Abstract
Consumer complaints affect company market value and common sense suggests that a negative impact is expected. However, do complaints always negatively impact company market value? We hypothesize in this study that complaints may have a non-linear effect on market value. Positive (e.g. avoiding high costs to solve complaints) and negative (e.g. speedy and intense diffusion) tradeoffs may occur given the level of complaints. To test our non-linear hypothesis, a panel data was collected from cell phone service providers from 2005 to 2013. The results supported our tradeoff rationale. Low levels of complaints allow for companies to increase market value, while high levels of complaints cause increasing harm to market value. The sample, model and period considered in this study, indicates a level of 0.49 complaints per thousand consumers as the threshold for a shift in tradeoffs. The effects on market value become increasingly negative when trying to make reductions to move below this level, due to negative tradeoffs.
consumer complaints; negative word of mouth; satisfaction; company market value; communication
Introduction
Managers have closely monitored consumer complaints to further develop marketing
programs and manage customer dissatisfaction. Previous studies showed that
dissatisfaction may result in negative word of mouth, for instance by people warning
friends (Matos & Rossi, 2008Matos, C. A. de, & Rossi, C. A. V. (2008). Word-of-mouth
communications in marketing: a meta-analytic review of the antecedents and
moderators. Journal of the Academy of Marketing Science,
36(4), 578-596.; Singh & Wilkes, 1996Singh, J., & Wilkes, R. E. (1996). When consumers complain: a
path analysis of the key antecedents of consumer complaint response estimates.
Journal of the Academy of Marketing Science,
24(4), 350-365.; Trusov, Bucklin, & Pauwels, 2009Trusov, M., Bucklin, R. E., & Pauwels, K. (2009). Effects of
word-of-mouth versus traditional marketing: findings from an internet social
networking site. Journal of Marketing,
73(5), 90-102. doi: 10.1509/jmkg.73.5.90
https://doi.org/10.1509/jmkg.73.5.90...
), or may result in
complaints to private or public agencies (Singh,
1988Singh, J. (1988). Consumer complaint intentions and behavior:
definitional and taxonomical issues. Journal of Marketing,
52(1), 93-107.). Consumers play a critical role in spreading brand value and
affecting the efficiency of marketing programs (Kozinets, Valck, Wojnick, & Wilner, 2010Kozinets, R. V., Valck, K. de, Wojnick, A. C., & Wilner, S. J.
S. (2010). Networked narratives: understanding word-of-mouth marketing in online
communities. Journal of Marketing,
74(2), 71-89. doi: 10.1509/jmkg.74.2.71
https://doi.org/10.1509/jmkg.74.2.71...
). Consumers have also
gained control over a wide variety of media available to them, including posting
opinions online and having the option to block unsolicited marketing (De Bruyn & Lilien, 2008De Bruyn, A., & Lilien, G. L. (2008). A multi-stage model of
word-of-mouth influence through viral marketing. International Journal of
Research in Marketing, 25(3), 151-163. doi:
10.1016/j.ijresmar.2008.03.004
https://doi.org/10.1016/j.ijresmar.2008....
).
In some public service industries, regulatory agencies keep public records of
complaints and assess companies’ performance on the basis of consumer complaint
levels. Public records of complaints also affect market perception about a company
and help disseminate failure of products and services by simply describing stories
of negative experiences (Luo, 2009Luo, X. (2009). Quantifying the long-term impact of negative word of
mouth on cash flows and stock prices. Marketing Science, 28(1),
148-165. doi: 10.1287/mksc.1080.0389
https://doi.org/10.1287/mksc.1080.0389...
; Winchester, Romaniuk, & Bogomolova, 2008Winchester, M., Romaniuk, J., & Bogomolova, S. (2008). Positive
and negative brand beliefs and brand defection/uptake. European Journal
of Marketing,
42(5/6), 553-570. doi:
10.1108/03090560810862507
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).
Very often in a complaining context, the informant is not necessarily an opinion
leader with his/her reputation at stake (Weimann,
1991Weimann, G. (1991). The influentials: back to the concept of opinion
leaders? Public Opinions Quarterly,
55(2), 267-279. doi: 10.1086/269257
https://doi.org/10.1086/269257...
