A Catastrophe Model for Developing Service Satisfaction Strategies Author(s): Terence A. Oliva, Richard L. Oliver, Ian C.

MacMillan Source: The Journal of Marketing, Vol. 56, No. 3 (Jul., 1992), pp. 83-95 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/1252298 . Accessed: 18/06/2011 03:02
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Terence A. Oliva, Richard L. Oliver, & lan C. MacMillan

Model for Catastrophe Service Satisfaction Developing Strategies

Customer satisfaction/dissatisfaction has become an important issue for marketing practitioners. The authors examine the issue in terms of customer service. In particular, practitioners and academicians have noted that simply investing in greater service delivery may not return the cost of the additional investment. Part of the problem is that customers' response to service increments can be nonlinear, and satisfaction and dissatisfaction thresholds may not occur at the same point. The authors propose a method for analyzing this complex behavior in a way that can lead to the development of more accurate service strategies through an understanding of the relationships among customer-transaction costs, satisfaction, and purchase loyalty. They use a catastrophe model to describe a service loyalty customer-response surface. Then, by presenting a "real-world" application with a small service-quality customer dataset provided by General Electric Supply, they show how one actually estimates such a model and interprets the results.

INTEREST in customer service as an overriding management objective is now widespread. It has resulted in a legion of programs at the corporate and national levels to help industry implement a serviceoriented philosophy. Though some observers have suggested that this trend is "fashionable" (e.g., Coyne 1989), theoretical and empirical evidence shows that firms that provide higher levels of service reap higher profits than those that do not (Jacobson and Aaker 1987; Phillips, Chang, and Buzzell 1983; Rogerson 1983; A. Terence Oliva Professor, is of UniDepartment Marketing, Temple L. Richard Oliver Professor, is Owen Graduate School Manof versity. Vanderbilt is and lan agement, University. C.MacMillanProfessor Director theSolC.Snider of Center, Wharton Entrepreneurial The School, TheUniversity Pennsylvania. of is to Appreciationexpressed General Electric for the the Supply generously providing dataon which appliis cation based. second The author thanks Dean's the Fund Faculty for Research theOwen of Graduate of School ManagementVanderbilt of for for An version University providing partial support thisproject. early of theconceptual in model thisarticle presented theTIMS was at ColInterest Conference Services on lege on Marketing Special Marketing for atVanderbilt organized theCenter Services by Marketing University, 1990. the thank editor several the and unSeptember Finally, authors JM named reviewers their for comments. helpful

Shapiro 1983). It is not surprising, then, that the popular press has now picked up on this theme. For example, a Business Week (1990, p. 88) article entitled "King Customer" provided the general admonition that "at companies that listen hard and respond fast, bottom lines thrive," and similarly "that companies can score big gains in sales and profits by satisfying customers first." The few detractors from this view generally take one of two complementary points of view. The first is based on the notion of loss of competitive differentiation whereby all suppliers attain a common level of indistinguishable product quality. In this situation, Coyne (1989, p. 69) comments that service quality
. .. appears to offer an opportunity for positive last-

ing differentiation, at least theoretically. But many executives are skeptical. They ask: Can companies truly distinguish themselves from competitors based on greater service? Will customers pay for service? In the final analysis, is the payoff from better service likely to be worth the investment?

Coyne continues that companies must understand why investments in service fail, how customers view ser-

Journal of Marketing Vol. 56 (July 1992), 83-95

Model/ 83 Catastrophe

vice, and when firms should or should not invest in service. Zeithaml, Pasasuraman, and Berry (1990, p. 8) agree. They note:
Investments to improve service may not come back as profit gains. Indeed, a lot of money is wasted in organizations every year in the name of quality improvement. From adding costly service features that are unimportant to customers to spending training money unwisely, it is quite common for organizations to throw money away pursuing better service quality.

In explaining this phenomenon, they cite PIMS studies (e.g., Buzzell and Gale 1987) showing that shortrun superior quality leads to profit gains through premium pricing. However, unless growth in relative quality is maintained, these profits will erode as other firms emulate quality and price. The second point of view and the one most directly addressed here is that the response function linking investments in service satisfaction to customer response may not operate as is frequently assumed because the complexity of the relationship may be underestimated. As Coyne (1989, p. 73) states further:
. . . the links between satisfaction and behavior are not always easily discerned, for the following reasons. * The relationship is nonlinear, involving two critical thresholds. There appear to be thresholds of service for affecting customer behavior. In the [case of] consumer durables, when satisfaction rose above a certain threshold, repurchase loyalty climbed rapidly. In contrast, when satisfaction fell below a different threshold, customer loyalty declined equally rapidly. However, between these thresholds, loyalty was relatively flat. * Behavior lags behind satisfaction. Dissatisfaction with a single transactionis unlikely to cause the customer to switch loyalties, particularly
where switching barriers are high . . . Con-

tablishments (e.g., self-service gas stations), to have ambivalent (mixed) response to service enhancement (e.g., software upgrades), to be loyal to relatively deteriorating service (e.g., "behind the times" neighborhood shops), to continue to be disgruntled over improving service (e.g., American cars), and to rapidly shift from loyalty to disloyalty and vice versa (e.g., support for various political candidates or sports teams). One purpose of our article is to present a wellgrounded approach for modeling service-related phenomena observed in the marketplace, thereby affording practitioners an analytical method that can capture both nonlinear and multithreshold characteristics. To accomplish this objective, we present catastrophe theory representation of the relationships among three customer service delivery concepts. In the following sections we discuss, in turn, the conceptual framework to be modeled, the catastrophe theory model, model dynamics under catastrophe theory, model operationalization with an illustrative example, and the strategic implications of this perspective. If the conditions outlined here apply, firms can begin to examine how different investments in service strategies will affect customer loyalty and ultimately repeat purchasing. This better understanding may help firms to develop more effective service strategies.

