A Model of Consumer Learning for Service Quality and Usage

Abstract

In many services (e.g., the wireless service industry), consumers choose a service plan according to their expected consumption. In such situations, consumers experience two forms of uncertainty. First, they may be uncertain about the quality of their service provider and can learn about it after repeated use of the service. Second, they may be uncertain about their own usage of minutes and learn about it after observing their actual consumption. The authors propose a model to capture this dual learning process while accounting for the nonlinearity of the pricing scheme used in wireless services. The results show that both quality learning and quantity learning are important. The authors conduct several policy experiments to capture the effects of consumer learning, pricing, and service quality on customer lifetime value (CLV). They find that consumer learning can result in a win–win situation for both consumers and firm; consumers leave less minutes on the table, and the firm experiences an increase in overall CLV. For example, the authors find that there is a 35% increase (approximately $75) in overall CLV with consumer learning than without. The key driver of this result is the change in the retention rate with and without learning.