Pre- and Post-Purchase Management of Customer Satisfaction

Recently, and especially in expanding markets, firms put an extraordinary emphasis on customer satisfaction, sometimes treating it as a superior measure of a company performance to current earnings. While customer satisfaction increases future profits through the effect of positive consumer feedback on future demand, customer satisfaction efforts have a shortterm cost. Therefore, a question arises as to what level of customer satisfaction is optimal for the firm when the costs of customer satisfaction are accounted for. This paper explores two strategies in customer satisfaction: pre-purchase management of customer satisfaction through providing a higher expected value for money (i.e., lower price) to the potential customers, and the post-purchase management through providing extra services and/or gifts (not promised at the time of the purchase) after the purchase to the existing customers – and shows that if post-purchase management is not feasible a forward-looking firm should decrease its first-period price if and only if the price history is not observed by later consumers. If postpurchase management is feasible, the firm should use it if the market is growing fast enough. Furthermore, if the market is growing slowly, the firm should both reduce the first-period price and provide extra services and/or gifts after the purchase, while if the market is growing fast, the effect on the price may reverse: the firm may find it optimal to charge higher price in the first period, shifting all its customer satisfaction efforts to the post-purchase management. Additionally, the paper shows that the optimal efforts in customer satisfaction should be higher when the idiosyncratic part of the consumer uncertainty is larger.