Managing Retention in Service Relationships

• Published in: Management science 2014-02, Vol.60 (2), p.415-433
• Main Authors: Aflaki, Sam, Popescu, Ioana
• Format: Article
• Language: English
• Subjects: Analysis; Asymmetry; Business administration; Customer relations; Customer relationship management; Customer retention; Customer satisfaction; Customer services; Customers; domain_shs.gestion.man-op; Dynamic models; Economic aspects; Financial management; Habituation; Humanities and Social Sciences; lifetime value optimization; Loss aversion; Management science; Marketing; Marketing strategies; Memory; Prices; Public relations; Quality of service; Retention; Risk aversion; service quality; service relationships; Services industry; Studies; Value
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2013.1775

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. This paper was accepted by Christian Terwiesch, operations management.