Conceptual Background
Several useful satisfaction and service quality frameworks are available to provide a basis for understanding how nonlinearities and thresholds might play a role in a customer's response to service delivery (Bitner 1990; Bolton and Drew 1991; Oliver 1980, 1989; Yi 1990). All are based on the expectancyconfirmation framework, which suggests that satisfaction is a function of the degree to which expectations match, exceed, or fall short of product or service performance. Satisfaction, in turn, is thought to be an immediate antecedent to quality judgments and then to loyalty (Bitner 1990; Kasper 1988; LaBarbera and Mazursky 1983). Customer loyalty has been found to be directly related to firm profitability (Heskett, Sasser, and Hart 1990). Despite the volume of literature on consumer satisfaction and dissatisfaction, less is known about the relation between satisfaction and loyalty. In an early study, Newman and Werbel (1973) found a relationship between satisfaction and a repeat-buying measure of loyalty, a finding replicated by LaBarbera and Mazursky (1983) and by Kasper (1988) using switching data. Repeat-buying loyalty indices are not valid measures of loyalty, however, because of "happenstance" purchasing unrelated to psychological commitment (Jacoby and Chestnut 1978). Alternatively, satisfaction has also been shown to be related to a

versely, a single transaction producing a state of [excitement] is unlikely to lead to new loyalty. Customers have many encounters, and states of mind build over time. For example, a string of encounters in a short period producing dissatisfaction can lead to anger, then to a behavior change. Or a string of encounters producing an excited state can lead to the belief that the provider is unique.

This issue of an observed nonlinearity, coupled with multiple thresholds, is problematic for modeling. Most techniques used on such problems by academic researchers cannot easily handle a behavioral structure characterized by "misbehaving phenomena." The nonlinearity issue, in particular, is very problematic and a number of anecdotal examples are available to suggest the ubiquity of this phenomenon. For example, consumers are known to prefer low service es-

84 / Journalof Marketing, July 1992

stated intention to repurchase (Bitner 1990; Oliver 1980; Oliver and Bearden 1985; Oliver and Linda 1981; Oliver and Swan 1989). However, an intention is only a tentative measure of behavioral loyalty, especially because followup studies are rarely performed. The lack of evidence on the satisfaction-loyalty relationship motivates our discussion. We propose that the relationship is both linear and nonlinear, depending on the level of customer involvement. Moreover, the proposed nonlinearities are due to threshold effects, much as suggested by Coyne (1989). The key to understanding the transformation from linear to nonlinear response is best discussed in terms of the effects of purchase involvement on consumer response. In short, involvement creates a commitment to the present situation (Beatty, Kahle, and Homer 1988). Though several involvement dimensions have been proposed in the literature (Andrews, Durvasula, and Akhter 1990), that which concerns us here is due to situational and decision factors and, in particular, the effort and cost elements of a purchase. Recently, authors have proposed a relationship between involvement or commitment and loyalty (e.g., Beatty, Kahle, and Homer 1988). Generally the more involved a purchaser is in the specifics of the purchase, the more loyal he or she becomes. However, one must assume that the purchase was largely satisfactory, a point noted by Oliver and Bearden (1983) and Houston and Rothschild (1978). Given an unsatisfactory purchase, commitment should beget disloyalty (switching), but not immediately. In fact, one characteristic of involvement is a resistance to belief change (Laczniak and Muehling 1990) due to one's investment in the process. Dissatisfaction therefore must be extreme or repetitive to dislodge a previously loyal customer under high involvement. Hence, we propose that neither commitment nor satisfaction is linearly related to loyalty because (1) commitment accompanied by dissatisfaction will at some point result in switching (alternatively, a lack of commitment accompanied by satisfaction will eventually result in loyalty) and (2) satisfaction following a history of dissatisfaction will not directly result in loyalty until a satisfaction threshold is attained (alternatively, dissatisfaction following a long period of satisfaction is not likely to result in switching until a dissatisfaction threshold is breached). In this context, purchase involvement (also known as decision, response, or instrumental involvement) represents the cost, effort, or investment in a purchase (Engel, Blackwell, and Miniard 1990; Mittal and Lee 1989). The particular operationalization used here is that of transaction costs. We use the customer's reported costs after service, as this approach does not require one to speculate as to the difficulty of the de-

