The Diffusion of Services

  • Libai B
  • Muller E
  • Peres R
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Abstract

Many of the products introduced during the past two decades are services rather than goods. One important influence on its growth and long-term profits is customer attrition, which can occur at the category level (disadoption) or between firms (churn). Yet the literature has rarely modeled how services penetrate a market and has not evaluated attrition’s effect on growth. The authors combine diffusion modeling with a customer relationship approach to investigate the influence of attrition on growth in service markets. In particular, the authors model the effects of disadoption and churn on evolution of a category and on growth of individual firms in a competitive environment. The authors show how neglecting disadoption can bias parameter estimation and especially market potential. They also derive an expression for the customer equity of a growing service firm and apply it to valuation of firms operating in competitive industries. The results for six of seven firms in four service categories are remarkably close to stock market valuations, an indicator for the role of customer equity in valuations of growing service firms.

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Authors

  • Barak Libai

  • Eitan Muller

  • Renana Peres

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