The Causal Effect of Service Satisfaction on Customer Loyalty

Guofang Huang, Purdue University, and K. Sudhir, Yale University, 2019, 19-122-07

Service satisfaction is considered a forward-looking metric of a firm’s customer base, and firms routinely conduct surveys of customer to evaluate their service encounters.

However, determining whether increasing service level satisfaction leads to improved customer retention and financial results has been difficult, because the estimated relationship between customer satisfaction and loyalty is subject to common methods bias and measurement error.

Here, Guofang Huang and K. Sudhir exploit a typically common source of randomization in the assignment of service employees to customers in service encounters. Their instrumental variables approach addresses key challenges in estimating causal effects: (1) common methods bias arising from the joint measurement of service satisfaction and loyalty intent in the same survey; (2) attenuation bias due to measurement error in service satisfaction due to heterogeneity in customer expectations, omitted variables, and response styles for the same objective level of service.  

They apply their IV approach to estimate the impact of service quality using the service encounter survey data from a large credit card issuer.


Contrary to the typical concern about upward bias in the relationship between service satisfaction and survey-based metrics of loyalty due to common methods bias, the authors find that downward attenuation bias caused by the measurement error in service satisfaction is more consequential.

This downward bias leads to significant underestimation of the gains in lifetime value from improving service satisfaction, and can lead to under-investment in both overall service satisfaction and/or targeted premium customer service.

The authors’ instrumental variables approach can be applied with no incremental cost even using routine within-firm repeated cross-sectional survey data collected by firms.

Guofang Huang is Assistant Professor, Krannert School of Management, Purdue University. K. Sudhir is Professor, Yale School of Management.


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