Customer satisfaction as a gain/loss situation: Are experienced customers more loss aversive?

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1 Customer satisfaction as a gain/loss situation: Are experienced customers more loss aversive? 1 Magnus Söderlund Center for Consumer Marketing, Stockholm School of Economics, P.O. Box 6501, SE Stockholm, Sweden Magnus.Soderlund@hhs.se Preferred track: Consumer behavior or Services marketing

2 Customer satisfaction as a gain/loss situation: Are experienced customers more loss aversive? Abstract: 2 This paper explores the notion of transaction-specific satisfaction as a gain/loss situation in relation to cumulative satisfaction prior to the most recent transaction. The empirical results from an experiment in a service setting indicate that loss aversion is at hand (i.e., losses loom larger than gains in the effects on behavioral intentions). Moreover, it is also shown that loss aversion is substantially more pronounced for experienced customers. The results imply that the supplier should be particularly attentive to experienced customers losses. Keywords: Customer satisfaction, loss aversion, customer experience. 1. Introduction From the repeat-purchase customer s point of view, each specific transaction with a supplier serves as the basis for a satisfaction assessment. These specific assessments, in turn, are assumed to result in an accumulated level of satisfaction; the accumulated satisfaction level is adjusted in light of each additional transaction, so that it represents a continuously updated account of the customer s relationship with the supplier. However, the specific nature of this adjustment process remains underresearched within the customer satisfaction domain. Here, we examine the process in terms of prospect theory, in which it is assumed that gains and losses, rather than absolute amounts, have a significant impact on judgments. More specifically, since it is likely that specific transactions are sometimes better and sometimes worse than the accumulated experience, we view each additional transaction as a gain/loss situation. A gain, then, is at hand when the additional transaction-specific satisfaction is perceived as higher than accumulated satisfaction, and a loss situation is at hand when the additional transaction-specific satisfaction is perceived as worse than accumulated satisfaction. The purpose of this paper is to explore the relationship between accumulated satisfaction and transaction-specific satisfaction in terms of a gain/loss perspective: we examine if satisfaction losses loom larger than gains in the effects on behavioral intentions. We also examine if the asymmetrical impact of gains and losses is moderated by the customer s level of experience.

3 3 2. Theoretical framework A main premise in prospect theory is that individuals are more attuned to differences, relative to a reference point, or norm, than absolute amounts. In other words, changes not final states are assumed to be the main carriers of value for the individual. Another premise, confirmed by a large number of empirical studies, is that an asymmetric impact ( loss aversion ) is at hand between losses and gains, in the sense that losses loom larger than gains. For example, the displeasure associated with losing a specific sum of money is generally greater than the pleasure associated with winning the same amount (Tversky & Kahneman 1986, Tversky & Kahneman 1992). In addition, given that a loss is a negative event and a gain is a positive event, an asymmetry has been identified in many situations in which the relative impact of positive and negative events has been examined (cf. Taylor 1991). Given that accumulated satisfaction is an important reference point for the customer, we assume that deviations from this point derived from additional transactions can be conceptualized as gains and losses. It is also assumed that such gains and losses have an asymmetric impact on the customer s view of the future of the relationship particularly on behavioral intentions, the main dependent variable in this paper. In other words, it is hypothesized that deviations from accumulated satisfaction in terms of transaction-specific satisfaction is one among several types of gain/loss situations, and that the general loss aversion is at hand in this specific situation. In fact, given that customer satisfaction in general is negatively skewed, i.e., customers are satisfied rather than dissatisfied (cf. Fornell 1992), there is more room for losses than for gains on the satisfaction continuum, so we expect a particularly significant loss aversion in the case of satisfaction gains and losses. However, we assume that loss aversion is subject to individual differences. We are particularly interested in the potential for such differences with respect to expert and novice customers. The issue, then, is if loss aversion is stronger or weaker for experts. One main difference between the two types of customers is that the expert has experienced the purchase situation several times and is therefore likely to have a more developed and more easily accessed cognitive structure related to the situation than the novice. It is also assumed that the expert is more committed to maintaining the level of the accumulated evaluation (the norm in this case). The main premises are that a) experts have been behaviorally involved in a larger number of supplier encounters, and b) repeated behavior tends to make the individual committed to his/her evaluations (cf. Kielser 1971). What, then, does this imply for the effects of loss aversion on behavioral intentions? On the one hand, a deviation from the norm, such as a loss, may become more cognitively disruptive for the expert. And since a high level of disruption is assumed to produce a higher level of response than a low level of disruption (Fiske 1982), we might expect stronger reactions from the expert when an additional transaction calls for an evaluation that is not consistent with the accumulated evaluation. On the other hand, however, given that a loss transaction represents a smaller fraction of the total experience for the expert, who has been in the purchase situation a relatively higher number of times, one specific loss may be cognitively overshadowed by the large number of transactions that has occurred prior to the loss, and consistency mechanisms may suppress the effect of the loss. If this is the case, the loss may have little impact. Thus, it is possible to derive rival statements with regard to the relative impact of losses on the judgments made by experts and novices. The issue, then, deserves an empirical assessment. We turn to this task now.

