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Indirect Financial Benefits from Service Quality

Summary: Improving service quality can increase revenues through (1) retaining a higher percentage of existing customers, (2) attracting more customers through positive word of mouth, and (3) increasing the usage rates of existing customers. While the direct benefits of service quality (from customer retention) have been extensively studied, virtually no empirical work has been done exploring the indirect benefits of service quality (from attracting customers and expanding usage rates). Data from a market for which customer retention is not yet an important factor were employed to explore the effects of service quality on customer attraction and customer usage rates. Results show that service quality impacts initial customer attraction through the mechanism of word of mouth. Specifically, service quality affects likeliness to recommend, which in turn affects customer attraction. Advertising also has a significant effect on customer attraction, consistent with the results of numerous previous studies. On the other hand, customer usage rates are driven by service quality but not by advertising. These findings imply that different components of market share may arise from very different mechanisms. It is apparently necessary to model the components of market share separately, rather than having a single equation for predicting market share, as is currently common industry practice. Additional managerial implications are that managers may need to use different strategies, depending upon whether the strategic goal is increased customer retention, increased customer attraction, or increased usage rates.

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  • Topics: Customer Satisfaction and Value
  • Keywords: Marketing,Customer retention,Customers,Advertising,Word of mouth
  • Author: Danaher, Peter J.; Rust, Roland T.
  • Journal: Quality Management Journal