cision process before purchase. Indeed, Mehrotra and Palmer (1985) propose that involvement is maximized in the postpurchase decision-making stage. The framework linking cost-related involvement, satisfaction, and loyalty is presented next. We constrain the concepts in this model to loyalty and its most frequently posed antecedents, commitment and satisfaction. Hence, the expectancy disconfirmation concepts are assumed to be incorporated in the satisfaction response, as are quality judgments at the attribute level (Bolton and Drew 1991; Oliver 1992). We believe this three-dimensional model is a likely explanation for the set of relationships proposed here and the real-world observations of Coyne (1989) and others. It is important to keep in mind that the term "customer" is used to characterize buyers in both the consumer and industrial markets. The major variables are described next. Independent Variables Customer-transaction costs. Customer-transactioncosts are represented as a latent construct indicating how heavily the buyer is invested in the service components of the transaction.' We take the concept of customer-transaction cost to mean the service-related costs (i.e., search effort, ease or difficulty in getting problems resolved, salesforce helpfulness, etc.) required to access or use the service. For consumer markets we are assuming that the Howard and Sheth (1969) model captures the essential nature of purchasing behavior. That is, there are three general categories of purchase behavior: (1) routinized response behavior, (2) limited problem solving, and (3) extensive problem solving. For industrial markets we assume the buyclass structureof Robinson, Faris, and Wind (1967), who propose that industrial purchases can be categorized into three types: (1) straight rebuy, (2) modified rebuy, and (3) new task. Both classification structures have a common thread of increased complexity, involvement, and dollar cost as the customer proceeds from lower level categories to higher level categories. In buyer-seller exchange, we assume that some component of service is present, even if it is nothing more than locating or bagging. For many routine or low involvement purchases, this service component may be of little value to the purchaser beyond the expected norms surrounding the acquisition. For example, a newsstand seller may or may not offer a greeting without offending buyers. These situations are characterized by low customer-transaction costs. Straight rebuys exemplify low customer-transaction
'The hyphenated term "customer-transaction"is used to distinguish the construct from that used in transaction costs analysis (Williamson 1979, 1981). Though some aspects of the Williamson approach might be relevant, they are not considered here.

Model/85 Catastrophe

cost situations for industrialpurchasers. In fact, the process may be entirely automatic. Moderatecustomer-transaction costs are presentin situationsinvolving some effort on the partof the purchaser to obtain the productor service. The costs for groceryshoppingand air traveltend to be of this type. Here the buyer must exert some reasonableeffort to acquire the goods or services, and additionally requires that the service component be satisfactorily performed.The increasein customereffort means that the purchaseris more vested in the buying process. Modified rebuys fit into this category for industrial customers. costs Finally, high customer-transaction occur when the customer is heavily invested in the purchaseprocess. For consumermarkets,they occur with high involvement goods such as a house, car, or a child's medical care. With these products, consumers invest a great amountof time, effort, and money in consummating the transactionand the service component is generally very important.New task buys fit into this category for industrialfirms.
Customer satisfaction/dissatisfaction is the sec-

ond latentindependent variablein our model. As noted, a core element in customerservice is the satisfied customer. We propose that, with the proper degree of consumer involvement, such a customer will behave in a way that will contributeto the marketer'ssuccess throughrepeatpurchasingand positive word of mouth (LaBarberaand Mazursky 1983; Swan and Oliver 1989). For the purposes of this article, we treat customer satisfaction/dissatisfactionas a latent construct with multiple indicatorsat the attributelevel (Bolton and Drew 1991; Oliver 1992). The latent construct, however, is assumed to be unidimensional, ranging from disgust (intense dissatisfaction) to delight (extreme satisfaction) after Westbrook(1980). Dependent Variable We view the interplay of customer-transaction-costdriven involvement and the level of (dis)satisfaction as leading to brand loyalty or to brand avoidance (switching). We also allow for the likelihood that a customer loyalty response can lag behind satisfaction or dissatisfactionlevels. That is, a single dissatisfying transaction not necessarilychangea customerfrom will brandloyal to being a brandavoider. Thus, this being dependent loyalty dimension can be perceived as ranging from proactive avoidance at the negative extreme to proactive loyalty at the positive extreme.

1976, 1977) and its relativechaos theory(Gleick 1988). These approacheshave become intriguingto researchers in behaviorallybased disciplines such as economics (Fischer and Jammeregg 1986; Varian 1979), psychology (Alexander et al. 1992; Stewart and Peregoy 1983), and management (Oliva, Day, and MacMillan 1988; Sheridan 1985). The models' strengthsare that they can capturecomplex behavior by using significantly fewer nonlinearequations than the numberof linear equationsneeded to describe the same phenomena. We use a cusp catastrophemodel to describe the interrelationships among the key variables (purchase loyalty, satisfaction level, and customer-transaction costs). Prior use of catastrophetheory in marketing has been limited. Childey, Lewis, and Walker(1978) examined the cusp model as a marketplanning aid, focusing on brand loyalty and switching relative to price sensitivity, whereas Oliva and Bums (1978) applied it to consumerbehaviorsituationsof new product adoption and complaining behavior. Since these early efforts, not much has been attemptedin the way of marketingapplications,other than ones reportedat conferences from time to time. The main reason for the limited numberof applicationshas been the lack of a means to estimate these models within a multidimensionalframework.Workby Cobb (1978), Cobb and Zacks (1985), and Oliva et al. (1987) has helped to mitigate this problem. Though scope and space limitations preclude a complete descriptionof cusp catastrophemodels, we provide an intuitive overview to acquaintthe reader with the specifics used here. Figure 1 shows the general form of the cusp model.2 The model's dependent
2The equation that generates the surface in Figure 1 is YZ = 0.
Z3 X -

FIGURE 1 Purchase Response Surface for Cost and Satisfaction Level

ind LoyaI ind Neutral lnd Avoid

)-Avoid

Z-Axis

Y-Axis

J o

Catastrophe Models
ulated by catastrophe theory (Thom 1975; Zeeman

,
,y_

(n Ul

(D

Interestin developing more parsimoniousapproaches to the modeling of complex behavior has been stim-