). Rather, emotions are evident and the story of the informant deeply
touches listeners (Richins, 1983Richins, M. L. (1983). Negative word-of-mouth by dissatisfied
consumers: a pilot study. Journal of Marketing,
47(1), 68-78.) in such a
way that evoke a good and evil battle or a perception of a seriously harmed victim
(Laer & Ruyter, 2012Laer, T. van, & Ruyter, K. de (2012). In stories we trust: how
narrative apologies provide cover for competitive vulnerability after
integrity-violating blog posts. International Journal of Research in
Marketing,
27(2), 164–174. doi:
10.1016/j.ijresmar.2009.12.010
https://doi.org/10.1016/j.ijresmar.2009....
). The company
then becomes vulnerable to the level of complaint that influences the company market
value in a direct linear fashion (Luo, 2007Luo, X. (2007). Consumer negative voice and firm- idiosyncratic
stock returns. Journal of Marketing, 71(3), 75–88. doi:
10.1509/jmkg.71.3.75
https://doi.org/10.1509/jmkg.71.3.75...
,
2009Luo, X. (2009). Quantifying the long-term impact of negative word of
mouth on cash flows and stock prices. Marketing Science, 28(1),
148-165. doi: 10.1287/mksc.1080.0389
https://doi.org/10.1287/mksc.1080.0389...
) or in a novel, non-linear way.
We hypothesize in this study that complaints may have a non-linear effect on company market value. The hypothesis deals with a company’s ambition to defeat consumer complaint at any cost. We actually expect positive and negative tradeoffs between complaint and performance, suggesting that a company may have market value increased with low levels of complaints. Once a certain level of complaint is displayed, further increase in complaints will sharply reduce company market value. We argue that positive tradeoffs (i.e. market value increase under increasing complaint levels) create conditions for companies to avoid image decay and save costs by not attending to over-demanding consumers and costly problem-solving issues. We also argue that negative tradeoffs (i.e. market value decrease under increasing levels of complaints) destroy corporate and brand reputation as well as increase the speed and intensity of bad evaluation diffusion.
Previous studies looked deeply into the behavior and antecedents of complaints (Richins, 1983Richins, M. L. (1983). Negative word-of-mouth by dissatisfied
consumers: a pilot study. Journal of Marketing,
47(1), 68-78.; Singh & Wilkes, 1996Singh, J., & Wilkes, R. E. (1996). When consumers complain: a
path analysis of the key antecedents of consumer complaint response estimates.
Journal of the Academy of Marketing Science,
24(4), 350-365.), and the direct linear effect on company
market value (Chevalier & Mayzlin, 2006Chevalier, J. A., & Mayzlin, D. (2006). The effect of word of
mouth on sales: online book reviews. Journal of Marketing Research,
43(3), 345–354. doi: 10.1509/jmkr.43.3.345
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;
Goldenberg, Libai, Moldovan, & Muller,
2007Goldenberg, J., Libai, B., Moldovan, S., & Muller, E. (2007).
The NPV of bad news. International Journal of Research in
Marketing,
24(3), 186–200. doi:
10.1016/j.ijresmar.2007.02.003
https://doi.org/10.1016/j.ijresmar.2007....
; Mittal, Ross, & Baldasare,
1998Mittal, V., Ross, W. T., Jr., & Baldasare, P. M. (1998). The
asymmetric impact of negative and positive attribute-level performance on
overall satisfaction and repurchase intentions. Journal of
Marketing,
62(1), 33-47.; Romani, Grappi, & Dalli, 2012). Beyond these previous
contributions, our paper contributes to the literature by suggesting a non-linear
effect of complaints on a company’s market value. Intuitively, it seems evident that
high levels of complaints are associated with poor financial performance, however,
marketing research has mainly paid attention to the effects on customer experiences,
especially at the customer satisfaction levels (Bernhardt, Donthu, & Kennett, 2000Bernhardt, K. L., Donthu, N., & Kennett, P. A. (2000). A
longitudinal analysis of satisfaction and profitability. Journal of
Business Research,
47(2), 161–171. doi:
10.1016/S0148-2963(98)00042-3
https://doi.org/10.1016/S0148-2963(98)00...
; Fornell, Mithas, Morgeson, & Krishnan, 2006Fornell, C., & Wernerfelt, B. (1988). A model for customer
complaint management. Marketing Science,
7(3), 287-298.; Luo & Homburg, 2008Luo, X., & Homburg, C. (2008). Satisfaction, complaint, and the
stock value gap. Journal of Marketing, 72(4), 29–43. doi:
10.1509/jmkg.72.4.29
https://doi.org/10.1509/jmkg.72.4.29...
