Executive Summary

Retailer customer service has been shown to lead to increases in consumer attraction and retention, but what is less apparent is whether shareholders are fully rewarded for retailers’ customer service efforts. Therefore, our first goal is to examine the extent to which investors associate retailer customer service with increases in retailer cash flows and shareholder value. Further, because investors often use heuristics in their decision making, our second goal is to examine how heuristics moderate the effect of customer service on retailers’ shareholder wealth. For firms, understanding the role of heuristics in investors’ (and consumers’) evaluation of firm service offers new insights for maximizing the value of their customer service strategies.  

            Our conceptual framework follows the service-profit chain, suggesting that customer service leads to increases in retailer cash flows and shareholder value. Because the delivery of service is uncertain, however, we suggest that the service’s shareholder wealth creation is affected by the perceived likelihood of service delivery. We contend that when investors are not certain that the service will be delivered, investors react less positively to retailer service, attenuating the service’s effect on retailers’ shareholder wealth.

We suggest that investors judge the likelihood of service delivery through brand and availability heuristics. According to the availability heuristic, outcomes and events which come readily to mind (i.e., available events) are judged likely, and ones which are difficult to bring to mind are unlikely. Thus, when the customer service springs readily to the investor’s mind, the service’s perceived likelihood is high and the firm’s promises are credible, and investor reaction to the retailer’s service is positive. In the paper, we explore how the service’s availability is impacted by the service’s imaginability (i.e., the ease with which the service can be brought to mind), the service’s vividness (i.e., its clarity), and the service’s affect (i.e., its desirability). Further, since the firm’s reputation is a credible and diagnostic cue for firm performance, we also propose the service’s perceived likelihood is high when the retailer has a strong reputation.    

We found 48 announcements of retailer customer service strategies, indicated by advertising campaigns emphasizing customer service. Using an event study, we documented a significant abnormal return of 1.09 percent, on average, to the announcement of a retailer’s customer service strategy. This abnormal return is higher than many others documented in the marketing literature, suggesting that service is one of the more valuable strategic marketing actions available to the firm. Campaigns which emphasized the retailer’s prices, merchandise breadth, or merchandise quality were found to be associated with negative abnormal returns, suggesting that retailers are punished when their advertising campaigns emphasize factors other than customer service.

The role of the availability and reputation cues was tested through a cross-sectional analysis of the abnormal returns. Coders identified seven types of retailer customer service in the announcements: providing information, providing solutions, passionate customer service, empathic customer service, friendly customer service, shopping ease, and a general promise to take care of customers. Experiments were then used to capture proxies for the imaginability, vividness, and affect of each of these seven customer service types. Results indicated that aspects related to the perceived likelihood of service delivery explain significant variance in the abnormal returns. Retailer customer service which is easy to bring to mind and vivid customer service were found to generate greater shareholder value. We also found that the shareholder wealth from the retailer’s customer service is positively related to the firm’s reputation. 

For firms, our results suggest that investors (and consumers) only reward retailers for their customer service efforts when they can be confident that the service will be delivered. Thus, retailer promises of customer service which are vivid and easy-to-imagine (e.g., friendly service or a convenient shopping experience) create shareholder value. Promises involving difficult-to-imagine customer services (e.g., passionate service) are less credible, limiting the creation of shareholder value. Firms may want to reconsider difficult-to-imagine customer service activities due to the inherent consumer and investor skepticism of these claims. If firms highlight a difficult-to-imagine service, they should provide additional cues about their ability to provide the service, such as customer or employee testimonials or service performance guarantees. Further, firms should also consider the implications of the availability heuristic on service quality and customer satisfaction models based on the comparison of expectations to perceptions. Our results suggest that when a service is easy-to-imagine, expectations should be high, and consumers should be upset when delivery falls short. When a service is difficult-to-imagine, however, consumers may attenuate their negative reactions to service failure because successful service delivery was not certain.