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Managing customer relationships through price and service quality

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Author Info

  • Bitran, Gabriel R.

    (MIT)

  • Rocha e Oliveira, Paulo

    ()
    (IESE Business School)

  • Schilkrut, Ariel

    (Scopix)

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    Abstract

    This paper examines the ways in which a service provider's policies on pricing and service level affect the size of its customer base and profitability. The analysis begins with the development of a customer behavior model that uses customer satisfaction and depth of relationship as mediators of the impact of price and service level on profitability. Based on this model of customer behavior, the system is analyzed as a queuing network from which the properties of the aggregate population's behavior are derived. The analysis reveals the counterintuitive result that a policy that involves a decrease in prices or an increase in service level may lead to a smaller customer base. However, this policy may also lead to higher profits. The novelty of this result lies in the explanation of the phenomenon: that when the customer base decreases due to a change in prices or service quality, companies may experience gains in profit that result not from a decrease in costs associated with serving fewer customers but from an increase in revenues resulting from the indirect effects of the lower prices or higher level of service on customer behavior. The application of optimization techniques to the model developed in this paper yields optimality conditions through which managers can assess the long-term profitability of their pricing and service-level policies.

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    Bibliographic Info

    Paper provided by IESE Business School in its series IESE Research Papers with number D/750.

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    Length: 32 pages
    Date of creation: 29 Apr 2008
    Date of revision:
    Handle: RePEc:ebg:iesewp:d-0750

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    Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
    Web page: http://www.iese.edu/
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    Related research

    Keywords: Customer relationship management; operations/marketing interface; two-part tariffs; service operations management; service quality;

    This paper has been announced in the following NEP Reports:

    References

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    1. Christopher M. Rump & Shaler Stidham, 1998. "Stability and Chaos in Input Pricing for a Service Facility with Adaptive Customer Response to Congestion," Management Science, INFORMS, vol. 44(2), pages 246-261, February.
    2. Shaler Stidham, 1992. "Pricing and Capacity Decisions for a Service Facility: Stability and Multiple Local Optima," Management Science, INFORMS, vol. 38(8), pages 1121-1139, August.
    3. Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
    4. Roland T. Rust & J. Jeffrey Inman & Jianmin Jia & Anthony Zahorik, 1999. "What You Know About Customer-Perceived Quality: The Role of Customer Expectation Distributions," Marketing Science, INFORMS, vol. 18(1), pages 77-92.
    5. Knudsen, Niels Chr, 1972. "Individual and Social Optimization in a Multiserver Queue with a General Cost-Benefit Structure," Econometrica, Econometric Society, vol. 40(3), pages 515-28, May.
    6. David C. Schmittlein & Donald G. Morrison & Richard Colombo, 1987. "Counting Your Customers: Who-Are They and What Will They Do Next?," Management Science, INFORMS, vol. 33(1), pages 1-24, January.
    7. Noah Gans, 2002. "Customer Loyalty and Supplier Quality Competition," Management Science, INFORMS, vol. 48(2), pages 207-221, February.
    8. Ruth N. Bolton, 1998. "A Dynamic Model of the Duration of the Customer's Relationship with a Continuous Service Provider: The Role of Satisfaction," Marketing Science, INFORMS, vol. 17(1), pages 45-65.
    9. Skander Essegaier & Sunil Gupta & Z. John Zhang, 2002. "Pricing Access Services," Marketing Science, INFORMS, vol. 21(2), pages 139-159, June.
    10. Peter J. Danaher, 2002. "Optimal Pricing of New Subscription Services: Analysis of a Market Experiment," Marketing Science, INFORMS, vol. 21(2), pages 119-138, February.
    11. Joseph Hall & Evan Porteus, 2000. "Customer Service Competition in Capacitated Systems," Manufacturing & Service Operations Management, INFORMS, vol. 2(2), pages 144-165, November.
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