Executive Summary
Many of the products introduced during the past two decades are services rather than goods. Among widely used products that did not exist before 1980 are wireless telephone, satellite radio, and online banking services. Development of the Internet has generated numerous subscription service offerings, including instant messaging, shopping portals, and online brokerages.
An important influence on a service’s ability to grow is customer attrition. Beginning with the initial stages of penetration into a market, some customers discontinue their service: They may switch to a competitor or abandon the service category altogether. Customer attrition (and its complement, customer retention) has gained considerable attention from managers and researchers in recent years after demonstrations of the relationship between a firm’s customer retention rate and its long-term profits.
This article provides a framework for understanding how the dynamics of customer attrition affect the growth of markets for services and examines the consequences of those effects for management. The authors present a multifirm model that captures the complex dynamics of customer acquisition and retention during a service firm’s growth. In any given period, a firm can acquire customers from the pool of nonusers (which includes new customers and customers who previously abandoned the service) and from consumers who switch from a competitor (known as “churn”). At the same time, the firm can (and likely will to some extent) lose customers to competitors (churn) or to disadoption of the service category. Although the dynamics are not trivial, the model presented in this article is relatively simple and enables an in-depth analysis of the growth of services at the brand level.
The authors demonstrate the implications of their approach in two ways. First, they begin with a simple model that focuses on category-level growth. This model enables them to consider how category-level attrition (disadoption) affects the growth of a service. They show that neglecting attrition and using the classic diffusion approach—an approach intended originally for durables but widely used for service markets—can create considerable bias in parameter estimations and, more seriously, in estimates of market potential.
Second, they construct a model of a competitive brand-level market that considers interfirm churn and category disadoption. The model for calculations of customer equity at the brand level enhances existing aggregate approaches in two ways: It (1) provides for brand-level analysis and (2) incorporates attrition, both in customer lifetime value and in the growth function. Thus, the model is especially well suited to cases such as cellular phone service, in which interfirm customer churn is an integral part of the growth process. They compare their customer equity measures with stock market estimations of firms’ values and demonstrate that in six of seven cases in four service categories, the estimations are notably close to the stock market’s valuations of the firms. They also show that neglecting account for attrition leads to considerable underestimation of the value of the customer base.
Biography
Barak Libai is Associate Professor of Marketing in the Recanati Graduate School of Business at Tel Aviv University. He has a BS in Industrial Engineering and Management from the Technion–Israel Institute of Technology, an MBA from Tel Aviv University, and PhD in Marketing from the University of North Carolina in Chapel Hill. Recently, he had been Visiting Associate Professor of Marketing in the Sloan school of Management at the Massachusetts Institute of Technology, and during which time, this study was completed. He has published in various marketing journals, such as Marketing Science, Journal of Marketing, and the International Journal of Research in Marketing, for which he also serves on the editorial review board.
Eitan Muller is Professor of Marketing in the Stern School of Business at New York University and Chaired Professor of Marketing in the Recanati Graduate School of Business at Tel Aviv University. He has a BSc (with distinction) from the Technion–Israel Institute of Technology and an MBA (with distinction) and a PhD in Managerial Economics from the Kellogg Graduate School of Management at Northwestern University. He has published more than 60 articles in journals in marketing and economics, such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Management Science, American Economic Review, RAND Journal of Economics, and Journal of Economic Theory. He is a member of the editorial review boards of Journal of Marketing and Journal of Marketing Research and is an area editor of Marketing Science and International Journal of Research in Marketing.
Renana Peres is Assistant Professor of Marketing in the Graduate School of Business at Hebrew University of Jerusalem and Visiting Assistant Professor of Marketing in the Wharton School at the University of Pennsylvania. She has a BSc and an MSc (with distinction) in Physics from the Hebrew University, an MBA from Tel Aviv University, and a PhD in Marketing from Tel Aviv University. She is spending the coming academic year as a visiting professor in the marketing department at Wharton. Renana Peres has published in International Journal of Research in Marketing, where she serves on the editorial review board. She is the founder and was the first chief executive officer of Persay Ltd., a subsidiary of Comverse Technology. This article is based on her doctoral dissertation.
J Marketing Research, Volume 46, Number 2, April 2009
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