Service organizations pursue long-term relationships with customers for three major reasons. First, relationships with customers are market-based assets that directly influence shareholder value by accelerating or increasing the magnitude of cash flows, lowering the volatility and vulnerability of cash flows, and increasing their residual value (Srivastava et al. 1998). Consequently, long relationships increase customer equity or the value of the customer base, as well as many other measures of financial performance (Hogan et al. 2002; Kumar and Shah 2009). Second, long relationships between a service organization and its customers imply high customer retention rates. Customer retention usually has the largest influence (vis-à-vis other components) on the value of the customer base (Gupta et al. 2004). Third, customers in long-term relationships exhibit favorable behaviors such as paying price premiums, increasing service usage, cross-buying and increasing share of customer or wallet (Bolton and Lemon 1999; Verhoef et al. 2001). These behaviors lead to better customer and employee role performance and to decreased costs to serve customers in some industries (Meuter et al. 2005). However, long-term relationships must be managed so that they are beneficial to both the organization and its customers. Sometimes, as customers stay longer with a service organization, they may expect price discounts or better service, leading to increased costs to serve them and lower margins.
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Business, Management and Accounting(all)