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Measuring Customer Relationships: The Case of the Retail Banking Industry

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  • Venky Nagar

    ()
    (University of Michigan, 701 Tappan Street, Ann Arbor, Michigan 48109)

  • Madhav V. Rajan

    ()
    (Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, California 94305)

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    Abstract

    Arguing that GAAP is ill suited for estimating the future profitability of intangibles, the accounting literature (e.g., Kaplan and Norton 1996, Lev 2001) has recently proposed alternative measurement models. These models view intangibles as composed of a set of fundamental business activities and use multiple financial and nonfinancial metrics causally interlinked to profits to represent this view. Using a unique and proprietary cross-sectional data set of the retail banking industry, we provide some of the first tests on the empirical validity of such measurement models. We characterize the core deposit intangible, an important retail banking intangible representing a bank's relationships with its customers, using financial and nonfinancial metrics on price, service, customer usage, and customer satisfaction. We find that the metrics do not individually predict future earnings, but gain individual significance in a collective setting, increasing the predictive power substantially. We argue that this result occurs because the activities underlying the measures are causally interlinked to profits and explicitly illustrate these linkages with a structural path model. Our measurement model also predicts significant interactive effects in the way our measures are informative about future profits, and we document such effects, not just among the individual measures, but also across the measures and environmental factors such as the bank's strategy. In sum, our measurement model illustrates the key drivers, measures, and interactions in retail banking customer relationships.

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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0376
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 51 (2005)
    Issue (Month): 6 (June)
    Pages: 904-919

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    Handle: RePEc:inm:ormnsc:v:51:y:2005:i:6:p:904-919

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    Related research

    Keywords: nonfinancial measures; balanced scorecard; retail banking;

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    Cited by:
    1. Steven, Adams B. & Dong, Yan & Dresner, Martin, 2012. "Linkages between customer service, customer satisfaction and performance in the airline industry: Investigation of non-linearities and moderating effects," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 48(4), pages 743-754.
    2. Chow, Clement Kong Wing, 2014. "Customer satisfaction and service quality in the Chinese airline industry," Journal of Air Transport Management, Elsevier, vol. 35(C), pages 102-107.
    3. Marcos Singer & Patricio Donoso & Alan Scheller-Wolf, 2008. "Una Introducción A La Teoría De Colas Aplicada A La Gestión De Servicios," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 11(2), pages 93-120.
    4. Yee, Rachel W.Y. & Yeung, Andy C.L. & Edwin Cheng, T.C., 2010. "An empirical study of employee loyalty, service quality and firm performance in the service industry," International Journal of Production Economics, Elsevier, vol. 124(1), pages 109-120, March.
    5. Peecher, Mark E. & Schwartz, Rachel & Solomon, Ira, 2007. "It's all about audit quality: Perspectives on strategic-systems auditing," Accounting, Organizations and Society, Elsevier, vol. 32(4-5), pages 463-485.

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