Read the working paper
INSEAD Working Paper 2013/42/DS revised version of 2012/42/DS
In a repeat business context, past experiences with a service provider a ect customers' decisions to renew their contract. How should a strategic rm 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 e ect of past service experiences on service quality expectations, customer satisfaction, and retention. Although rms can bene t from managing service expectations at the beginning of a relationship, we nd 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 rms 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 e ect of customer memory on service levels is determined by whether habituation or rather goodwill drives defection decisions.