4 4 3. Research method 3.1. Sample and data collection The empirical study involved a reversed-treatment non-equivalent control group design with pretest and posttest measures. All data were collected with a questionnaire. One particular airline was used as the stimulus object. The respondents were participants in marketing classes including both undergraduate students and executive MBA students. All respondents included in the analysis had flied with the airline at least once. First, the levels of accumulated satisfaction and experience were assessed (pretest measures). Second, the respondents were subject to treatment. We asked them to imagine that they had just patronized the airline again, and we provided them with a hypothetical description of what had happened during this trip. Two different scenarios were used and each subject responded to only one of them. Thus, each questionnaire contained only one scenario, and the questionnaires were randomly distributed to the respondents. Scenario 1 (n = 123) was designed to produce high cabin crew performance, and Scenario 2 (n = 110) was designed to produce low cabin crew performance. This approach was followed in order to obtain some variance in the satisfaction measures, since they tend to be negatively skewed (cf. Fornell 1992). Third, we assessed transaction-specific satisfaction and behavioral intentions (posttest measures) after the simulated additional trip Measurement Gains and losses in satisfaction. The pretest measure of satisfaction served as the accumulated satisfaction measure. A three-item scale from Fornell (1992) was used: How satisfied or dissatisfied are you with Airline X? (1 = very dissatisfied, 10 = very satisfied), To what extent does Airline X meet your expectations? (1 = not at all, 10 = totally), and Imagine an airline that is perfect in every respect. How near or far from this ideal do you find Airline X? (1 = very far from, 10 = cannot get any closer). Cronbach s alpha was 0.94 for this scale. The unweighted mean of the responses to the three items was used as a measure of accumulated satisfaction. The posttest satisfaction measure served as a measure of transaction-specific satisfaction, and it included the same three items (alpha = 0.89). From these two measures, a gain/loss score was computed for each respondent by subtracting the pretest measure from the posttest measure. A difference score, then, was used in the measurement of gains/losses. A value larger than zero indicates a gain, while a value less than zero indicates that a loss had taken place. In other words, a gain is conceptualized (and operationalized) as the bipolar opposite of a loss. Customer experience is a multidimensional construct (cf. Alba & Hutchinson 1987), and it was assessed in two ways (in the pretest stage). First, subjective knowledge was measured with a four-item scale adopted from Flynn & Goldsmith (1999). A 10-point version of the scale was used (1 = low knowledge, 10 = high knowledge, Cronbach s alpha = 0.92). Second, customer familiarity was assessed with the following item: How many times have you traveled with X during the past two years?. The correlation between subjective knowledge and familiarity was 0.6 (p < 0.001), thus suggesting that a certain level of validity was at hand in the measures of customer experience. Behavioral intention was measured with the following (posttest) item: If possible, how likely is it that you would choose X on your next flight? (1 = very unlikely, 10 = very likely).

