Quantifying the effect of service quality and word of mouth on customer acquisition, usage and retention

This paper contributes to the service marketing and social networking literature by identifying and quantifying the direct and indirect effects of service quality on new customer acquisition, usage and retention using behavioral data. We use a unique dataset describing the launch of a new high-tech entertainment product (a video on demand type service). We observe the signal quality which translates directly into the number of movies available for viewing, thus representing a part of overall service quality. For this technology, service quality is exogenously determined, objectively measured and spatially uncorrelated. Our counterfactual experiment involves computing the marginal effect of service quality improvement on Customer Lifetime Value (CLV).;We find that the Customer Lifetime Value (CLV) and the marginal CLV have a non-linear relationship. Interestingly, the lowest CLV decile has the highest marginal effect. On average, a 10% increase in service quality leads to a 2.3% increase in customer lifetime value. The practical implication is that resources related to service quality should be allocated not by the absolute CLV but by the marginal CLV.;We also document the existence and magnitude of contiguous word of mouth effects of signal quality on customer acquisition. We operationalize contiguous word of mouth effects based on geographic proximity and use behavioral data to resolve typical challenges in measuring causal social network effects.;We find that contiguous word of mouth affects about 8% of the new subscribers. However, this effect acts as a double-edged sword as it is asymmetric. We find that the effect of negative word of mouth arising from poor signal quality is more than twice as large as the effect of positive one arising from excellent signal quality. Besides contiguous word of mouth, we find that advertising and the retail environment also play a role in adoption. We find these effects after controlling for unobserved heterogeneity, competition and consumer demographics.;Keywords: Services, Service Quality, Customer Relationship Management (CRM), Customer Lifetime Value, New Product Adoption, Word of Mouth, Contagion, Social Networks, High Technology, Hazard Models...