Managing customer relationships through price and service quality

Gabriel R. Bitran, Paulo Rocha e Oliveira () and Ariel Schilkrut
Additional contact information
Gabriel R. Bitran: MIT
Paulo Rocha e Oliveira: IESE Business School, Postal: Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Ariel Schilkrut: Scopix

No D/750, IESE Research Papers from IESE Business School

Abstract: This paper examines the ways in which a service provider's policies on pricing and service level affect the size of its customer base and profitability. The analysis begins with the development of a customer behavior model that uses customer satisfaction and depth of relationship as mediators of the impact of price and service level on profitability. Based on this model of customer behavior, the system is analyzed as a queuing network from which the properties of the aggregate population's behavior are derived. The analysis reveals the counterintuitive result that a policy that involves a decrease in prices or an increase in service level may lead to a smaller customer base. However, this policy may also lead to higher profits. The novelty of this result lies in the explanation of the phenomenon: that when the customer base decreases due to a change in prices or service quality, companies may experience gains in profit that result not from a decrease in costs associated with serving fewer customers but from an increase in revenues resulting from the indirect effects of the lower prices or higher level of service on customer behavior. The application of optimization techniques to the model developed in this paper yields optimality conditions through which managers can assess the long-term profitability of their pricing and service-level policies.

Keywords: Customer relationship management; operations/marketing interface; two-part tariffs; service operations management; service quality (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-04-29
New Economics Papers: this item is included in nep-mkt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.iese.edu/research/pdfs/DI-0750-E.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ebg:iesewp:d-0750

Access Statistics for this paper

More papers in IESE Research Papers from IESE Business School IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN. Contact information at EDIRC.
Bibliographic data for series maintained by Noelia Romero ().