5 5 4. Analysis and results In the first step of the analysis, a procedure used by Mittal et al (1998) was followed. It means that two values were allocated to each individual: one loss value and one gain value. If the respondent had been subject to a satisfaction gain, the (positive) difference between transaction-specific satisfaction and accumulated satisfaction became his/her gain value (and a loss value equal to zero was allocated to this individual). Conversely, each individual with a negative difference between transaction-specific satisfaction and accumulated satisfaction was given this value as a loss value (and s/he received a gain value equal to zero). Absolute values were used for the loss values in order to facilitate the interpretation of regression coefficients. Then, regression analysis was performed with gains and losses as independent variables and intention as the dependent variable. A first regression analysis was performed on the total sample, in order to examine the presence of a general gain/loss asymmetry. The result is presented in Table 1. Table 1: Regression on intention Variable Beta t Sig. Loss Gain R 2 = 0.41, F = 78.37, p < Table 1 reveals that the regression coefficient for losses is larger than for gains; one unit of satisfaction loss is thus having a stronger impact on intention than the same unit of satisfaction gain. This is in tune with the general propositions in prospect theory about the stronger effects of losses vs. gains. However, do differences rather than absolute amounts offer better explanations in this case? A regression with intention as the dependent variable, and satisfaction in the standard sense (here: the posttest measure; the absolute amount of satisfaction) as the independent variable, explains more variance in intention (R 2 = 0.63, F = , p < 0.001) than the regression analysis reported in Table 1. Yet this standard analysis does not allow for a detection of differences in the effects of satisfaction along the satisfaction continuum. Returning to the asymmetry between satisfaction gains and losses, our next question was if the asymmetry is equally pronounced for different individuals. Since we have theoretically based reasons to believe that this is not the case with regards to customers experience, we examined the gain/loss function with respect to this variable. The sample was split into two groups with the subjective knowledge scale midpoint (i.e., 5.5) as the demarcation line. Since Kahneman & Tversky (1979) has suggested that the emphasis in prospect theory on gains and losses as drivers of value judgments should not be taken to imply that the initial position (i.e., the norm) is unimportant, we examined if the two groups were different with regard to the norm in this case (accumulated satisfaction before treatment). The difference was not significant (t = -0.86, p = 0.39). Regression analysis was then performed on both groups. Again, satisfaction gains and losses served as the two independent variables, and intention as the dependent variable. The resulting coefficients for gains and losses were.33 (p <.001) and

6 6.43 (p <.001) in the low knowledge case (R 2 =.44, F = 60.14, p < 0.001). In the high knowledge case (R 2 =.41, F = 24.61, p <.001), however, they were 0.08 (p =.42) for gains and.61 (p <.001) for losses. A similar pattern occurred when familiarity was used as an indicator of customer experience. Thus, both low and high experience customers were subject to an asymmetry but loss aversion became more pronounced for customers with a high level of experience. 5. Discussion The results imply that service providers who strive for repeated purchases by customers should avoid the creation of perceived losses to a larger extent than they should create perceived gains. Moreover, the results suggest that experienced customers, who appear to be particularly sensitive to losses, should be the subject of more elaborated responses to service failures (given that such failures are unavoidable). More generally, it seems as if closer link between satisfaction theory and prospect theory would lead to fruitful outcomes in terms of the advancement of knowledge about how repeat-purchase customers make assessments of their suppliers. A strict emphasis on loss avoidance, however, is likely to produce a far less exciting internal environment in a service firm than an emphasis on innovation in terms of gain activities such as positive surprises. Indeed, it seems more challenging, from a management point of view, to create motivation for loss-avoidance activities. In addition, from the customer s point of view, a focus on loss avoidance may be welcomed for instrumental services such as airline travel. However, services providers with a more hedonic content in their products may run the risk of being perceived as boring if loss avoidance becomes the dominant issue. References Alba JW & Hutchinson JW, 1987, Dimensions of Consumer Expertise, Journal of Consumer Research, Vol. 13, March, Fornell C, 1992, A National Customer Satisfaction Barometer: The Swedish Experience, Journal of Marketing, Vol. 56, January, Flynn LR & Goldsmith RE, 1999, A Short, Reliable Measure of Subjective Knowledge, Journal of Business Research, Vol. 46, Kahneman D & Tversky A,1979, Prospect Theory: An Analysis of Decision Under Risk, Econometrica, Vol. 47, No.2, March, Kiesler CA, 1971, The Psychology of Commitment, Academic Press, New York. Mittal V, Ross WT & Baldasare PM, 1998, The Asymmetric Impact of Negative and Positive Attribute-Level Performance on Overall Satisfaction and Repurchase Intentions, Journal of Marketing, Vol. 62, January, Taylor SE, 1991, Asymmetrical Effects of Positive and Negative Events: The Mobilization-Minimization Hypothesis, Psychological Bulletin, Vol. 110, No. 1, Tversky A & Kahneman D, 1986, Rational Choice and the Framing of Decisions, Journal of Business, Vol. 59, No. 4, Tversky A & Kahneman D, 1992, Advances in Prospect Theory: Cumulative Representations of Uncertainty, Journal of Risk and Uncertainty, Vol. 5,