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Customer Satisfaction Incentives

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Author Info

  • John R. Hauser

    (Massachusetts Institute of Technology)

  • Duncan I. Simester

    (University of Chicago)

  • Birger Wernerfelt

    (Massachusetts Institute of Technology)

Abstract

Customer satisfaction incentive schemes are increasingly common in a variety of industries. We offer explanations as to how and when incenting employees on customer satisfaction is profitable and offer several recommendations for improving upon current practice. Faced with employee groups (including managers) who may have shorter time horizons than the firm, such systems enable a firm to use customer reaction to monitor implicitly how employees allocate effort between the short and long terms. These systems can be used to encourage employees to make tradeoffs that are in the best interests of the firm. We derive optimal reward systems for an equilibrium in which the firm maximizes profits, employees maximize their expected utility, and customers choose purchase quantities based on initial reputations, employee efforts (both ephemeral and enduring), and price. The formal model shows how the reliance placed on customer satisfaction in an incentive scheme should depend upon the precision with which customer satisfaction is measured and the extent to which employees focus on the short term. Recommendations for improving upon current practice include: measure customers, former customers, potential customers; measure satisfaction with competitors' products; disaggregate satisfaction to reflect better the performance of employee groups, and, when different customer segments have different switching costs or they vary in the precision with which their satisfaction can be measured, then measure the segments separately and assign different weights in the incentive plan. Throughout the paper we interpret the formal results based on our experience with actual firms and the current literature. We close with a brief discussion of on-going research at field sites.

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File URL: http://dx.doi.org/10.1287/mksc.13.4.327
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 13 (1994)
Issue (Month): 4 ()
Pages: 327-350

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Handle: RePEc:inm:ormksc:v:13:y:1994:i:4:p:327-350

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Related research

Keywords: competitive strategy; measurement; customer satisfaction; incentives;

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Citations

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Cited by:
  1. Dutta, Sunil & Reichelstein, Stefan J., 2002. "Leading Indicator Variables, Performance Measurement and Long-Term versus Short-Term Contracts," Research Papers 1756, Stanford University, Graduate School of Business.
  2. Aoudji, Augustin K.N. & Adégbidi, Anselme & Ganglo, Jean C. & Agbo, Valentin & Yêvidé, Armand S.I. & De Cannière, Charles & Lebailly, Philippe, 2011. "Satisfaction across urban consumers of smallholder-produced teak (Tectona grandis L.f.) poles in South Benin," Forest Policy and Economics, Elsevier, vol. 13(8), pages 642-651, October.
  3. Hauser, John R. & Simester, Duncan I. & Wernerfelt, Birger., 1995. "Internal customers and internal suppliers," Working papers 3759-95. WP (Internationa, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Ittner, Christopher D. & Larcker, David F. & Randall, Taylor, 2003. "Performance implications of strategic performance measurement in financial services firms," Accounting, Organizations and Society, Elsevier, vol. 28(7-8), pages 715-741.
  5. Daniel H. Simon & Miguel I. Gómez & Edward W. McLaughlin & Dick R. Wittink, 2009. "Employee attitudes, customer satisfaction, and sales performance: assessing the linkages in US grocery stores," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 27-41.
  6. Dirk Sliwka, 2002. "On the Use of Nonfinancial Performance Measures in Management Compensation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 11(3), pages 487-511, 09.
  7. Evgeni Stanimirov & Vladimir Jechev, 2013. "Consumer Orientation as a Factor for Satisfying the Clients," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 56-89.
  8. Griffin, Abbie. & Hauser, John R. & Griffin, Abbie, 1994. "Integrating R&D and marketing : a review and analysis of the literature," Working papers #112-94. Working paper (S, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Hauser, John R. & Katz, Gerald M. & International Center for Research on the Management of Technology., 1998. "Metrics : you are what you measure!," Working papers 172-98, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. Sanjog Misra & Anne Coughlan & Chakravarthi Narasimhan, 2005. "Salesforce Compensation: An Analytical and Empirical Examination of the Agency Theoretic Approach," Quantitative Marketing and Economics, Springer, vol. 3(1), pages 5-39, January.
  11. Yusong Wang & David Bell & V. Padmanabhan, 2009. "Manufacturer-owned retail stores," Marketing Letters, Springer, vol. 20(2), pages 107-124, June.
  12. Rust, Roland T. & Metters, Richard, 1996. "Mathematical models of service," European Journal of Operational Research, Elsevier, vol. 91(3), pages 427-439, June.

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