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Managing Retention in Service Relationships

Author

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  • Sam Aflaki

    (Operations Management and Information Technology Area, HEC Paris, 78350 Jouy en Josas, France)

  • Ioana Popescu

    (Decision Sciences Area, INSEAD, 138676 Singapore)

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

Suggested Citation

  • Sam Aflaki & Ioana Popescu, 2014. "Managing Retention in Service Relationships," Management Science, INFORMS, vol. 60(2), pages 415-433, February.
    • Handle: RePEc:inm:ormnsc:v:60:y:2014:i:2:p:415-433
    DOI: 10.1287/mnsc.2013.1775
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    References listed on IDEAS

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    3. Yan, Xiaoming & Chao, Xiuli & Lu, Ye, 2024. "Optimal control policies for dynamic inventory systems with service level dependent demand," European Journal of Operational Research, Elsevier, vol. 314(3), pages 935-949.
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