Consumers shopping for a service such as a gym membership or an online-video-rental plan may be uncertain not only about the quality of the service but also about how often they will use it. This uncertainty is perhaps most prevalent in the wireless industry, in which consumers must choose from among a wide variety of plans and often can’t judge the true quality of the service until after they have bought their cell phone plans.
In most cell phone plans, such features as included minutes can’t be carried over to the next month. It often takes a few months for consumers to learn how many minutes they generally use. They might also learn that their cell phone service isn’t reliable. Consumers sometimes use this information to change their service plan or service provider as soon as their contract allows them to do so.
Professor Asim Ansari, working with Raghuram Iyengar of the Wharton School and Sunil Gupta of Harvard Business School, modeled this dual process of learning about quality and quantity. They also analyzed the effects of consumer learning, pricing schemes and service quality on the customer lifetime value (CLV) to a company.
Consumers who don’t use all their allotted minutes tend to increase their usage, downgrade their plan or leave their service provider, the researchers found. Consumers who exceed their allotted minutes either cut back on consumption or upgrade. Overall, consumers learn about the quality and quantity of their service very quickly. More than 90 percent of learning about quality occurs within the first five service encounters.
The researchers concluded that consumer learning benefits both consumers and service providers. Consumers who learn about their cell phone usage wind up with fewer unused minutes, and the provider reaps a 35 percent increase (equivalent to $75) in CLV. In their comparison of the relationship between service quality and CLV, the researchers found that improving quality, on average, by 1 percent leads to about a $2 increase in CLV.