Strengthening Customer Relationships

Abstract

Building long-term, profitable, customer relationships has become a strategic mandate for service firms. In this research, the authors present a modeling framework for understanding the decision of a noncontractual customer to strengthen the relationship with the firm by migrating to a contractual relationship. Drawing upon expected utility theory, the customer migration decision is modeled as a function of expected gains (actual expectations of service usage) and losses (price of the noncontractual service). In addition, the authors investigate the direct and indirect effects of the age of the noncontractual relationship and propose a model to understand the process of expectations formation. The framework is tested empirically in a business-to-consumer context in mobile communications services. The findings provide strong support for the proposed model and they reveal that actual expected service usage and noncontractual price increase the probability of the customer migrating to a contract, and that relationship age has both direct (positive) and indirect (through expected service usage) effects on the studied behavior. The present study also provides new theoretical and empirical insights into the formation of actual customer usage expectations. Finally, the study findings have several important implications for service managers to strengthen their relationships with their current noncontractual customers. For example, they need to proactively manage customers’ actual expectations about future service usage in order to increase a customer’s probability to migrate to a contract.