). In addition, studies have focused
more on assessing consumer intentions (East,
Hammond, & Lomax, 2008East, R., Hammond, K., & Lomax, W. (2008). Measuring the impact
of positive and negative word of mouth on brand purchase probability.
International Journal of Research in Marketing,
25(3), 215–224. doi:
10.1016/j.ijresmar.2008.04.001
https://doi.org/10.1016/j.ijresmar.2008....
) or employee satisfaction (Bernhardt et al., 2000Bernhardt, K. L., Donthu, N., & Kennett, P. A. (2000). A
longitudinal analysis of satisfaction and profitability. Journal of
Business Research,
47(2), 161–171. doi:
10.1016/S0148-2963(98)00042-3
https://doi.org/10.1016/S0148-2963(98)00...
) and few
have measured companies’ financial performance (see Torres & Tribó, 2011Torres, A., & Tribó, J. A. (2011). Customer satisfaction and
brand equity. Journal of Business Research,
64(10), 1089–1096. for one exception).
There has been a need to establish better metrics to measure how different marketing
strategies affect a company’s market value (Mintz
& Currim, 2013Mintz, O., & Currim, I. S. (2013). What drives managerial use of
marketing and financial metrics and does metric use affect performance of
marketing-mix activities? Journal of Marketing,
77(2), 17-40. doi: 10.1509/jm.11.0463
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; Srinivasan &
Hanssens, 2009Srinivasan, S., & Hanssens, D. M. (2009). Marketing and firm
value: metrics, methods, findings, and future directions. Journal of
Marketing Research, 46(3), 293-312. doi:
10.1509/jmkr.46.3.293
https://doi.org/10.1509/jmkr.46.3.293...
) and a growing trend has arisen where financial indicators
are increasingly being applied to previous studies (Anderson, Fornell, & Mazvancheryl, 2004Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (2004).
Customer satisfaction and shareholder value. Journal of Marketing,
68(4), 172-185. doi: 10.1509/jmkg.68.4.172.42723
https://doi.org/10.1509/jmkg.68.4.172.42...
; Fang, Palmatier, & Steenkamp, 2008Fang, E., Palmatier, R. W., & Steenkamp, J.-B. E. M. (2008).
Effect of service transition strategies on firm value. Journal of
Marketing, 72(5) 1-14. doi: 10.1509/jmkg.72.5.1
https://doi.org/10.1509/jmkg.72.5.1...
; Goldenberg et al., 2007Goldenberg, J., Libai, B., Moldovan, S., & Muller, E. (2007).
The NPV of bad news. International Journal of Research in
Marketing,
24(3), 186–200. doi:
10.1016/j.ijresmar.2007.02.003
https://doi.org/10.1016/j.ijresmar.2007....
; Luo & Homburg, 2008Luo, X., & Homburg, C. (2008). Satisfaction, complaint, and the
stock value gap. Journal of Marketing, 72(4), 29–43. doi:
10.1509/jmkg.72.4.29
https://doi.org/10.1509/jmkg.72.4.29...
; Osinga, Leeflang, Srinivasan, & Wieringa, 2011Osinga, E. C., Leeflang, P. S. H., Srinivasan, S., & Wieringa,
J. E. (2011). Why do firms invest in consumer advertising with limited sales
response? A shareholder perspective. Journal of Marketing,
75(1), 109-124. doi: 10.1509/jmkg.75.1.109
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). Lehman (2004)Lehmann, D. R. (2004). Metrics for making marketing matter.
Journal of Marketing,
68(4), 73–75. doi: 10.1509/jmkg.68.4.73.42727
https://doi.org/10.1509/jmkg.68.4.73.427...
emphasizes that practitioners who
want to be involved in the important decisions their businesses make should seek
consistent links between strategies and financial indicators, in particular, those
related to increasing shareholder value. Studies have used Tobin’s Q Ratio as a
parameter to calculate a company’s market value and as a metric to evaluate the
effectiveness of strategies (e.g.
Fang et al., 2008Fang, E., Palmatier, R. W., & Steenkamp, J.-B. E. M. (2008).
