Background Note | HBS Case Collection | January 2003 (Revised September 2007)

A Note on Racing to Acquire Customers

by Thomas R. Eisenmann

Abstract

Examines factors that motivate a firm's race to acquire customers in newly emerging markets and explores conditions under which racing strategies are likely to yield attractive returns. Provides a definition of racing behavior, introduces the notion of an optimal level of investment in customer acquisition efforts, and considers reasons why firms might invest more or less than this optimal amount, including funding constraints and the impact of budgeting and compensation systems. Explains why firms may be motivated to race to acquire companies when they confront increasing returns to scale due to network effects and/or high fixed, up-front costs and/or high customer switching costs. Describes how the relative strength of the first and late mover advantages determines whether firms should seek to pioneer. New market opportunities often spark speculative bubbles and the case discusses why such bubbles may lead firms to overinvest in customer acquisition efforts. Presents frameworks for deciding: 1) whether to enter a new market in which rivals are likely to race to acquire customers and 2) how a company should respond when a competitor escalates a race.

Keywords: Customers; Price Bubble; Network Effects; Emerging Markets; Market Entry and Exit; Behavior; Competition;

Citation:

Eisenmann, Thomas R. "A Note on Racing to Acquire Customers." Harvard Business School Background Note 803-103, January 2003. (Revised September 2007.)