X-Axis

86 / Journalof Marketing, July 1992

variable (Z) is on the vertical axis and representsthe purchaseloyalty dimension. Movement occurs on the surface as shown by the letteredarrows, and is driven by two independentvariables. Satisfaction level, the horizontal axis (X), controls left/right movement; customer-transaction costs, the depth axis (Y), control movement. Note that the response surface front/back is where the lettered arrows are; the straightlines in the figure are for axis reference only. by Complexbehavioris captured movementin and aroundthe folded area, which is characterizedas one of the following five types (Thom 1975;Zeeman 1976, 1977). Divergence. Looking at points F and G in Figure 1, we see that as the value of Y increases positively from the origin, small initial differences in the value of X can result in totally differentbehavior. In short, small differencesin starting positioncan resultin vastly differentand opposite ending positions. For example, marketersare familiar with situationsin which slight differences or errorsin productpositioning can make one product successful and anothera failure. Catastrophe. Sudden, discontinuous shifts can occur along the dependentvariable dimension. If the X and Y values are such that the edge of the fold is crossed, there is a sudden shift to the opposite surface, which implies a sudden change in behavior. In marketingterms, this shift is like a consumer's emotional response changing from positive to negative affect and vice versa without going through the intermediate positions. A more dramaticexample is how quickly consumer attitudes toward Tylenol changed when the packagetampering occurreda few years ago. The vertical shift up from C to D and down from D back to E exemplifies this behavior. Hysteresis. Once a sudden shift occurs, a return to the former sheet will not occur even if the independent variablevalues returnto the levels they were when the shift was made. There is a lag or hysteresis (inertia)in the process, which tends to keep behavior at its currentlevel. For example, when a brandloyal customer for a high involvement product switches to anotherbrandbecause of dissatisfactionwith the first brand's performanceor service, the customer is not likely to be easily switched back. Points C, D, and E demonstratethis effect in Figures 1 and 2. Bimodality. Within the area of the fold delimited by the cusp in Figure 1, the dependent variable can take one of two different possible values for a given set of independent variables. The reason is that the currentbehaviorof the system is dependenton recent past behavior,just as service adjustmentsprovided to an unhappycustomermay not reduceunhappiness, and the same adjustmentsmade to a happy customer may not reduce happiness. Inaccessibility. The middleconnectingsheet shown

2 FIGURE Movement at High Transaction Cost Levels

Purchase Behavior

Dissotisfied

OK

Satisfied

as the darkenedarea in Figure 1 is inaccessible and representsthe area of least likely behavior. In practical terms, and anticipating our application somewhat, the implication is that customers with high transaction costs are most likely to be eithervery brand or brand avoiders and least likely to be brand loyal neutral. This behavior commonly occurs when there is high customer involvement with the product. We now show how this model can be used to relate cost involvement and satisfactioneffects on loyalty. In Figure 1, we have characterizedtransaction costs in catastrophetheory terms as the Y variableso that the scale runs from low to high, back to front. In some respects, these costs act as a moderatoron the influence of satisfaction. Under low cost involvelevment, majorswings in satisfaction/dissatisfaction els result in only modest changes in neutrallevels of loyalty, if any at all. However, at extreme involvement when costs are high (psychological or monetary), loyalty levels are resistantto change, even under fairly wide shifts in satisfaction. In contrast to movement of the Y variable, changes in the satisfaction/dissatisfaction variableX will affect loyalty differentially depending on the level of cost involvement.

Model Dynamics
We now discuss changes in the loyalty response as a result of the moderatingeffect of transactioncosts on satisfaction influences. Cases of low, moderate, and high transactioncosts are elaboratedseparately.

Model 87 / Catastrophe

When customer-transactioncosts are low, the range of customer behavior is relatively constrained. That is, customers tend to be brand neutral or express a low level of brand loyalty or brand avoidance. This situation is reflected in Figure 1 by movement between A and B in the low transaction cost region. The vertical distance represents the range in behavior in relation to the level of satisfaction or dissatisfaction for this level of costs. Also, to the degree that loyalty or avoidance is present, it tends to be related directly to the level of satisfaction or dissatisfaction experienced by the customer. In short, products/services with these characteristics have relatively little importance to the customer beyond their specific function. This situation is reflected by the fact that switching may occur frequently because of deals, variety seeking, and other extraneous factors. Note that changes in satisfaction levels are translated relatively directly to differences in loyalty, but at a slow rate and within modest levels of conviction. Thus, if an uninvolved customer were to become more dissatisfied with service performance over time (i.e., less satisfied with each repeat purchase), a fairly large increase in dissatisfaction would be necessary to move the customer from moderate loyalty to moderate avoidance; the reverse is also true. Travel between points A and B in Figure 1 reflects this situation. As customer-transaction costs become moderate, customer responses become more wide-ranging. Here consumers are less likely to be brand neutral over a wide range of satisfaction/dissatisfaction levels. Hence, customers may exhibit higher levels of loyalty or avoidance than they would at the same levels of satisfaction or dissatisfaction when transaction costs are low. Because more effort has been invested in the acquisition and/or redress process, greater emotional investment (positive and negative) is associated with the transaction. Note that small changes in satisfaction levels can result in fairly substantial changes in loyalty increments. The transitions in loyalty, however, are smooth. There is no discontinuous shift from brand loyalty to brand avoidance as satisfaction moves toward dissatisfaction. Thus, if customers are neither satisfied nor dissatisfied, brand neutrality may result. If costs increase beyond moderate levels, the behavioral response moves out to C, D, E, and beyond and becomes bimodal, as represented by the fold in Figure 1 and shown in cross-section in Figure 2. This response means that customers will be either brand loyal or avoid the brand and will not be brand neutral-even if their satisfaction level is moderate. If transaction costs are sufficiently high, customers tend to resist change until satisfaction levels take on an opposite extreme value. Hence, a loyal (disloyal) consumer remains loyal (disloyal) even under

