Economics of customer poaching

Some more reflections on my previous post on changing operators. As someone who’s worked with sales and marketing, it first struck me as a bit odd that my old operator would be lame enough only to send me a SMS when trying to keep from switching to their competitor. Then I remembered that the operators had met at the Ministry of Transports and Communications to deal with problems related to “too aggressive” telemarketing in selling mobile phone subscriptions. They managed to get the minister to start the process of changing the law so as to outlaw telemarketing of  mobile phone subscription (see the press release in Finnish here).

And so if the operators agreed not to actively sell subscriptions by calling customers, then a handy way of sidelining this is to send a SMS to the customer, and encourage him to call you.

The economics of this issue are related to customer poaching and how it can increase the competitive pressures in the market, ie. lead to lower profits for the operators.

If you in effect can manage to get the state to outlaw aggressive poaching practices, then you can increase profitability. Given that you are more or less happy with the amount of customers you have, then by agreeing with your competitors not to pursue their customers too aggressively, while getting them to reciprocate, you can increase your profits. The problem in a normal competitive situation is of course that after entering into an agreement like this you will have an incentive to deviate – Get your competitors to play nice with you, while you plan not so nice with them will be a winning strategy.

With everybody knowing this we have a prisoner’s dilemma, ie. the operators know it’s in their private interest not to honor the agreement, even though everybody would be better of with everybody honoring the agreement as, compared to nobody honoring the agreement. One way of avoiding this unpleasant outcome is to get some additional credibility to your promise not to be aggressive – ask the state to draft an appropriate law banning the aggressive behavior. For the incumbent operators this has the additional benefit of making entry by new actors harder. Homerun!