The Effects of Service Quality and Word of Mouth on Customer Acquisition, Retention and Usage

48 Pages Posted: 11 Mar 2007  

Sungjoon Nam

City University of Hong Kong; Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick; University of Chicago GSB

Puneet Manchanda

University of Michigan, Stephen M. Ross School of Business

Pradeep K. Chintagunta

University of Chicago

Date Written: March 2007

Abstract

This paper documents the existence of the direct and indirect (via word-of-mouth) effects of service quality on new customer acquisition, usage and retention using behavioral data from the launch of a new video on demand type service. For this technology, service quality - the quality of the signal determining the number of movies available for viewing - is exogenously determined and objectively measured. This information, coupled with location and neighborhood information for each subscriber allows us to measure both the direct and indirect effects of service quality. Our identification strategy for these effects arises from both the main effect of neighbors who have previously adopted and the interaction between the number of neighbors and their realized service quality, while controlling for other geographic and demographic covariates.

We find a direct effect of service quality on rental usage and termination behavior. In addition, we find that word of mouth affects about one-fifth of the subscribers with respect to their activation behavior. However, this indirect effect of service quality acts as a double-edged sword as it is asymmetric. We find that the effect of negative word of mouth is twice as high as the effect of positive word of mouth for consumers influenced by word of mouth. We find these effects after controlling for unobserved heterogeneity, marketing activity, distance to retail and demographics.

Consumers affected by word of mouth tend to be heavy users once they adopt the service. The implication from these results is that service quality is important for new customer acquisition in the sense that the heavy users tend to be acquired by word of mouth rather than advertising. In terms of profitability, we find that a 10% increase in service quality leads to a 7% increase in customer lifetime value. Finally, for our sample of adopters, we find that word of mouth effects also lead to acceleration in adoption behavior.

Keywords: Services, New Products, Service Quality, Word of Mouth, Contagion, Social Interaction, Social Networks, High Technology, Hazard Models

JEL Classification: L65, M30, M31

Suggested Citation

Nam, Sungjoon and Manchanda, Puneet and Chintagunta, Pradeep K., The Effects of Service Quality and Word of Mouth on Customer Acquisition, Retention and Usage (March 2007). Available at SSRN: https://ssrn.com/abstract=969770 or http://dx.doi.org/10.2139/ssrn.969770

Sungjoon Nam

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States
973-353-1645 (Phone)

HOME PAGE: http://home.uchicago.edu/~snam2

University of Chicago GSB ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Puneet Manchanda (Contact Author)

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)

Pradeep K. Chintagunta

University of Chicago ( email )

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

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