moderate dissatisfaction (satisfaction). However, extreme dissatisfaction of a previously brand loyal consumer will cause brand switching, and delight over a "commodity-type" brand may cause loyalty. Furthermore, satisfaction or dissatisfaction thresholds emerge, which demarcate the switching points from loyalty to avoidance and vice versa. Consider a situation in which a customer with high transaction costs is dissatisfied (point C in Figures 1 and 2). Because costs are high, neutrality will not occur and much effort will be necessary on the part of the vendor to move the customer from brand avoidance to brand loyalty. In fact, this change will occur only after the customer has become completely satisfied (a difficult task under an avoidance predisposition) and his or her behavior switches to position D in Figures 1 and 2. At the same time, a brand loyal customer will not avoid the brand until he or she reaches the point of complete dissatisfaction, at which time there will be a sudden shift to brand avoidance. This response is shown in Figures 1 and 2 by the movement from D to E. For vendors, it means loyal customers will endure some amount of displeasure before switching. To this point in the discussion, we have assumed that different transactions (purchases) have different costs. It is also possible to use the model for a single purchase occasion with multiple vendor interactions, as for products that require warranty repairs or userelated help (e.g., software support) or for cases in which recontact is not usual, but becomes necessary. For example, if a carpet cleaning service fails to remove a stain and is required to reclean the carpet, but in doing so is late for the appointment, the transaction cost to the consumer escalates. Even if the level of dissatisfaction has not changed, the purchaser may have gone from brand neutrality to brand avoidance because the transaction costs have escalated. If, however, the customer is more than satisfied with the return visit (e.g., the cleaning service not only rectifies the problem, but compensates the customer for the inconvenience), increased brand loyalty can be generated even as transaction costs increase. The situation is shown by following points F and G in Figure 1. Point F represents the deteriorating situation and point G represents the positive situation. In the next two sections we provide a real-world illustration of this approach. Given that the data are cross-sectional and not longitudinal, the main result of the following estimation is a service loyalty response surface. The chief diagnostic value contained in this example consists of estimation of the derived impact coefficients. That is, the surface will not yield process information about customer behavior as would longitudinal data. Keep in mind that applications of this technique to individual situations necessitate a

88 / Journalof Marketing, July 1992

measurement program. Though we use available data, other researchers may want to construct companyspecific measures or use measures with known psychometric properties. A large amount of work has been done in the area of consumer satisfaction and suggestions for methods (Oliver 1981) and scales (e.g., Oliver and Westbrook 1982; Westbrook and Oliver 1981) have been elaborated. We use a transaction-cost proxy for the involvement construct, but both general and specific involvement scales are available, including those of Laurent and Kapferer (1985), Mittal (1989), and Zaichkowsky (1985). Finally, measures of true psychological loyalty have not yet been developed. Researchers have used repeat purchasing patterns and behavioral intention items as proxy measures. Elrod (1988) has proposed a scanner data approach and Morris and Holman (1988) discuss an indicator-based model. Historical purchase patterns available to individual firms may yield adequate data in specific applications.

sidual sum of squares. This iteration process continues until no further improvement occurs or the residuals equal zero. Because of the discontinuous nature of the surface, the specific research method used does not require that the objective function be differentiable or the variables continuous (Oliva et al. 1987). For a more technical example, see Oliva (1991). Data and Sample General Electric Supply conducts an ongoing, largescale, nationwide industrial survey of service quality among its customers. We were given a randomly selected subsample of 137 observations taken from the survey. Of that number, 89 had no missing data on the measures used in our study. The use of commercial data collected under the auspices of General Electric mitigates certain validity issues that arise when students or other convenient sampling populations are used. General Electric Supply is a very good case for examining service strategies because it is a purely distribution operation, and hence a "pure" service business. It stocks a vast array of GE and other companies' products and sells multi-item orders to customers that buy highly varied mixes of different items from General Electric Supply's inventory. Hence, the survey respondents are responding purely in terms of the service provided by General Electric Supply, and there is little chance that they are responding in terms of product characteristics. However, because we lacked input to the questionnaire development process, the specificity and nature of the measures are not as precise as we might have desired. We believe nonetheless that the insight gained from an actual application significantly outweighs the limitations. Data were collected through a mail questionnaire. We were given access to a section of 31 statements describing the quality of service customers received from General Electric Supply. Respondents were requested to rate their level of agreement with each statement on a scale ranging from strongly disagree (1) to strongly agree (5). The statements covered the following service categories: (a) personnel, (b) quotations, (c) ordering, (d) delivery, (e) post-order service, (f) disputes and returns, and (g) overall evaluation. These subcategories were used as surrogate measures of the independent and dependent variables as follows. Subsections (a) through (e) represent indicators of the satisfaction/dissatisfaction latent variable. The justification is that they directly tap service performance and indirectly reflect expectancy disconfirmation. Subsection (f) is a fairly direct measure of customer-transaction costs and subsection (g) gives us a proxy measure of loyalty to General Electric Supply. Because responses within subsections were expected to be correlated, factor analysis was used to select the best statement from subsections (a) through

