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Managing satisfaction in relationships over time

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Consider a firm that has the flexibility to actively manage and customize the service offered to its customers in a repeat business context. What is the long-term value of such flexibility, and how should firms manage the service relationship over time? We propose a dynamic model of the firm-client relationship that relies on behavioral theories and empirical evidence to model the endogenous evolution of service expectations and customer satisfaction, as well as their impact on repurchase decisions. In general, we find that firms can extract higher long-term value by managing service experiences and expectations over time. Varying service in the long run is not optimal, however. We characterize the firm's optimal dynamic service policy and show that it converges over time to a steady-state service level. Loss aversion expands the range of constant optimal service policies, suggesting that behavioral asymmetries limit the value of responsive service. Our results provide insights for service suppliers seeking to leverage customer-level data and service flexibility in order to prioritize clients and improve long-term performance.

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