Customer Service Efforts Mean More When State of the Economy is Better

While customer experience matters when the economy is doing poorly, factors such as customer satisfaction and whether the firm has rectified a failure matter more to customers when the economy is doing better, according to results of a recently published study in Marketing Science.

“During the recent recession [firms] said the last thing they want to do is cut customer experience initiatives because they wanted to hold on to their existing customers and discourage them from switching to competitors. But what we find is that irrespective of how the firm views the importance of customer experience, customers viewed it differently. Customers use their previous service experiences with the firm to decide whether to purchase again to a greater extent when the economy is doing better than when it is doing worse,” Nita Umashankar, PhD, assistant professor of marketing at Georgia State University, said. “From past insights we knew that when firms have more resources, they can afford to invest more in customer experience, but we did not know if that would ultimately mean more to customers.”

Effect of economy on customer service

The research team combined data on state-level economic well-being provided by the Gallup Poll with data on hundreds of customers of a Fortune 1000 international airline carrier, including their purchase behavior and perceptions of the firm collected from multiple surveys conducted over time.

The conclusion was that during positive economic times, it becomes all the more important for service firms to improve customer experience by increasing satisfaction, reducing failures, and implementing recovery efforts to enhance the positive effects of a good economy. For the firm analyzed in this study, it doubled its gain in revenue from improvements in customer experience during a better economic period. For example, the authors found that the same improvement in customer experience yields a 10% gain in revenue when the economy is worse off but yields a 20% gain when the economy is better.

The researchers conjecture that when the state of the economy is poor, consumers focus more on price and less on customer experience. In contrast, in a better economy, consumers are less price sensitive and turn their attention to other aspects of the service encounter. In particular, consumers focus on how satisfied they have been in the past and whether the firm fixed any causes of dissatisfaction.

The researchers also find that while both higher and lower income consumers are likely to spend more in a strong economy, the leap in spending from a weak to a strong economy is larger for lower income consumers.

“We never advocate that businesses should not care about customer service. It is certainly something you want to excel at,” Umashankar said. “In general, [firms] strive to create strong relationships with their customers by providing superior customer experiences. But we did not know when it was more appropriate to invest in customer service and certainly did not know that this would depend on the macro-economic environment. It was surprising to find that it is more appropriate to improve customer service in a better economy because consumers feel that way, and not because firms have more resources.”

Managerial implications

Service firms should focus on communicating lower prices and why their services are more cost effective when the economy is doing worse, and focus on advertising how they provide a superior experience when the economy is doing better, according to the researchers. During a strong economy, firms should focus on preventing service failures, and implement additional recovery tactics in the event of a service failure.

Keeping focus on low income and high income consumers also is important as the economy fluctuates. Providing value-based offers to lower income consumers would be beneficial when the economy is poor, while providing higher margin offerings to both lower and higher income consumers would be beneficial when the economy is better.

“We recommend that service firms implement the insights from our research and tailor prices based not only on their customers’ demographics (e.g., income) and purchase history (e.g., purchase frequency and revenue), but also based on sensitivities to macroeconomic conditions,” the researchers concluded. “Furthermore, service firms can adjust prices based on how different segments of consumers in different income brackets react to the economy.” — by Casey Tingle

For more information:
Kumar V. Marketing Science. 2014;doi:10.1287/mksc.2014.0862.

Disclosure: Umashankar has no relevant financial disclosures.

Leave a Reply

Your email address will not be published.