Method
Currently, two different approaches are considered the most appropriate for estimating catastrophe models (Alexander, DeShon, and Hanges 1992). One is by Cobb (1978) and the other, called GEMCAT, was developed by Oliva et al. (1987). The two methods are different, having advantages and disadvantages (see Alexander, DeShon, and Hanges 1992). Cobb's procedure is classified as an "exploratory statistical method" in which researchers cannot indicate a priori which measured variables relate to which independent variable (Alexander, DeShon, and Hanges 1992). GEMCAT, in contrast, is a "confirmatory, multivariate analytical procedure" (Alexander, DeShon, and Hanges 1992). Researchers can specify a priori which variables will load onto the X and Y variables. In the illustration developed here, our purpose is confirmatory so the GEMCAT method is the appropriate choice (Alexander, DeShon, and Hanges 1992).3 Conceptually, the estimation method is akin to various multidimensional scaling techniques found in marketing. Basically, a linear combination of latent variables is developed by randomly estimating a weight (importance) for each indicator to represent its contribution or impact on its respective construct. The resulting estimated latent variable scores are used to solve the equation in footnote 3. Results differing from zero are squared and summed. Because the equation should equal zero for each latent triple, the squared results represent squared residuals similar to those found in a regression analysis. Next the weights are randomly changed to see whether the new set reduces the re3The computer program used was an APL version of GEMCAT developed by Wayne S. DeSarbo, Graduate School of Business, University of Michigan.

Model/ 89 Catastrophe

(e) and (g), and the four best statements from (f). Finally, because the data are cross-sectional rather than longitudinal, the obtained loyalty response surface reflects the impact of different service components rather than a diagnosis of specific service encounters with individual customers. Items and their respective descriptive statistics are listed in the Appendix.

Analysis and Results

Before the GEMCAT procedure was performed, we preprocessed the data. Specifically, the satisfaction and brand loyalty measures were mean-centered (rescaled so the midpoint was at zero) for easier interpretability of the derived latent variables. As a result, positive and negative scores can be interpreted as relative satisfaction (loyalty) and dissatisfaction (disloyalty), respectively. The transaction-cost scores were not modified in this way; rather, they were reversed-scaled so that a "strongly agree" response would be interpreted as one of low transaction costs. and Comparison With Regression After preprocessing, we subjected the data to the GEMCAT procedure, which generated the following latent variable impact coefficients on the dependent variable, loyalty. Satisfaction Dimensions Personnel Quotations Ordering Post-order Transaction Cost Dimensions Quickhandling
Equitable handling Easy returns Prompt crediting Delivery

TABLE 1 OLS Regressions on Loyalty (n = 89) Standardized Coefficients Model Model Model 1 2 3 Independent Variables Satisfaction Indicators Personnel (PER) .033 .013 Quotations (QUO) .276b .287b .134 .128 Ordering (ORD) .145 .121 Delivery (DEL)
Post-order (PO)
.295b

.273a

Transaction-Cost Indicators Quick handling (PDR1) Equitable handling (PDR2) Easy returns (PDR3) Prompt crediting (PDR4)
Adj. R2

.384c

.011 .142 .215 .107

.134c

-.103 .027 .058 .108

.363c

bSignificantat .01 level. TF-testbased on R2significant at .01 level.

at "Significant .05 level.

Estimation

1.000
.542
.112

.375 .009 .065 2.574

.177

.245

Three regressions were run as a basis for comparison; the results are reported in Table 1. Our prior expectation was that regression of the dependent variable on the X-measures (model 1: right/left in Figure 1) should result in a much better R2 than a similar regression run on the Y-measures (model 2: front/back in Figure 1). If the data are on the back portion of the surface, regression analysis would be a sufficient estimation device because the surface is single valued and relatively flat. It is only when data have the five characteristics described previously that a fold is suspected and catastrophe estimation is needed. As stated before, this approach does not replace the more common linear estimation techniques; rather, it extends them when the data contain nonlinearities. Regression models 1 and 2 in Table 1 conform to our expectation. Regression 1 has an adjusted R2 of .384, whereas regression 2 has an adjusted R2 of .134. Furthermore, to the degree that these regressions are

tapping different dimensions in the data, we might expect that combining them would not necessarily produce significantly better results, and could produce poorer results. Regression model 3 in Table 1 conforms to this expectation. The adjusted R2 for regressing the dependent variable against all the independent measures is .363 or a drop of 2.1% in adjusted variance explained in comparison with model 1. Regression 3 also provides a means of testing our catastrophe theory estimation against the straight linear assumption. Specifically, if we compare the residuals from the catastrophe estimation with the residuals from the regression analysis, and the catastrophe residuals are lower, the catastrophe model is a better fit. It is also the case that the estimated R2 is no worse than the R2 given by the regression.4 To compare the residuals, both the regression and catastrophe residuals were standardized. The resulting residuals follow. Standardized regressionresiduals
Standardized catastrophe residuals 71.961

65.688

The catastrophe residuals are approximately 8.7% lower. Because the adjusted R2 for the regression is .363, we argue that this is the lower bound on vari4Calculation of the regression residuals is performed in the standard way by taking the difference between actual and predicted values of the dependent variable. This is not the case for the calculation of catastrophe theory residuals. In catastrophe theory modeling, the difference between the actual dependent variable values and the dependent latent variable values is a linear constant. Hence, actual and predicted values can be matched perfectly, yet the model fit may not be perfect. The reason is that model fit is determined by the solution to equation 1; that is, each latent variable triple should cause Z3 ZY - X to equal zero. Catastrophe residuals therefore are the deviations from zero for the set of latent variable triples in the defining equation.

