Thinking Allowed: Which is more important? Service Quality or Price?

The discussion in the service industry regarding the relative importance of price and service quality has been raging for decades. As virtually any manager would agree, building and sustaining customer loyalty is critical to business success. In fact, the majority of business leaders participating in a recent strongly agreed that creating a relationship with the consumer is strategically important (Aksoy, 2013). Be that as it may, is it really? 

The case for service quality is really quite simple. The service sector is experiencing rapid growth as the world continues to transition from a product-dominant logic (PDL) to a service-dominant logic (SDL). The transition to SDL requires a different approach to marketing. While it is possible to study PDL marketing by observing individual transactions, SDL marketing relies on the study of customer relationships over time with customer satisfaction being the key construct necessary to continue the relationship (Grönroos, & Gummerus, 2014). Therefore, while earlier service-marketing models frequently stressed pricing, the current environment is changing the service-marketing paradigm requiring more attention on studying the customer lifetime value (CLV; Rust & Tuck Siong, 2006).

Support for the shift in focus to CLV can be found in Palmatier’s, Jarvis’, Bechkoff’s, and Kardes’ (2009) argument that the scholarly consensus based on empirical research has concluded that relationship marketing has been demonstrated to increase customer trust and loyalty thus influencing future purchasing decisions. However, in addition to trust and loyalty, the researchers proposed future consumer purchasing decisions are also influenced by another construct, gratitude. Gratitude was defined as the consumer being appreciative of the benefits received and feeling a need to reciprocate.

Interestingly, Palmatier et al. (2014) suggest that feelings of gratitude and a desire to reciprocate are influenced by the consumer’s perception that the benefit was based on the seller’s free will and generosity. The researchers’ contend the consumers’ feel more gratitude when employees are empowered to resolve issues by bending the rules rather than through well-documented consumer loyalty programs. Simply put, bending the rules to help a consumer is perceived as free will, whereas the benefit derived from a loyalty program is not perceived as free will. Similarly, consumers would not feel gratitude to a salesperson providing exceptional support in the sales transaction if they were aware that the salesperson received a commission.

Yet, on the flip side, some companies have selected a price leadership strategy and despite having low customer satisfaction, they may still be the consumer’s first choice. Often times, companies selecting a price leadership strategy are able to leverage its economies of scale and pure purchasing power in order to keep the price to the consumer lower than the competition while still maintaining healthy margins. In these cases, price leadership can often trump perceived service quality. As an example, according to the American Customer Satisfaction Index (2015), Wal-Mart has the lowest consumer satisfaction levels when compared to others in the grocery industry, yet a recent study found that many Americans surveyed name the company as their first choice for groceries (Keiningham, Gupta, Aksoy, & Buoye, 2014). This leaves many organizations without similar economies of scale in the position to compete largely on service.

Keiningham et al. (2014) argued that no business enterprise could survive without loyal customers. However, improving service cannot be allowed to undermine an organizations’ financial stability. While improving customer loyalty may be strategically important, it does not eliminate the business requirement for fiscal prudency and a well thought out strategy.

So which is most important, pricing or service quality? The short answer is it depends on the organizations’ strategy and positioning. Companies with lower levels of customer satisfaction can survive by leveraging economies of scale into a price leadership strategy. However, companies without the economies of scale risk being caught in a “no man’s land” without a strong service strategy to migrate those who operate with a price leadership strategy.

What do you think?

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© 2015. The Williard Group LLC

References:

Aksoy, L. (2013). How do you measure what you can’t define? The current state of loyalty measurement and management. Journal of Service Management 24(4). 356-38. doi: 10.1108/JOSM-01-2013-0018

American Customer Satisfaction Index (2015) ACSI: Retail customer satisfaction drops despite improvement for online shopping [Press Release]. Retrieved from https://www.theacsi.org/news-and-resources/press-releases/press-2015/press-release-retail-2014

Grönroos, C., & Gummerus, J. (2014). The service revolution and its marketing implications: service logic vs service-dominant logic. Managing service quality, 24(3), 206-229. doi: 10.1108/MSQ-03-2014-0042

Keiningham, T., Gupta, S., Aksoy, L., & Buoye. A. (2014). The high price of customer satisfaction. MIT Sloan Management Review. Retrieved from: http://sloanreview.mit.edu/article/the-high-price-of-customer-satisfaction/

Palmatier, R. W., Jarvis, C. B., Bechkoff, J. R., & Kardes, F. R. (2009). The role of customer gratitude in relationship marketing. Journal Of Marketing, 73(5), 1-18. doi:10.1509/jmkg.73.5.1

Rust, R. T., & Tuck Siong, C. (2006). Marketing models of service and relationships. Marketing Science, 25(6), 560-580. doi: 10.1287/mksc.1050.0139