Executive Summary
Driven by an intolerant financial market that rewards any growth, firms in contexts ranging from the loamy labor of coffee to the soaring spirit of airlines continue to experience growing pains. The saga of Starbucks vividly illustrates the theme of the current research: Growth-driven investments made today can often produce consequences that impair a firm’s ability to leverage key assets and shape long-term performance. The 1990s saw Starbucks build a highly satisfied customer portfolio; it also helped that the company delivered a tight value proposition to a homogeneous target market. Phenomenal growth followed, and Starbucks, like many firms that grow rapidly on the basis of superior customer satisfaction, now faced the consequence of an increasingly heterogeneous customer portfolio—that is how to continue to acquire new customers while satisfying/retaining everybody and how to do so in a manner that grows shareholder value? Today, Starbucks is vigorously deploying resources to do both—offering free samples, taking out newspaper advertisements, and passing out coupons on the street, all to lure new customers while still focusing on service quality, retraining baristas, installing new coffee machines, and exploring new service delivery formats, all to appease the increasingly diverse pool of existing customers. While the jury is out on the efficacy of these actions, Starbucks recently cut its earnings estimates and posted its first-ever loss (2008 third-quarter loss of $6.7 million) since it went public 16 years ago.
Against this anecdotal backdrop, the authors center on the following key question: What are the implications of current advertising and service quality for a firm’s future ability to leverage customer satisfaction in the evolving customer base? Systematic analysis of secondary data from diverse sources that describe the dynamics in the U.S. airlines industry over a nine-year period (1997–2005) unveils a cautionary tale. While certain investments may help firms grow by acquiring new customers and/or retaining existing customers, the resultant heterogeneity that they spawn has a profound impact on the utility of resultant marketplace assets, such as customer satisfaction. First, while service quality increases the level of satisfaction and reduced satisfaction heterogeneity, current advertising expenditures increase heterogeneity even as they increased the level of satisfaction. Second, although satisfaction heterogeneity reduces the contemporaneous volatility in shareholder value, it also reduces the translation of satisfaction to shareholder value. Although satisfaction reliably increases shareholder value when it is associated with low levels of heterogeneity (i.e., low variance around the mean), the returns are dramatically stunted when the same satisfaction is associated with high levels of heterogeneity (i.e., high variance about the mean). Particularly notable is the reduction in the returns to satisfaction as a function of satisfaction heterogeneity: The translation of satisfaction to shareholder value decreased by almost 68% in going from low to high satisfaction heterogeneity. In addition to discussing the broad implications for the architecture of satisfaction and shareholder value, the article illustrates the underlying dynamics using the contrasting journeys evidenced by Continental Airlines and Southwest Airlines.
Biography
Rajdeep Grewal is Irving & Irene Bard Professor of Marketing in the Smeal College of Business at the Pennsylvania State University. He is also Associate Research Director of the Institute for the Study of Business Markets in the Smeal College of Business at the Pennsylvania State University. His research focuses on empirically modeling strategic marketing issues and has appeared in prestigious journals such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Management Science, Journal of Consumer Psychology, MIS Quarterly, and Strategic Management Journal, among others. Currently, he serves or has served on the editorial boards for Journal of Marketing, Marketing Science, International Journal of Research in Marketing, and Decision Sciences. He has received several awards for his research, including a doctoral dissertation award from the Procter & Gamble Market Innovation Research Fund. His research also received an honorable mention award for the prestigious Marketing Science Institute/Journal of Marketing competition on “Linking Marketing to Financial Performance and Firm Value” and the 2003 Young Contributor Award from the Society of Consumer Psychology for his 2003 article in Journal of Consumer Psychology. His article on incentive-aligned conjoint analysis was the finalist for the 2006 Paul E. Green Award for best article published in Journal of Marketing Research in 2005. In 2003, he was named in the Marketing Science Institute’s Young Scholars List (people with a PhD after 1995 selected on the basis of research productivity in top-tier marketing journals). He also received the American Marketing Association’s Marketing Strategy Special Interest Group Early Career Award in 2007.
Murali Chandrashekaran lives in Sydney, Australia, where he is Professor of Marketing and the Academic Director of the AGSM MBA Programs in the Australian School of Business at the University of New South Wales. He earned his PhD in Marketing from Arizona State University and his BTech in Electrical Engineering from the Indian Institute of Technology, Madras, India. His research on topics including modeling consumer and managerial conviction, customer satisfaction, and innovation generation and diffusion has appeared in leading marketing journals, including Journal of Marketing Research, Marketing Science, Journal of Consumer Research, Journal of Consumer Psychology, and Journal of Marketing. He has consulted widely in the areas of customer satisfaction and new product development. He is currently working on a customer-based analysis of mergers and acquisitions, as well as a better understanding how the architecture of customer satisfaction influences lost business and shareholder value.
Alka Citrin is Assistant Professor of Marketing in the DuPree School of Management at the Georgia Institute of Technology. Her research interests at an organizational level focus on understanding the impact of outsourcing and offshoring of service activities on a firm’s customer relationship management capability, innovativeness, and ability to manage change. At a consumer level, she is interested in the role of interactivity and its impact on customer relationship management. Dr. Citrin has several years experience in product development with a number of international firms developing and marketing their products worldwide. She is also the founder and chief executive officer of an online educational content development and tutoring firm (BeaStarTutoring.com).
Journal of Marketing Research, Volume 47, Number 4, August 2010
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