Effect of service transition strategies on firm value. Journal of
Marketing, 72(5) 1-14. doi: 10.1509/jmkg.72.5.1
https://doi.org/10.1509/jmkg.72.5.1...
).
Therefore, the aim of our study is to explore the impact of a non-linear effect of
complaint on company market value as measured by its Tobin’s Q.
The empirical evidence to test our hypothesis was obtained from panel data collected
from 2005 to 2013, from ANATEL, the regulatory agency that deals with all
telecommunication issues in Brazil. ANATEL’s website provides monthly data on the
number of complaints made to the agency, broken down by cell phone service provider,
since 2005. Complaints made to a third party agency is critical for a company’s
performance because consumers may have already complained directly to the company
and to others (Cronin & Fox, 2010Cronin, J. J., & Fox, G. L. (2010). The implications of
third-party customer complaining for advertising efforts. Journal of
Advertising,
39(2), 21-34. doi: 10.2753/JOA0091-3367390202
https://doi.org/10.2753/JOA0091-33673902...
; Ruyter & Brack, 1993Ruyter, K. de, & Brack, A. (1993). European legal developments
in product safety and liability: the role of customer complaint management as a
defensive marketing tool. International Journal of Research in
Marketing, 10(2), 153–164. doi:
10.1016/0167-8116(93)90002-G
https://doi.org/10.1016/0167-8116(93)900...
). We also collected
data from the three main publicly quoted cell phone service providers in Brazil.
These three cell phone providers that compose the data for the empirical test
account for 72% of the market and were chosen due to their large client base and
high number of complaints according to ANATEL records. Over 750,000 complaints
related to these companies have been reported to ANATEL. This industry is also
suitable for our study because of the highly competitive market and the relatively
homogeneous products, which provide a context for negative consumer opinion to
become relevant to distinguish one company brand from another. This context,
resembling a homogeneous oligopoly market structure, has been theoretically shown to
be an interesting setting to study complaint issues (Fornell & Wernerfelt, 1988Fornell, C., & Wernerfelt, B. (1988). A model for customer
complaint management. Marketing Science,
7(3), 287-298.). Finally, previous academic studies have
focused mainly on the Northern Hemisphere context, especially the United States
(S. W. Brown et al.,
2005Brown, S. W., Webster, F. E., Jr., Steenkamp, J.-B. E. M., Wilkie,
W. L., Sheth, J. N., Sisodia, R., S., Kerin, R. A., MacInnis, D., McAlister, L.,
Raju, J. S., et al. (2005). Marketing renaissance: opportunities and imperatives
for improving marketing thought, practice, and infrastructure. Journal
of Marketing,
69(4), 1-25. doi: 10.1509/jmkg.2005.69.4.1
https://doi.org/10.1509/jmkg.2005.69.4.1...
). Our study also adds to the literature by looking at the complaint
issue in specific markets and in a developing country. The following sections will
summarize the theory relevant to this research, the methods used, an analysis of the
data, and a discussion of our results and conclusions.
Consumer Complaint and Company Market Value
There is a growing consensus that market value better captures the impact of consumer
complaints (Luo, 2009Luo, X. (2009). Quantifying the long-term impact of negative word of
mouth on cash flows and stock prices. Marketing Science, 28(1),
148-165. doi: 10.1287/mksc.1080.0389
https://doi.org/10.1287/mksc.1080.0389...
; Luo & Homburg, 2008Luo, X., & Homburg, C. (2008). Satisfaction, complaint, and the
stock value gap. Journal of Marketing, 72(4), 29–43. doi:
10.1509/jmkg.72.4.29
https://doi.org/10.1509/jmkg.72.4.29...
). Immediately after receiving bad
service, consumers can, for instance, pass on a negative comment about the service
by phone, in person or through online social networks (Bentivegna, 2002Bentivegna, F. J. (2002). Fatores de impacto no sucesso do marketing
boca a boca online. Revista de Administração de Empresas,
42(1), 79-87.; Santos &
Fernandes, 2011Santos, C. P. dos, & Fernandes, D. V. D. H. (2011). Perceptions
of justice after recovery efforts in internet purchasing: the impact on consumer
trust and loyalty toward retailing sites and online shopping in general.
Brazilian Administration Review,
8(3), 225-246. Retrieved from
http://www.scielo.br/pdf/bar/v8n3/a02v8n3.pdf. doi:
10.1590/S1807-76922011000300002
http://www.scielo.br/pdf/bar/v8n3/a02v8n...
