Preyas S. Desai, Ajay Kalra, & B.P.S. Murthi
Executive Summary
In many service markets, a large human component is required in delivering the service to customers. This makes service quality inherently more variable and imposes greater uncertainty on the consumers. The authors examine two ways a firm’s longevity in business can reduce consumers’ perceived risk. Depending on the amount of information available to consumers, a firm’s longevity can act in one of two ways to reduce the consumers’ perceived risk: (1) Longevity may act as an extrinsic cue about the firm’s quality, and (2) an older firm may naturally provide a longer track record about its prior performance, which in turn allows customers to estimate future performance with a greater precision and thus increase their preference for the older firm.
In a series of experiments, the authors show that a firm’s age can act an extrinsic cue of the firm’s quality when there is no other information available. The benefits of advertising a firm’s longevity is enhanced in high-perceived-risk situations. This suggests that advertising longevity is more effective in reducing risk when the customers face greater uncertainty about the quality. Conversely, when consumers have information about intrinsic attributes and business longevity, they integrate both types of information, but they rely more on the longevity cue in low-involvement situations than in high-involvement situations. Thus, older firms may have a competitive advantage over newer firms with similar intrinsic attributes, especially with less involved customers. Furthermore, if the information about a firm’s longevity is supplemented with a firm’s prior performance, as is common in financial markets, more data resulting from a longer tenure in the industry reduce the customer’s perceived risk. This effect is more pronounced in high-variance environments. This implies that service industries that face a greater variability in quality are likely to benefit more from using longevity as a cue in their advertisements. Finally, when consumers are demanding (i.e., they have high expectation or aspiration levels), they prefer firms with a shorter track record, even though they may perceive these firms to be riskier choices. Thus, all else being equal, younger firms are better off targeting high-aspiration-level customers, and older firms should target low-aspiration-level customers.
Biography
Preyas S. Desai is Professor of Business Administration in the Fuqua School of Business at Duke University. He holds a BE and an MBA from Gujarat University and an MS and a PhD from Carnegie Mellon university. His research interests include marketing strategy, management of distribution channels, and marketing of durable goods. His research on these topics has appeared in journals such as Journal of Marketing Research, Marketing Science, Management Science, and Quantitative Marketing and Economics.
Ajay Kalra is Associate Professor of Marketing in the Tepper School of Business at Carnegie Mellon University. He received his undergraduate degree in Economics from Birla Institute of Technology and Science, Pilani, and a PhD in Marketing from Duke University. His research interests include designing incentive systems and determining how consumers form quality assessments. His research has appeared or is forthcoming in Journal of Marketing Research, Marketing Science, Management Science, and Journal of Advertising. He is the recipient of the William F. O’Dell Award in 1998 and the George Leland Bach Award for teaching excellence and is a finalist for the John Little Award in 1999. His more recent research is on why consumers buy products but may often not use them and on identifying when consumers are more likely to purchase extended service contracts.
B.P.S. Murthi is Associate Professor of Marketing in the School of Management at the University of Texas at Dallas. He obtained his bachelors degree in engineering from Indian Institute of Technology, New Delhi; his MBA from the Indian Institute of Management, Kolkata; and his doctoral degree from Carnegie Mellon University, Pittsburgh. His research uses quantitative analysis to build models that examine issues related to consumer promotions, customer relationship management, and personalization on the Internet. His research has been published in journals such as Marketing Science, Journal of Marketing Research, Management Science, Strategic Management Journal, and Journal of Business. In recent research, he has developed a model for optimally allocating advertising dollars between multiple themes of advertising and is studying the role of reward cards and affinity cards in enhancing customer lifetime and profitability.
Journal of Marketing, Vol. 72, No. 1, January 2008
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