Working Paper | HBS Working Paper Series | 2014

How Do Customers Respond to Increased Service Quality Competition?

by Ryan W. Buell, Dennis Campbell and Frances X. Frei

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: Customer Relationship Management; Quality; Customer Value and Value Chain; Service Operations; Consumer Behavior; Customer Satisfaction; Price; Market Entry and Exit; Service Delivery; Competitive Strategy; Banking Industry;

Citation:

Buell, Ryan W., Dennis Campbell, and Frances X. Frei. "How Do Customers Respond to Increased Service Quality Competition?" Harvard Business School Working Paper, No. 11-084, February 2011. (Revised April 2013, June 2014.)