). Consumers tend to make great efforts to pass on the
details of serious problems (Richins, 1983Richins, M. L. (1983). Negative word-of-mouth by dissatisfied
consumers: a pilot study. Journal of Marketing,
47(1), 68-78.).
Not all word of mouth is equal, and it depends on the proximity of the source to
those involved, the source’s influence and credibility and the characteristics of
the network where the word of mouth is occurring (J. J. Brown & Reingen, 1987Brown, J. J., & Reingen, P. (1987). Social ties and
word-of-mouth referral behavior. Journal of Consumer Research,
14(3), 350-362.). A third party agency’s credentials
may further intensify the impact of complaints by simply collecting, sorting, and
disseminating the issues to the general public (Ruyter & Brack, 1993Ruyter, K. de, & Brack, A. (1993). European legal developments
in product safety and liability: the role of customer complaint management as a
defensive marketing tool. International Journal of Research in
Marketing, 10(2), 153–164. doi:
10.1016/0167-8116(93)90002-G
https://doi.org/10.1016/0167-8116(93)900...
). Depending on the agency’s or consumer’s
influence in a given industry, there may be severe damage to the company’s
reputation and eventually to its sales. Complaints can give the company a chance to
compensate for bad service or recover a lost sale, once the problem is properly
identified and consumer trust is redeemed (Santos
& Fernandes, 2008Santos, C. P. dos, & Fernandes, D. V. D. H. (2008). Antecedents
and consequences of consumer trust in the context of service recovery.
Brazilian Administration Review,
5(3), 225-244. Retrieved from
http://www.scielo.br/pdf/bar/v5n3/v5n3a05.pdf. doi:
10.1590/S1807-76922008000300005
http://www.scielo.br/pdf/bar/v5n3/v5n3a0...
).
A seminal study on the nature of consumer dissatisfaction showed three dimensions by
which consumers respond to a bad experience with a product or service (Singh, 1988Singh, J. (1988). Consumer complaint intentions and behavior:
definitional and taxonomical issues. Journal of Marketing,
52(1), 93-107.). First, consumers may engage in
voice response by seeking to redress the problem directly with the company.
Consumers may want to have the product repaired or other compensation. Second,
telling friends and relatives about the problem is also regarded as a dimension of
customer dissatisfaction response. This negative word of mouth creates a remedy
arousal that feeds back into future actions. Third, the response may also be
materialized by filing a formal complaint report with a third party public or
private agency. Reporting to agencies is considered a voluntary hard action while
the other two response dimensions are considered easy choices (Singh & Wilkes, 1996Singh, J., & Wilkes, R. E. (1996). When consumers complain: a
path analysis of the key antecedents of consumer complaint response estimates.
Journal of the Academy of Marketing Science,
24(4), 350-365.). Feick (1987)Feick, L. F. (1987). Latent class models for the analysis of
behavioral hierarchies. Journal of Marketing Research,
24(2), 174-186. doi: 10.2307/3151507
https://doi.org/10.2307/3151507...
posited that third-party responses are at a higher
hierarchical level than voice and private, negative word of mouth. Furthermore,
previous empirical studies have shown that when third-party responses happened it is
because any kind of voice or negative word of mouth has happened before (Singh & Wilkes, 1996Singh, J., & Wilkes, R. E. (1996). When consumers complain: a
path analysis of the key antecedents of consumer complaint response estimates.
Journal of the Academy of Marketing Science,
24(4), 350-365.). Agency reports are
objective and not driven by consumer intention to complain since it captures the
actual fact that consumers have formally complained. Therefore, we isolate the
third-party influence and focus on the impact of public records of complaints to
assess the impact on company market value.
A common mistake made by managers is to not adequately measure financial results of
their marketing programs, which undermines their overall company credibility (Mintz & Currim, 2013Mintz, O., & Currim, I. S. (2013). What drives managerial use of
marketing and financial metrics and does metric use affect performance of
marketing-mix activities? Journal of Marketing,
77(2), 17-40. doi: 10.1509/jm.11.0463
https://doi.org/10.1509/jm.11.0463...