90 / Journalof Marketing, July 1992

ance explained and that the catastrophemodel fit exceeds this performancelevel. The reported GEMCAT-estimatedimpact coeffimeasuresshow wide cients for each of the independent variation. Because the original scaling was the same for each of these measures, the within-categoryimpacts are directly comparable. For example, we see that sales personnelknowledge is roughlytwice as importantas promptlydeliveredservice quotations(1.000 are to .542). Similarly,promptquotations roughly 1.44 times as importantas undamagedmaterials (.542 to .375). Though it may seem unusualfor company personnel knowledge and quotationsto have greaterimpact than the arrival of undamaged materials, that if finding is understandable the delivery of damaged material is a low probabilityevent. Notice also that prompt notification in the delivery schedule has virvariable(i.e., tually no impacton the latentsatisfaction If changes in delivery schedules are rare, this .009). dimension is unimportant.Thus, for this set of customers, General Electric Supply should focus on salesforce knowledge, prompt delivery, and undamaged materials.If a situationarises in which costs are an issue and tradeoffs on service become necessary, the company will have some guidelines with this set of industrialcustomers. costs, we see that Turningto customer-transaction one measuremattersfor customerswhen a probonly lem arises-equitable treatment (handling, PDR2) dominates the other measures (2.574 vs. .065, .177, and .254). The fact that this is an industrialsituation may explain why this measure dominates both speed and ease of redress.Thoughthe weightsmight be more balancedthan in consumerpurchasing(cf. Oliver and Swan 1989), the situation hereis straightforward. When all effort must go into ensuring that problems arise, customersfeel an equitablesolution has been reached. This finding suggests that policies that manage expectations during disputes, adequately allow customers to state their side of the issue, and arrive at a jointly agreed-uponsolution will be among the more successful.

provide a frameworkfor helping to think throughthe answer to this question. We take the position that any enhancementof service is in fact a form of investment, from which the marketingstrategistshould expect a positive return(or be able to demonstratethat failure to make the offering would result in financial losses from business lost to the competition). To make an informedinvestment decision, it is crucial to identify which facets of service manifest nonlinearrelationsbetween satisfaction and loyalty, which do not, where the firm is competitively vulnerablein terms of service, where it has competitive advantagein service, and what moves it can make to sustain an advantageor to create one that can be sustainedlong enough to recoupthe investment in it. Hence, on the basis of the catastrophetheory analysis and consistent with Coyne's discussion, we recommend the following approach to the development of a service strategy. Identify All Service Encounters howeverbrief, betweenthe firm and Every interaction, the customer is a service encounter-an opportunity to distinguish the firm from its competitorsby providing some facet of superiorservice. The greaterthe transactioncost of the customer in this service encounter, the more likely it is that the relationbetween satisfaction with service and repurchase loyalty is nonlinear. All encounters therefore should be identified, from initial encounters such as sales calls and customer enquiries, to product returns, to the final consumptionof the productby the customer. An extremeexample of a firm workinghardto reducetransaction costs of customers in nonobvious places is the current effort underway by an engineered plastics manufacturerto help customers who purchase their products.They are developingways to recyclethe large amountsof nonbiodegradable plasticsthatpersistwhen the product made from the plastic is scrapped. With increasing landfill site problems, biodegradabilityis becoming a crucial determiningfactor in the choice between the use of plastics and environmentally sound alternativessuch as wood or metal. Measure the Impact of Service Satisfaction on Repurchase Loyalty Having identified and documentedall service encounters, the firm must establish what the relation is between customer satisfaction and purchase loyalty on all the major dimensions of service. A catastrophe theory analysis can help to identify service offerings thathave nonlinear relations-as we have argued,these are offerings that renderthe firm particularlyvulnerable if they underperform particularly and powerful if they overperformthe competitors.In this context it is

Implications for Service Strategy

Moving from the more tactical issues discussed in the illustrationto more strategic issues pertainingto service strategy in general, our research indicates that, depending on transactioncosts, the relation between customer satisfactionand loyalty can be nonlinear, at least for some facets of service. This finding has importantimplicationsfor service strategyand decisions on how to deploy a limited budget across different opportunitiesto enhance service, given that competitors are making similar decisions. The question is: Where do we place our chips to enhance service? We

91 Model/ Catastrophe

importantto design surveys that transcendthe usual customer satisfaction surveys in two ways. First, make sure a useful dependentvariableis included in the survey. By "useful"we mean a variable that enables us to identify the key independentvariables that drive purchasingbehavior. Many surveys, like the one in our study, simply ask the respondents for their overall satisfaction. A more powerful variable, which is being contemplatedfor the next survey, is the percentageof business customers are giving to the survey company as opposed to competitors. This variable will enable us to pinpoint the key linear and nonlinearindependentvariablesthat most explain the percentageof business being secured or lost. Second, make sure the independentvariablesmeasure performanceof the firm in relation to competitors. It is better to ask how the firm performsagainst key competitorson a dimensionof service than to ask for simple satisfactionscores. Once again, this information enables us to focus more precisely on the few key variables that matter in securing the customer's business. Identify Key Service Strategy Variables A catastrophetheory analysis will identify key nonlinear variables where significant increases in repurchase loyalty can be gained through small increases in satisfaction. The objective now is to scan the list of key variables and find three types:
the competitors, * variables from which major increases in loyalty can be gained for relatively small investments, and * increases in service that can be made by drawing on assets of the firm that are relatively inappropriableby competitors.

