The Effect of Service Price Increases on Customer Retention

This study examines the impact of actual price increases on customer retention in a service context and how the effect of a price increase is moderated by both tenure and breadth of the customer's relationship. The study finds that tenure is associated with lowered customer sensitivity to price increases as well as having a favorable direct effect on customer retention rates. The study also finds that relationship breadth can exacerbate the adverse effect of price increases on customer retention. Finally, relationship breadth is found to have a favorable direct effect on retention rates only among newer customers. The managerial implication is that marketers must pay extra attention to short-tenure and broad-breadth customers when implementing price increases. The study represents a unique contribution to the service marketing literature, which to date reports little research examining the effect of actual price changes on consumer behavior.

[1]  W. Reinartz,et al.  On the Profitability of Long-Life Customers in a Noncontractual Setting: An Empirical Investigation and Implications for Marketing , 2000 .

[2]  Katherine N. Lemon,et al.  The Theoretical Underpinnings of Customer Asset Management , 2002 .

[3]  K. Sivakumar,et al.  Quality Tier Competition: How Price Change Influences Brand Choice and Category Choice , 1997 .

[4]  R. Hallowell.  The relationships of customer satisfaction, customer loyalty, and profitability: an empirical study , 1996 .

[5]  Subhash Sharma,et al.  Identification and Analysis of Moderator Variables , 1981 .

[6]  Andreas Herrmann,et al.  An empirical analysis of the determinants of price tolerance , 2004 .

[7]  Richard A. Spreng,et al.  Modelling the relationship between perceived value, satisfaction and repurchase intentions in a business‐to‐business, services context: an empirical examination , 1997 .

[8]  Dawn Iacobucci,et al.  The Calculus of Service Quality and Customer Satisfaction: Theoretical and Empirical Differentiation and Integration: Volume 3 , 1994 .

[9]  G. Laurent,et al.  Repeat Purchasing of New Automobiles by Older Consumers: Empirical Evidence and Interpretations , 2005 .

[10]  C. Ranaweera,et al.  On the relative importance of customer satisfaction and trust as determinants of customer retention and positive word of mouth , 2003 .

[11]  F. Buttle,et al.  Customer retention: a potentially potent marketing management strategy , 2001 .

[12]  Jc Ko de Ruyter,et al.  On the relationship between perceived service quality, service loyalty and switching costs , 1998 .

[13]  David Mazursky,et al.  Temporal decay in satisfaction – Purchase intention relationship , 1989 .

[14]  Robert C. Blattberg,et al.  Recapturing Lost Customers , 2004 .

[15]  Barry A. Wray,et al.  Determinants of relationship quality: An artificial neural network analysis , 1996 .

[16]  R. Oliver.  Whence Consumer Loyalty? , 1999 .

[17]  Wagner A. Kamakura,et al.  Identifying Innovators for the Cross-Selling of New Products , 2001, Manag. Sci..

[18]  A. Gustafsson,et al.  The Effects of Customer Satisfaction, Relationship Commitment Dimensions, and Triggers on Customer Retention , 2005 .

[19]  D. Aaker.  Managing brand equity : capitalizing on the value of a brand name , 1992 .

[20]  Byron Sharp,et al.  Loyalty programs and their impact on repeat-purchase loyalty patterns , 1997 .

[21]  T. Nilssen.  Two Kinds of Consumer Switching Costs , 1992 .

[22]  Stephanie Coyles,et al.  Customer retention is not enough , 2005 .

[23]  Walfried M. Lassar,et al.  Why do customers switch? The dynamics of satisfaction versus loyalty , 1998 .

[24]  M. Marn,et al.  Managing price, gaining profit. , 1992, Harvard business review.

[25]  Byron Sharp,et al.  Brand Salience and Customer Defection in Subscription Markets , 2003 .

[26]  P. K. Kannan,et al.  Implications of loyalty program membership and service experiences for customer retention and value , 2000 .

[27]  M. Colgate,et al.  An investigation into the switching process in retail banking services , 2001 .

[28]  Robert J. Fisher,et al.  Customer betrayal and retaliation: when your best customers become your worst enemies , 2008 .

[29]  S. Hunt,et al.  The Commitment-Trust Theory of Relationship Marketing , 1994 .

