Service Quality Variability and Termination Behavior

Ross School of Business Paper No. 1224

Management Science, Forthcoming

54 Pages Posted: 22 May 2013 Last revised: 26 Sep 2014

S. Sriram

The Stephen M. Ross School of Business at the University of Michigan

Pradeep K. Chintagunta

University of Chicago

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business

Date Written: September 1, 2014

Abstract

We investigate the roles of the level and variability in quality in driving customer retention for a new service. We present model-free evidence that while high average quality helps in retaining customers, high variability leads to higher termination rates. Apart from these main effects, we use model-free evidence to document the presence of (a) an interaction effect between average service quality and its variability on termination rates, (b) customer learning about service quality over time, and (c) slower rate of learning among households that experience high variability. We postulate a mechanism involving risk aversion and learning, which can induce this interaction effect and test this against several alternative explanations. We show that it is important to consider variability in quality while inferring the impact of improvements to average quality - ignoring the interaction effect between average quality and variability leads 18% to 64% (5% to 31%) overestimation (underestimation) of quality improvement elasticities among high-variability (low-variability) households. Given that responsiveness to quality decreases with variability, it is better for the firm to focus quality improvement efforts on customers experiencing low variability; increasing average quality by 1% lowers termination by 1.1% for low-variability households, but only by 0.41% for high-variability households.

Keywords: Service quality, customer retention, Bayesian learning, dynamic models

JEL Classification: M31, C10, C50, D81, D83, D90

Suggested Citation

Sriram, S. and Chintagunta, Pradeep K. and Manchanda, Puneet, Service Quality Variability and Termination Behavior (September 1, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2267549 or http://dx.doi.org/10.2139/ssrn.2267549

S. Sriram (Contact Author)

The Stephen M. Ross School of Business at the University of Michigan ( email )

Ann Arbor, MI 48109
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-936-2445 (Phone)
734-936-8716 (Fax)

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