Learning from service experience ratings: effects on experience quality, credence quality, and customer satisfaction

Abstract

This paper examines the effects of service experience ratings (SERs) in service industries. SERs are defined as consumers’ assessments of a service encounter (typically on a 3-, 5-, or 10-point numeric scale) that are made immediately after the encounter. We conceptualize SERs as being a mechanism for retailers to observe how much effort employees expend on the provision of experience quality. Using a principal-agent analytical model in which the worker provides credence quality for altruistic reasons and SERs enhance customers’ recognition of the experience quality that is delivered, we investigate whether a retailer should solicit SERs, how SERs influence a worker’s expenditure of effort on experience and credence qualities, and the impact of SERs on customer retention. SERs present a fundamental tradeoff between the benefits from heightened customer satisfaction (which generates future profit) and larger costs (due to monitoring costs and additional compensation to induce the worker to exert more effort). We find that soliciting SERs is profitable for a retailer when the cost of administrating surveys is low, most consumers appreciate the effort workers devote to providing experience attributes, consumers expect a low service quality, and satisfied customers generate high future profit. The nuanced effects of SERs lead to several surprising results. For example, it may be optimal for the retailer to respond to higher expectations about quality by providing a lower-quality service. Also, although SERs only assess experience quality, it is possible that SERs may become more beneficial when consumers highly value credence quality. Another intriguing result is that there are situations in which SERs do not enhance a retailer’s profit even if were costless to collect this information. For example, higher worker altruism may eliminate the incentive to collect SERs and, as a result, lead to fewer customers being satisfied with the service.