; Rust, Lemon, & Zeithmal, 2004Rust, R. T., Lemon, K. N., & Zeithaml, V. A. (2004). Return on
marketing: using customer equity to focus marketing strategy. Journal of
Marketing,
68(1), 109-127. doi:
10.1509/jmkg.68.1.109.24030
https://doi.org/10.1509/jmkg.68.1.109.24...
). There is a relationship
between customer satisfaction and generating shareholder value, which underlines the
relevance of market value (Anderson et
al., 2004Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (2004).
Customer satisfaction and shareholder value. Journal of Marketing,
68(4), 172-185. doi: 10.1509/jmkg.68.4.172.42723
https://doi.org/10.1509/jmkg.68.4.172.42...
; Gruca & Rego,
2005Gruca, T. S., & Rego, L. L. (2005). Customer satisfaction, cash
flow, and shareholder value. Journal of Marketing,
69(3), 115–130. doi: 10.1509/jmkg.69.3.1.66358
https://doi.org/10.1509/jmkg.69.3.1.6635...
; Luo & Homburg, 2008Luo, X., & Homburg, C. (2008). Satisfaction, complaint, and the
stock value gap. Journal of Marketing, 72(4), 29–43. doi:
10.1509/jmkg.72.4.29
https://doi.org/10.1509/jmkg.72.4.29...
).
Several studies seek to establish empirical evidence about the impact of marketing
activity on company financial indicators (e.g.
Anderson et al., 2004Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (2004).
Customer satisfaction and shareholder value. Journal of Marketing,
68(4), 172-185. doi: 10.1509/jmkg.68.4.172.42723
https://doi.org/10.1509/jmkg.68.4.172.42...
; Sorescu & Spanjol, 2008Sorescu, A. B., & Spanjol, J. (2008). Innovation’s effect on
firm value and risk: insights from consumer packaged goods. Journal of
Marketing, 72(2), 114-132. doi:
10.1509/jmkg.72.2.114
https://doi.org/10.1509/jmkg.72.2.114...
). The underlying
logic considers that customer satisfaction positively influences a company’s ability
to retain them, and this guarantees future revenue and reduces the cost of future
transactions, such as investments in advertising, services and sales (Anderson et al., 2004Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (2004).
Customer satisfaction and shareholder value. Journal of Marketing,
68(4), 172-185. doi: 10.1509/jmkg.68.4.172.42723
https://doi.org/10.1509/jmkg.68.4.172.42...
).
One of the ways to evaluate the impact of marketing strategies on company market
value is to use Tobin’s Q Ratio. This is an index based on share values, which
presents advantages over traditional financial indices such as Return on Assets or
Return on Net Capital (Fama, 1970Fama, E. F. (1970). Efficient capital markets: a review of theory
and empirical work. The Journal of Finance, 25(2), 383–417.
doi: 10.1111/j.1540-6261.1970.tb00518.x
https://doi.org/10.1111/j.1540-6261.1970...
). The
Tobin’s Q, based on the theory of efficient market prices, reflects all available
relevant information including projected future cash flow adjusted for risk, and
reflecting a company’s intangible assets, which cannot easily be measured by
accounting figures (Srivastava, Shervani, &
Fahey, 1998Srinivasan, S., & Hanssens, D. M. (2009). Marketing and firm
value: metrics, methods, findings, and future directions. Journal of
Marketing Research, 46(3), 293-312. doi:
10.1509/jmkr.46.3.293
https://doi.org/10.1509/jmkr.46.3.293...
). The Q ratio is used to compare companies in different
industries, because it is not affected by specific accounting conventions (Chakravarthy, 1986Chakravarthy, B. S. (1986). Measuring strategic performance.
Strategic Management Journal,
7(5), 437-458. doi: 10.1002/smj.4250070505
https://doi.org/10.1002/smj.4250070505...
).
