Managing Satisfaction in Relationships over Time

INSEAD Working Papers Collection; 2010, Issue 32, p1-41; Consider a firm that has the exibility to actively manage and customize the service offered to its customers in a repeat business context. What is the long-term value of such exibility, and how should firms manage the service relationship over time? We propose a dynamic model of the firm-client relationship that relies on behavioral theories and empirical evidence to model the endogenous evolution of service expectations and customer satisfaction as well as their impact on repurchase decisions. In general, we find that firms can extract higher long-term value by managing service experiences and expectations over time. Varying service in the long run is not optimal, however. We characterize the firm's optimal dynamic service policy and show that it converges over time to a steady-state service level. Loss aversion expands the range of constant optimal service policies, suggesting that behavioral asymmetries limit the value of responsive service. Our results provide insights for service suppliers seeking to leverage customer-level data and service exibility in order to prioritize clients and improve long-term performance.