Reports

Consequences of Customer Engagement: How Customer Engagement Alters the Effects of Habit-, Dependence-, and Relationship-Based Intrinsic Loyalty

Conor M. Henderson, Lena Steinhoff, and Robert W. Palmatier, 2014, 14-121

Existing customers are commonly considered a relatively secure source of revenue and thus taken for granted. Yet complacency can result in missed opportunities to expand the business or, in the worst case, customer defection. Customer engagement—sellers’ initiatives to occupy the attention of an existing customer by providing special benefits and experiences that go beyond the core offering—is often promoted as a proactive solution to revive and deepen business with complacent customers.

While customer engagement initiatives are potent, these firm-initiated stimulants to ongoing exchanges have potentially conflicting consequences for customer performance. In this study, Conor Henderson, Lena Steinhoff, and Robert Palmatier investigate the performance ramifications of customer engagement by identifying how these initiatives interact with customer loyalty mechanisms that already operate in the background, underlying ongoing business exchanges.

They use a longitudinal field experiment with a service provider to understand how customer engagement alters, rather than simply augments, an existing customer–company bond, characterized by three intrinsic loyalty mechanisms (habit, dependence, and relationship). The results show customer engagement can have opposing performance implications for customers’ likelihood of expansion and defection, related to both habits and relationships.

The results also provide greater insight into the power of each source of intrinsic loyalty. For instance, the loyalty benefits of relationship and dependence appear to be latent and become activated by external stimuli, such as an engagement initiative. Alternatively, habit’s power is in its inertia, which is disrupted by external stimuli such as an engagement initiative.

These findings offer insights to managers to identify prototypical customer loyalty profiles for which engagement helps, hurts, or has mixed performance effects. The authors identify four unique groups of customers, on the basis of their intrinsic loyalty profiles, then use a spotlight analysis for each group to determine the local effects of engagement.

For example, “loyalists” are characterized as the most appropriate target of customer engagement as there are benefits with no offsetting penalty (5.1% reduction in defection with no significant effect on expansion). Customer engagement initiatives signal the seller still cares, and thus activate latent dependence and relationship mechanisms.

“Sleeping dogs” describe customers who are mainly bound by habit; awakening them with engagement initiatives can cause them to either play (expansion increases by 1.9%) or bite (defection increases by 3.3%). Firms might need to wait for them to become “leashed” by higher levels of dependence and relationship, which suppresses their defection likelihood, before attempting to engage them.

If managers can determine the intrinsic loyalty profile of their existing customers, they can design, test, and target customer engagement strategies with maximal effectiveness.

Conor M. Henderson is Assistant Professor of Marketing, Lundquist College of Business, University of Oregon. Lena Steinhoff is Assistant Professor of Marketing, Faculty of Business Administration and Economics, University of Paderborn, Germany. Robert W. Palmatier is John C. Narver Endowed Chair in Business Administration and Professor of Marketing, Michael G. Foster School of Business, University of Washington.

Acknowledgments
The authors acknowledge helpful feedback from the MSI Review Committee, Kevin Steensma, Shailendra Jain, Joshua Beck, Ju-Yeon Lee, and Hari Sridhar on a previous draft of this article.

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