The Non-Linear Effect of Complaints
Previous literature and evidence indicates that complaints reduce company
performance, though we argue that the level of complaints present an inverted
U-shape effect on performance. Luo (2007)Luo, X. (2007). Consumer negative voice and firm- idiosyncratic
stock returns. Journal of Marketing, 71(3), 75–88. doi:
10.1509/jmkg.71.3.75
https://doi.org/10.1509/jmkg.71.3.75...
suggests that achieving 100% customer satisfaction is not a very realistic scenario
and is rarely viable. There may be diminishing returns in efforts to satisfy
customers (Dixon, Freeman, & Toman,
2010Dixon, M., Freeman, K., & Toman, N. (2010). Stop trying to
delight your customers. Harvard Business Review, 88(7/8),
116-122.). An increase in complaint level can reduce company market value,
however not necessarily every time. This is because the cost, time, quality,
technological restrictions and customer satisfaction establish limits as to what can
be achieved, making it necessary for managers to make choices as tradeoffs emerge
(Skinner, 1969Skinner, W. (1969). Manufacturing – missing link in corporate
strategy. Harvard Business Review,
47(3), 136-145.). The tradeoff concept
requires that companies, when working close to the limit of their resources, make
choices between their competitive priorities. We therefore expect positive and
negative tradeoffs regarding complaint level effect on market value (Figure 1).
Positive tradeoffs may emerge and generate an increase in market value even under a low level of complaint. Two mechanisms may underlie such an increase. First, market value increase is possible because company image is little exposed to severe damage. Consumers holding emotional bonds with a company may tolerate other consumers’ bad experiences and rationalize it as less problematic personally. Even calculative consumers find no reason to stop buying from a seller and are not willing to afford the switching costs to move to a new seller (R. Lee & Romaniuk, 2009Lee, R., & Romaniuk, J. (2009). Relating switching costs to positive and negative word-of-mouth. Journal of Consumer Satisfaction, Dissatisfaction and Complaining Behavior, 22, 54-67.). From the stock market perspective, as long as consumers are willing to continue buying from a company, there is no negative effect on market analyst reports and consequently on stock prices. This allows for the company to even increase its market value under a low level of complaints.
The second mechanism to operate in positive tradeoffs is a company’s cost reduction
rationale that surpasses the benefits of reducing the overall damage of a low
complaint level. First, neglecting certain complaints may be justified by the high
costs of solving the root of a problem. Companies often worry just about measuring
customer satisfaction and forget to assess the customer lifetime value (CLV). The
CLV allows for an accurate evaluation over time whether a client provided revenues
that exceed, by an adequate margin, the marketing, sales and customer service costs
spent in relation to this particular customer (P. D.
Berger et al., 2006Berger, P. D., Eechambadi, N., George, M., Lehmann, D. R., Rizley,
R., & Venkatesan, R. (2006). From customer lifetime value to shareholder
value: theory, empirical evidence, and issues for future research.
Journal of Service Research,
9(2), 156-167. doi: 10.1177/1094670506293569
https://doi.org/10.1177/1094670506293569...
; Venkatesan & Kumar, 2004Venkatesan, R., & Kumar, V. (2004). A customer lifetime value
framework for customer selection and resource allocation strategy.
Journal of Marketing,
68(4), 106–125. doi:
10.1509/jmkg.68.4.106.42728
https://doi.org/10.1509/jmkg.68.4.106.42...
). Considering how heterogeneous individuals
are, managing negative word of mouth of complaints will be efficient when it is
possible to attract and retain customers who offer high potential profitability
(Niraj, Grupta, & Narasimhan, 2001Niraj, R., Gupta, M., & Narasimhan, C. (2001). Customer
profitability in a supply chain. Journal of Marketing,
65(3), 1-16. doi: 10.1509/jmkg.65.3.1.18332
https://doi.org/10.1509/jmkg.65.3.1.1833...
).
It is often necessary to address each customer’s specific complaints to reduce
negative word of mouth. Based on the concept of tradeoffs and client profitability,
reducing negative word of mouth that are already at low levels can mean significant
increases in costs, due mainly to the high level of personalization or customization
of services, which can compromise a company’s profitability and consequently its
market value.
Second, neglecting extremely demanding customers may be justified by the high costs
of satisfying them. An increase in complaint level can originate from a base of
consumers who offer little potential profitability and became dissatisfied due to a
price increase or simply reducing the package of services and customizations
available (Niraj et al.,
2001Niraj, R., Gupta, M., & Narasimhan, C. (2001). Customer
profitability in a supply chain. Journal of Marketing,
65(3), 1-16. doi: 10.1509/jmkg.65.3.1.18332
https://doi.org/10.1509/jmkg.65.3.1.1833...
