The Growth and Equity of Competitive Services

Numerous new products introduced to the market during the last few decades are services. An important characteristic of services that has a considerable influence on service growth is customer attrition. Attrition can occur at the category level (disadoption), or between firms (defection). Attrition is a major concern for service providers, and has a significant effect on the long-range profits of firms. Yet the product growth literature has dedicated only sparse efforts to modeling the penetration process of services into the market, and specifically has not related to attrition and its influences on market growth. In this study, we combine diffusion modeling with a CRM approach to investigate the influence of attrition on the evolution of service markets. In particular, we model the effects of disadoption and defection on the growth of a single firm in a competitive environment. We present a competitive services growth model, which explicitly incorporates competition and attrition into the growth process, and we discuss the influence of attrition at both the category and firm levels. We show how neglecting attrition biases both parameter estimation and managerial analysis at the category level. On the firm level, we use the model to derive a functional form solution to the customer equity of a growing service firm, and apply this solution to the valuation of service firms that operate in competitive industries. For four out of five firms, our results are remarkably close to the stock market valuations, a possible indicator for the role of customer equity in the valuation of growing service firms.