[30]  Michel Wedel,et al.  Cross-Selling Through Database Marketing: A Mixed Data Factor Analyzer for Data Augmentation and Prediction , 2003 .

[31]  Ron Garland.  Share of wallet's role in customer profitability , 2004 .

[32]  S. Raj,et al.  Reference Price Research: Review and Propositions , 2005 .

[33]  Wayne D. Hoyer,et al.  Customers’ reactions to price increases: Do customer satisfaction and perceived motive fairness matter? , 2005 .

[34]  Richard H. Thaler,et al.  Transaction Utility Theory , 1983 .

[35]  Robert P. Leone,et al.  Psychological Implications of Customer Participation in Co-Production , 2003 .

[36]  Harald Biong,et al.  Satisfaction and Loyalty to Suppliers within the Grocery Trade , 1993 .

[37]  Bernd Stauss,et al.  Regaining Service Customers , 1999 .

[38]  A. Gouldner.  THE NORM OF RECIPROCITY: A PRELIMINARY STATEMENT * , 1960 .

[39]  P. Patterson.  Demographic correlates of loyalty in a service context , 2007 .

[40]  Frederick F. Reichheld,et al.  The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Эффект лояльности: скрытая движущая сила роста, прибыли и постоянной ценности) , 1996 .

[41]  M. Perugini,et al.  The personal norm of reciprocity , 2003 .

[42]  G. Tellis.  The Price Elasticity of Selective Demand: A Meta-Analysis of Econometric Models of Sales , 1988 .

[43]  D. A. Kenny,et al.  The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical considerations. , 1986, Journal of personality and social psychology.

[44]  G. Kalyanaram,et al.  Empirical Generalizations from Reference Price Research , 1995 .

[45]  J. Bloemer,et al.  The importance of customer satisfaction in explaining brand and dealer loyalty , 1992 .

[46]  H. J. Arnold.  Moderator variables: A clarification of conceptual, analytic, and psychometric issues , 1982 .

[47]  Mary Jo Bitner,et al.  Relational benefits in services industries: The customer’s perspective , 1998 .

[48]  N. Malhotra,et al.  Estimating Models with Binary Dependent Variables: Some Theoretical and Empirical Observations , 1988 .

[49]  Katherine N. Lemon,et al.  A dynamic model of customers' usage of services : usage as an antecedent and consequence of satisfaction , 1999 .

[50]  R. Rust,et al.  Customer satisfaction, customer retention, and market share , 1993 .

[51]  F. Reichheld.  LEARNING FROM CUSTOMER DEFECTIONS , 1996 .

[52]  Judy K. Frels,et al.  Consumer switching costs: A typology, antecedents, and consequences , 2003 .

[53]  T. Keiningham,et al.  A Longitudinal Analysis of Customer Satisfaction and Share of Wallet: Investigating the Moderating Effect of Customer Characteristics , 2007 .

[54]  Tammo H. A. Bijmolt,et al.  New Empirical Generalizations on the Determinants of Price Elasticity , 2005 .

[55]  P. Danaher,et al.  Modelling customer satisfaction in Telecom New Zealand , 1997 .

[56]  David M. Szymanski,et al.  Customer satisfaction: A meta-analysis of the empirical evidence , 2001 .

[57]  Katherine N. Lemon,et al.  Customer Equity Management , 2002 .

[58]  Alok Gupta,et al.  Risk profile and consumer shopping behavior in electronic and traditional channels , 2004, Decis. Support Syst..

[59]  F. F. Reichheld,et al.  Zero defections: quality comes to services. , 1990, Harvard business review.

[60]  Philip Hans Franses,et al.  The impact of satisfaction and payment equity on cross-buying: A dynamic model for a multi-service provider , 2001 .

[61]  W. Reinartz,et al.  The mismanagement of customer loyalty. , 2002, Harvard business review.

[62]  A. Agresti.  Categorical data analysis , 1993 .

[63]  Susan M. Keaveney,et al.  Customer Switching Behavior in Service Industries: An Exploratory Study , 1995 .

[64]  J. Jaccard,et al.  The Detection and Interpretation of Interaction Effects Between Continuous Variables in Multiple Regression. , 1990, Multivariate behavioral research.