A brief synopsis of "The Effects of Service Quality and Word of Mouth on Customer Acquisition, Retention and Usage" (working paper, March 2007) by Puneet Manchanda, Sungjoon Nam and Pradeep K. Chintagunta
Word of mouth is a great way to reach new customers, but it’s an even better way to lose them. At least, that’s what three researchers found when they looked at how the usage patterns of a home video service changed with quality levels.
“We wanted to say something about how people react to variability in product and service performance,” explains Puneet Manchanda, associate professor of marketing at the University of Michigan’s Ross School of Business. When it comes to services, marketers tend to rely on survey data to provide insights on customer satisfaction and the quality of offerings. In this study, Manchanda and his coauthors, Sungjoon Nam and Pradeep K. Chintagunta, doctoral student and Robert Law Professor of Marketing, respectively, at the University of Chicago’s Graduate School of Business, were able to access a more tangible measure of service quality.
Specifically, they studied a video-on-demand service, which they call DirectMovie to keep the provider’s identity anonymous, that transmits its movies to living rooms via terrestrial signal (think rabbit ears). Consumers who adopted DirectMovie didn’t have to play with tinfoil antennae to watch their choice of 100 movies: The movies were transmitted in the background and stored locally on set-top boxes. Playback was always crystal clear regardless of broadcast reception.
However, the quality of the broadcast signal did affect how frequently the selection of movies turned over. Every household was to receive 10 new movies each week — as long as reception was good. But the spottier the signal, the fewer new movie options would be available. The researchers could directly monitor the quality of the signal received by each household — in essence, the quality of DirectMovie’s service — and could see its effects on household adoption, how many movies households watched and termination rates. Not surprisingly, as the 2007 working paper “The Effects of Service Quality and Word of Mouth On Customer Acquisition, Retention and Usage” explains, those with better signals were more likely to watch more movies (each for a small fee) and more likely to remain with DirectMovie longer, which confirms the link between signal/ service quality and customer satisfaction. The study covered over 3,000 households across three U.S. markets — Salt Lake City, Jacksonville and Spokane — between October 2003 and November 2004.
Apparently, service quality also affected how customers described DirectMovie to friends and family. Using neighborhoods as a proxy for social interaction, the researchers found clusters of households adopting DirectMovie; having a consumer adopt the service made neighbors, those living within a half mile, more likely to sign up in the future. As those neighbors then experienced it, they would tell more neighbors. And so on.
What the researchers also found is that good experiences with DirectMovie matter for this word-of-mouth effect. “When people in the neighborhood adopt the service, everyone in the neighborhood tends to adopt more quickly,” Manchanda explains. “If the signal is good, the probability of neighbors adopting goes up. If the signal is bad, the probability of neighbors adopting goes down. That can happen only if there was some kind of social interaction.” Note that reception could vary from household to household, even in the same neighborhood, and also over time in the same household.
Thus, Manchanda says, “For a proportion of the population, word of mouth is crucial in terms of adoption,” and even more so for negative buzz. The drop in the probability of adoption stemming from negative word of mouth was twice the rise gained from positive word of mouth.
The word-of-mouth stakes were further magnified because the consumers in the study who were most affected by word of mouth tended to be ambivalent to the company’s advertising — and they tended to order more movies once they signed up. In other words, they were both harder to reach and more profitable customers, especially in the short run. In fact, if the company could increase its service quality, the subsequent increase in lifetime revenues was highest for this set of customers. So most marketers should keep a careful eye on the word of mouth that their products and services engender.
But perhaps not all marketers. “The more experiential your product or service is, the more important are these findings,” Manchanda says. “If I’m buying gasoline, the only salient factor is price (attributes of the station notwithstanding). On the other hand, if I decide to see a movie … it’s critical for me to understand in advance whether that movie might be good or not.” And many people are more swayed by a movie’s buzz in their social circles than by movie trailers and studio ads. Since bad news is more contagious than good news, Manchanda says, “it’s important to get it right the first time.”
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