The Causal Effect of Service Satisfaction on Customer Loyalty

Abstract

We propose an instrumental-variable (IV) approach to estimate the causal effect of service satisfaction on customer loyalty, by exploiting a common source of randomness in the assignment of service employees to customers in service queues. Our approach can be applied at no incremental cost by using routine repeated cross-sectional customer survey data collected by firms. The IV approach addresses multiple sources of biases that pose challenges in estimating the causal effect using cross-sectional data: (i) the upward bias from common-method variance due to the joint measurement of service satisfaction and loyalty intent in surveys; (ii) the attenuation bias caused by measurement errors in service satisfaction; and (iii) the omitted-variable bias that may be in either direction. In contrast to the common concern about the upward common-method bias in the estimates using cross-sectional survey data, we find that ordinary-least-squares (OLS) substantially underestimates the casual effect, suggesting that the downward bias due to measurement errors and/or omitted variables is dominant. The underestimation is even more significant with a behavioral measure of loyalty--where there is no common methods bias. This downward bias leads to significant underestimation of the positive profit impact from improving service satisfaction and can lead to under-investment by firms in service satisfaction. Finally, we find that the causal effect of service satisfaction on loyalty is greater for more difficult types of services.

Keywords: service satisfaction, customer loyalty, common-method bias, measurement error, cross-sectional data

JEL Classification: M31