value creation for themselves. What to do? Neither knows what the other will do. The choice is summarised as follows:

Without trust in the relationship, the rational option is self interest, and thus the ‘betrayal option’ for both customer and company. At best, this means short term gains and at worst, a maintenance, for the time being, of the status quo.

The best option, of course, is the highest risk, the one based on trust and building longer term relationship gain.

Learning Points

• In both the prisoners and customer mangers dilemma the win-win outcome is based on a strong element of trust. Trust is much more than customer satisfaction, and needs more precise measurement (see How do your customers value you - Jennifer Kirkby)

• Betrayal is the 'safer', short term option – but what happens when the other party knows they have been betrayed? How will they retaliate? The consumer backlash for the customer manager is already in sight (see 2006- Company Relationship Management - Jennifer Kirkby)

• The Prisoners dilemma does not include iterations of the game – what happens in round 2 when each player knows what happened in round 1. The Customer Managers dilemma on the other hand has inherent iterations. Experiments with game theory have shown that the 'collective memory' is important; greedy strategies do badly over time, because of the mathematics of reward. Altruism plays a big part in value creation and win-win outcomes: top scorers at games theory rarely seek to gain the upper hand in a win:lose scenario.

• The customer manager has the extra complication of competitor action. Game theory can also be used to choose strategic options for market positioning.

The Future is Co-Creation

Customer co-creation, building products and services in collaboration with your customers is an idea on its way up the hype cycle (see Spotting Business Value in IT - Jennifer Kirkby). Trendwatching call it customer-made (www.trendwatching.com) and have identified it as the "biggest, most promising trend in the world of business." The famous case studies are of course eBay and Amazon, but many other companies are experimenting. Proctor & Gamble have a 'connect and develop' programme for products and in 2005 Boeing had 120,000 people sign up to help them design a new aircraft. Successful co-creation however, will mean both customers and companies indulging in a few iterations of game theory.

Jennifer Kirkby
Strategy & Business Analyst, CMC
jennifer.kirkby@mycustomer.com

Find out more about Jennifer Kirkby

Further Reading

• Short term revenues at the price of long term loyalty - Lior Arussy

• Forget how the crow flies -John Kay

• Customer advocacy drives business growth – London School of Economics

• Return on customer – Don Peppers & Martha Rogers

• A fundamental question – Alan Mitchell et al

• Evolving the enterprise – SAS

• Organizing and managing customer insight – Merlin Stone et al

• Squeezing more value from customer information – Prof Robert Shaw, London Business School

• Forget leaders, we need inspiration – Jennifer Kirkby

• Customer power rules, sellers out of date

• Bad service? Oh well never mind – Stuart Lauchlan

• the stupid company – National Consumer Council