Date of this Version
Marketing Science Institute
The growth of a new service is similar to a leaking bucket: There is an influx of new customers and, concurrently, an outflow of customers who either switch to competitors or leave the category. This attrition is a major concern for service providers and significantly affects long-range profits.
In this study, the authors investigate the influence of attrition on the growth of service markets. They develop a model of a multifirm growing market, where a firm may acquire customers from the pool of nonusers (which can include new customers as well as customers who disadopted the category in the past) and also acquire customers who switched from competitors. Alternatively, the firm may lose customers who switch or “churn” to a competitor or leave the category entirely. By capturing the complex dynamics of customer acquisition and retention, this model enables an in-depth analysis of the growth of services.
The authors use the model to explore the influence of attrition on the service category and on a particular brand. For service categories, they show that ignoring attrition biases the diffusion parameters and hence affects management diagnostics. For the individual brand, they present a brand-level growth model and use it to capture the effect of attrition on the firm’s customer equity: they calculate the customer equity of a growing service and evaluate service firms that operate in competitive industries, including Amazon.com, Barnes&Noble.com, E*Trade, Mobistar, and SK Telecom. For four of the five firms, the results are close to the stock market valuations, which may indicate the role of customer equity in the valuation of growing service firms.
The services growth model adds to the customer equity approach not only by explicitly incorporating customer attrition into market growth, but also by allowing for inter-firm churn dynamics to be included in the estimation. Hence, it is especially well suited to dealing with cases where interfirm customer churn is an integral part of the growth process.
Libai, B., Muller, E., & Peres, R. (2007). The Effects of Attrition on the Growth and Equity of Competitive Services. Marketing Science Institute, 07 (002), 77-98. Retrieved from https://repository.upenn.edu/marketing_papers/182
Date Posted: 27 November 2017
This document has been peer reviewed.