The Effect of Service Price Increases on Customer Retention

Abstract

This study examines the impact of actual price increases on customer retention in a service context and how the effect of a price increase is moderated by both tenure and breadth of the customer's relationship. The study finds that tenure is associated with lowered customer sensitivity to price increases as well as having a favorable direct effect on customer retention rates. The study also finds that relationship breadth can exacerbate the adverse effect of price increases on customer retention. Finally, relationship breadth is found to have a favorable direct effect on retention rates only among newer customers. The managerial implication is that marketers must pay extra attention to short-tenure and broad-breadth customers when implementing price increases. The study represents a unique contribution to the service marketing literature, which to date reports little research examining the effect of actual price changes on consumer behavior.