Academic journal article Journal of Business Strategies

An Empirical Test of Customer Retention-Perceived Quality Link: Strategic Management Implications

Academic journal article Journal of Business Strategies

An Empirical Test of Customer Retention-Perceived Quality Link: Strategic Management Implications

Article excerpt

Abstract

This paper employed times series econometric methods to test the theoretically-grounded link between customer retention and customer perceived quality. The results suggest that customer retention and quality have a stable positive link binding them together, which allows them to move together in the same direction over time. Importantly, empirical evidence of long term Granger-type causality running from quality to retention, was found in support of this positive link. Finally, customers 'perception of quality yesterday has a positive impact on their level of retention today. It suggests that customers' memories of quality linger on beyond the current period to positively impact customer retention levels in the future. In this sense, quality is an intangible strategic asset in which service managers should invest their capital.

In her strategic service management paper, Zeithaml, (2000, p. 76) states that: "Only a few research studies have been conducted that explicitly link service quality with customer retention (for exceptions, see Rust & Zahorik 1993)." Consequently, our literature review revealed that, even among the few studies that linked service quality with customer retention, including those cited by Zethaml (2000), none used time series data and methods as proposed in the current paper. Second, related to the above, none of the studies used time series market-level aggregate data to investigate the hypothesized relationship linking consumer perceived service quality and customer retention. By market-level aggregate data, we mean data on all consumers of a particular service (e.g., consumers of Pizza Hut's pizza). Stated another way, past research relied exclusively on individual-level (consumer-level) data to investigate the quality-retention link. This prompts the question: Why should the differences between market-level and individual-level data sets have empirical significance in the quality-retention link?

One important implication of the difference between the two data sets can be stated as follows: The veracity of the results of past research may be dependent on the individual-level data they used to investigate the nature of the functional form linking consumer perceived quality and consumer retention. The empirical question then arises: Absent the use of individual-level data, would the conclusions of past research still hold? Stated another way, if market-level aggregate time series data are used to explore the functional relationship linking consumers' perception of service quality and consumer retention, would the result be the same as the results obtained by researchers using individual-level data sets? This question is difficult to answer because the use of market-level aggregate data in this area of research is extremely scanty (Johnson, Anderson & Fornell, 1995).

Another important empirical question is: Does the level of customers' perceived service quality today positively impact the level of customer retention in the future? Intangible strategic assets theory predicts that the accumulation of intangible strategic assets such as perceived quality should be path-dependent (Dierickx & Cool, 1989). By path-dependency we mean that the accumulation process of intangible strategic assets cannot be rushed without incurring an exponential increase in the cost of accumulation. This phenomenon has been dubbed time compression diseconomies (Dierickx & Cool, 1989). In the same vein, the dissipation of intangible strategic assets such as perceived quality should be path-dependent under what is called asset erosion (Dierickx & Cool, 1989). Asset erosion of intangible strategic assets theory is equivalent to depreciation in physical assets (Dierickx & Cool, 1989). Because erosion of perceived quality is path-dependent, we expect that the impact of today's quality on future levels of customer retention will be positive and significant. Previous research on quality-retention could not investigate this dynamic impact because individual-level cross-sectional data have no information about the dynamic impact of quality on retention. …

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