HEC Paris2014-08-11 8:21 PM

Managing Retention in Service Relationships

Abstract

In a repeat business context, past experiences with a service provider affect customers' decisions to renew their contract. How should a strategic firm manage customized service over time to maximize the long-term value from each customer relationship? We propose a dynamic model that relies on behavioral theories and empirical evidence to capture the effect of past service experiences on service quality expectations, customer satisfaction, and retention. Although firms can benefit from managing service expectations at the beginning of a relationship, we find that varying service in the long run is not optimal.Behavioral regularities explain the structure of optimal service policies and limit the value of responsive service. Loss aversion expands the range of optimal constant policies; however, if satisfying experiences are more salient then firms should constantly vary service levels. Loyal or high-margin customers need not warrant better service; those who anchor less on past service experiences do-provided that retention is improved by better past experiences. The effect of customer memory on service levels is determined by whether habituation or rather goodwill drives defection decisions.

Author
I. POPESCU, Sam AFLAKI

Departments
Operations Management & Information Technology, GREGHEC (CNRS)

Journal Information
Management Science, February 2014, vol. 60, n°2, pp.415-433

Full Article
http://pubsonline.informs.org/doi/pdf/10.1287/mnsc.2013.1775

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HEC Paris

Founded in 1881 by the Paris Chamber of Commerce and Industry, HEC Paris specializes in education and research in management sciences. As a leading academic institution in Europe and worldwide, HEC Paris offers a complete and unique range of education programs for students and leaders.

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