chase loyalty but the firm has not yet lost customers as a result of hysteresis. Invest defensively here to regain this lost ground. Select Offensive Service Investments Once the defensive investmentshave been made, remaining resources can be allocated to offensive investments. Here there are choices: whether to boost the currentloyalty of present customers or to try to invest in services that will gain new customers. Once again, the catastrophetheory analysis, coupled with estimatesof the investmentsrequiredto secure the desired level of loyalty, can be used to decide on the few key areaswherethe minimuminvestment have will the greatest impact. Be Wary of Strategies That Claim to Gain New Customers In considering service moves to gain new customers, the firm must challenge how customers who are not yet benefiting from current service or interactingin any way with the firm will be made aware and convinced of the firm's new service offerings. A particularcase of gaining customers is the regaining of customers who were lost because of poor service performancein the past. For facets of service that have nonlinearrelationsbetween satisfactionand loyalty, an enormousinvestmentis necessaryto overcome the hysteresiseffect thatresultedin brandavoidance. This group of customers is particularlychallenging and will need enormousconvincing if they are to returnto the firm, as evidenced by the continued disillusionmentof the automobile-buying public with Americanautomobiles. Any service strategyclaiming that disgruntledformer customers can be recaptured warrantsintense suspicion. The firm should demand very convincing evidence of how such a strategy is going to work. Identify Trends in Satisfaction-Loyalty Relations The firm should also be alert to the fact that the playing field is constantly changing and that as competitors match each other's service capabilities, new facets of service become important.An example is the recent increase of business class passenger dissatisfaction with the luggage handling in and out of airports now that most airlines have done a reasonable job of reducing departuredelays. In addition, extraneous environmentalfactors intervene to make new facets of service important.An example in the airlineindustryis a significantincrease in concern with personal safety, particularly interon national trips.

* variableson which the firm is underperforming against

in a position to start making strategic service decisions. An example is the increasinguse by American Airlines of their SABRE reservation system to enhance service offerings to business class passengers. The SABRE system currentlyhandles more than 40% of all reservations, even those of other airlines, so American can make offerings that competitors find difficult to match. Thus, catastrophetheory analysis data help provide the basis for forging an informed investment strategy in enhancing service. Identify and Overcome Key Vulnerabilities The first place to invest to enhance service is in offerings that are underperforming competitors, when catastrophe theory analysis has indicated that customers really count the service as importantfor pur-

also materially affect the amount of business the customer is prepared to give in exchange, the firm is now

Having identified the key variables that distinguish a firm's service from that of its competitorsand which

92 / Journal Marketing, 1992 of July

Monitor Competition

Finally, the firm must constantlymonitorcompetitive moves in the service arena,particularly dimensions on of service that are nonlinear and in which the competitors can gain an advantage over the firm by aggressive, proactiveenhancementsof service offerings that are emerging as nonlinear.

sider catastrophe theory and other nonlinear techniques, especially when standard approaches do not adequately capture the underlying dynamic.

Latent VariableIndicatorMeasures and Descriptive Statistics

Mean Scale/Item Satisfaction/Dissatisfaction 1. Personnel are knowledgeable about the products they sell (PER) 4.28 2. Quotations are submitted to me 4.11 promptly (QUO) 3. Changes in part numbers are communicated to me prior to 3.48 shipment (ORD) 4. Delivered materials arrive undam3.99 aged (DEL) 5. GE Supply promptly notifies me of any change in delivery schedules (PO) 3.27 Customer-Transaction Costs 1. GE Supply quickly handles my 3.74 billing disputes/claims (PDR1) 2. GE Supply is equitable in handling my billing disputes/claims 4.05 (PDR2) 3. The procedure for returning material is easy (PDR3) 3.76 4. GE Supply promptlycredits me for returned merchandise (PDR4) 3.72 Brand Loyalty 1. GE Supply does a better job than my other suppliers in meeting my electrical supply needs (BL) 3.27 S.D. .95 1.03 1.33 .95 1.28 1.23 1.04 1.20 1.24

Appendix

Concluding Statement
We present a formal methodology for modeling the costs, satrelationships among customer-transaction and purchaseloyalty for the purpose of deisfaction, veloping more effective service strategies. The response surface proposed is the first step in helping managersand researchersto understandhow various customer dynamics relate to service offerings. This step, in turn, can lead to fairly detailed "whatif" analyses for firm-specific models. In addition, the model anchors Coyne's (1989) practitioner-basedobservations, particularlyin the way it handles nonlinearity and differential satisfaction/dissatisfaction thresholds. Beyond this context,catastrophe models may help researchersin other areasthat involve charmarketing acteristics of both incremental and radical changes, particularlyif lags in behavior are present. For example, complaining behavior and the related area of satisfaction, TV viewer commercial-clutterthresholds, marketingstrategy,and consumerperceptionsof productattributesall have elements that suggest they might be fruitfully examined in a catastrophetheory framework. We encourage other researchersto con-

1.34

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