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Managing Retention in Service Relationships

Abstract : Consider a firm that can actively manage and customize the service offered to customers in a repeat business context. What is the long-term value of such flexibility, and how should firms manage the service relationship over time? We propose a dynamic model of the firm-client relationship that relies on behavioral theories and empirical evidence to model the evolution of service quality expectations and their impact on customer retention and profitability. We find that firms can extract higher long-term value by managing service experiences and expectations over time. Varying service in the long run is not optimal, however. We characterize the optimal dynamic service policy and show that it converges to a steady-state service level. Loss aversion expands the range of constant optimal service policies, suggesting that behavioral asymmetries limit the value of responsive service. Sensitivity results characterize the effect of customer margin, loyalty, and memory on policies and profits.
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https://hal-hec.archives-ouvertes.fr/hal-00632076
Contributor : Antoine Haldemann <>
Submitted on : Thursday, October 13, 2011 - 2:14:04 PM
Last modification on : Friday, September 16, 2016 - 3:21:29 PM

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  • HAL Id : hal-00632076, version 1

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Sam Aflaki, Ioana Popescu. Managing Retention in Service Relationships. 2011, p. 1-32. ⟨hal-00632076⟩

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