Ruth N. Bolton, Katherine N. Lemon, & Peter C. Verhoef
Executive Summary
This study investigates business customers’ decisions to upgrade service contracts conditional on the decision to renew the contract. It develops and estimates a statistical model based on data describing 2000 contracts for (high-technology) system support services. Decision-maker satisfaction, objective service quality, and price have a significant effect on the decision to upgrade; price and satisfaction also moderate the effect of service quality on the decision. Simulations indicate that modest improvements in service quality for a focal contract can have a relatively large, positive effect on the likelihood that the firm will upgrade. The results provide four key insights for service suppliers on how to manage relationships with business customers profitably. First, suppliers must manage customer experiences simultaneously at the account level (i.e., perceptions that encompass the entire relationship) and at the contract level (e.g., service quality, price, discount) over time. Second, account management teams within the supplier’s organization must gain a deep understanding of each business customer’s needs and how the suppliers’ products can serve them. Customer dissatisfaction can be an opportunity for account management teams to “migrate” contracts to higher service levels because it may represent a situation in which the decision maker is paying particular attention to the service contracts and is in a “problem-solving” mode. Third, business customers hold many contracts—and the contracts are fairly complex—so contract management is a significant challenge. Consequently, suppliers should measure and manage service operations metrics and price levels at the contract level, so account managers are aware of the actual (not the promised) service quality levels for each and every contract the customer purchases and the current price paid on each contract. This knowledge will enable the supplier to identify proactively contracts with poor service quality delivery because these contracts represent both a risk and an opportunity. Situations in which the decision maker perceives the supplier’s management of the account relationship as satisfactory—but objective service quality varies noticeably across contracts— simultaneously represent an opportunity for upgrading to a higher-level service contract and a risk of losing the contract. Account management teams should view this situation not only as a critical moment but also as a “teachable moment,” when they can discuss an upgrade to a higher-level contract and demonstrate its value. Fourth, service suppliers must carefully manage multiple service contract environments. Popular services management heuristics frequently suggest that suppliers should always attempt to exceed customers’ quality expectations. This strategy encourages customer retention but not service contract upgrades. Extremely high service quality on all contracts eliminates the critical moments that suppliers can use to demonstrate the value of a service upgrade for a particular contract. Furthermore, if the supplier delivers extremely high service quality for some service contracts (but not all), the buying firm’s expectation or norm is likely to be higher, so that contracts with good, but not outstanding service quality will seem poor in comparison. There may be a “tipping point” at which instead of upgrading, the buying firm infers that service is unsatisfactory and chooses not to renew the contract.
Biography
Ruth N. Bolton is Professor of Marketing and W.P. Carey Chair in Marketing in the W.P. Carey School of Business at Arizona State University. She is presently an Honorary Professor at the University of Groningen, Netherlands. Dr. Bolton currently studies how organizations can grow the value of their customer base over time, focusing on service organizations. She previously held academic positions at Vanderbilt University, the University of Oklahoma, Harvard University, University of Maryland, and the University of Alberta. She also spent eight years with Verizon, working on projects in the telecommunications and information services industries. Dr. Bolton’s previous published articles investigate how organizations’ service and pricing strategies influence customer satisfaction, loyalty, and revenues. She currently serves as a member of the board of the Marketing Science Institute, the American Marketing Association, and the Sheth Foundation. She has published articles in Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, Journal of Service Research, Management Science, Marketing Science, and other leading journals. She currently serves on the editorial review boards of Journal of Marketing, Marketing Science, and Journal of Service Research. She previously served as editor of Journal of Marketing (2002–2005). She received a BComm, with honors, from Queen’s University (Canada), and an MSc and PhD from Carnegie-Mellon University.
Katherine (Kay) N. Lemon is Associate Professor of Marketing at Boston College’s Carroll School of Management. She received her PhD from University of California, Berkeley. Before her academic career, Kay held senior-level marketing positions in the high-technology and health care industries. Professor Lemon’s research and teaching focuses on strategic customer management, customer equity, customer value creation, marketing strategy, and marketing metrics. Her research and models have been implemented by global firms in several industries, including financial services, high-technology electronics, retailing, and pharmaceuticals. Lemon’s research appears in Journal of Marketing, Journal of Marketing Research, Marketing Science, Management Science, Harvard Business Review, Journal of Service Research, Journal of the Academy of Marketing Science, and other leading journals. Kay serves on the editorial boards of Journal of Marketing, Journal of Marketing Research, Journal of Service Research, Journal of the Academy of Marketing Science, and Journal of Interactive Marketing. She received best-article awards for articles in Journal of Marketing and Journal of Service Research, as well as the Marketing Science Institute’s Robert D. Buzzell Best Paper Award, the Early Career Contributions to Marketing Strategy Research Award, and the American Marketing Association–Berry Book Prize. Kay has consulted with and taught senior executives at leading global companies and currently serves as a member of the board of the American Marketing Association and as an academic fellow at the Center for Services Leadership at Arizona State University.
Peter C. Verhoef is Professor of Marketing in the Department of Marketing, Faculty of Economics, at University of Groningen, the Netherlands. He obtained his PhD in 2001 from the School of Economics at Erasmus University Rotterdam, the Netherlands. His research interests are customer management, customer loyalty, multichannel issues, category management, and buying behavior of organic products. He has published extensively on these topics. His publications have appeared in journals such as Journal of Marketing, Journal of Marketing Research, Marketing Science, International Journal of Research in Marketing, Quantitative Marketing and Economics, Marketing Letters, Journal of Consumer Psychology, Journal of the Academy of Marketing Science, and Journal of Retailing. His work has been awarded with the Donald R. Lehmann Award for the best dissertation-based article in Journal of Marketing and Journal of Marketing Research in 2003. He is currently an editorial board member of Journal of Marketing, International Journal of Research in Marketing, Journal of Retailing, Journal of Service Research, and International Journal of Electronic Commerce. He has extensive teaching experience for undergraduate, graduate, and doctoral students. He is also involved in executive teaching on customer management. He has consulting experience for several companies, such as KPN and Achmea. He is also the director and founder of the Customer Insights Center, University of Groningen.
Journal of Marketing, Vol. 72, No. 1, January 2008
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