How Do Customers Respond to Increased Service Quality Competition?

Ryan W. Buell (), Dennis Campbell () and Frances X. Frei ()
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Ryan W. Buell: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Dennis Campbell: Harvard Business School, Harvard University, Boston, Massachusetts 02163
Frances X. Frei: Harvard Business School, Harvard University, Boston, Massachusetts 02163

Manufacturing & Service Operations Management, 2016, vol. 18, issue 4, 585-607

Abstract: When does increased service quality competition lead to customer defection? And, which customers are most likely to defect? Our empirical analysis of 82,235 customers exploits the varying competitive dynamics in 644 geographically isolated markets in which a nationwide retail bank conducted business over a five-year period. We find that customers defect at a higher rate from the incumbent following increased service quality (price) competition only when the incumbent offers high (low) quality service relative to existing competitors in a local market. We provide evidence that these results are due to a sorting effect, whereby firms trade off service quality and price, and, in turn, the incumbent attracts service (price) sensitive customers in markets where it has supplied relatively high (low) levels of service quality in the past. Furthermore, we show that it is the high quality incumbent’s most profitable customers who are the most attracted by superior quality alternatives. Our results appear to have long-run implications whereby sustaining a high level of service quality is associated with the incumbent attracting and retaining more profitable customers over time.

Keywords: empirical service operations; service quality competition; customer defection; firm performance; customer compatibility (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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