). Complaints may emerge when customer satisfaction is dependent on
product or service customization. Anderson, Fornell
and Rust (1997)Anderson, E. W., Fornell, C., & Rust, R. T. (1997). Customer
satisfaction, productivity, and profitability: differences between goods and
services. Marketing Science, 16(2), 129-145. doi:
10.1287/mksc.16.2.129
https://doi.org/10.1287/mksc.16.2.129...
argue that there is incompatibility between customer
satisfaction and company market value when it is costly to provide high levels of
customization. Under these circumstances, an increase in complaint level may not
necessarily be harmful to company market value, given the savings generated by not
fulfilling the specific needs of these customers. In the effort to reduce
significant negative effects, it is important to verify whether the company, in
promoting products and services, has not created excessive expectations that will
lead to future dissatisfaction (Osinga et
al., 2011Osinga, E. C., Leeflang, P. S. H., Srinivasan, S., & Wieringa,
J. E. (2011). Why do firms invest in consumer advertising with limited sales
response? A shareholder perspective. Journal of Marketing,
75(1), 109-124. doi: 10.1509/jmkg.75.1.109
https://doi.org/10.1509/jmkg.75.1.109...
). Consumers perceive the product value on the
basis of what the company’s promises are, thereby seeking satisfaction over the long
term.
Negative tradeoffs, on the other hand, follow a stream of research that focuses on
the motives that lead consumers to make their voice loud and spread their bad
experience. Very satisfied or very dissatisfied customers are more likely to
initiate positive or negative word of mouth (Anderson, 1998Anderson, E. W. (1998). Customer satisfaction and word of mouth.
Journal of Service Research, 1(1), 5–17. doi: 10.1177/109467059800100102
https://doi.org/10.1177/1094670598001001...
; Matos & Rossi,
2008Matos, C. A. de, & Rossi, C. A. V. (2008). Word-of-mouth
communications in marketing: a meta-analytic review of the antecedents and
moderators. Journal of the Academy of Marketing Science,
36(4), 578-596.). Previous studies, based on psychological aspects, begin with a
companies’ mistakes and investigate how they cause consumers’ negative emotions,
which are antecedents to dissatisfaction responses (Romani et al., 2012Romani, S., Grappi, S., & Dalli, D. (2012). Emotions that drive
consumers away from brands: measuring negative emotions toward brands and their
behavioral effects. International Journal of Research in
Marketing,
29(1), 55-67. doi:
10.1016/j.ijresmar.2011.07.001
https://doi.org/10.1016/j.ijresmar.2011....
; Sjödin, 2008Sjödin, H. (2008). Upsetting brand extensions: an enquiry into
current customers’ inclination to spread negative word of mouth. Journal
of Brand Management, 15(4), 258-271.). In Dixon, Freeman and
Toman (2010)Dixon, M., Freeman, K., & Toman, N. (2010). Stop trying to
delight your customers. Harvard Business Review, 88(7/8),
116-122., just 23% of customers who had a positive experience related
to a product or service sent this information to 10 or more people. On the other
hand, 48% of customers who had a negative experience sent this information to 10 or
more people. Heskett, Jones, Loveman, Sasser and
Schlesinger (1994)Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E., Jr.,
& Schlesinger, L. A. (1994). Putting the service-profit chain to work.
Harvard Business Review,
72(2), 164-170. developed the concept of the terrorist customer who
can significantly affect a company’s profitability. This type of customer is so
dissatisfied with the quality of a service provided that she spreads negative
information whenever the opportunity arises and is able to reach hundreds of other
potential customers through the internet (Santos
& Fernandes, 2011Santos, C. P. dos, & Fernandes, D. V. D. H. (2011). Perceptions
of justice after recovery efforts in internet purchasing: the impact on consumer
trust and loyalty toward retailing sites and online shopping in general.
Brazilian Administration Review,
8(3), 225-246. Retrieved from
http://www.scielo.br/pdf/bar/v8n3/a02v8n3.pdf. doi:
10.1590/S1807-76922011000300002
http://www.scielo.br/pdf/bar/v8n3/a02v8n...
).
Two mechanisms underlie the negative tradeoff. First, corporate and brand reputation
– i.e. defined by how consumers perceive a company or a brand –
affect company’s market value (Grönroos,
1984Grönroos, C. (1984). A service quality model and its marketing
implications. European Journal of Marketing,
18(4), 36–44. doi: 10.1108/EUM0000000004784
https://doi.org/10.1108/EUM0000000004784...
). There is a negative consumer reaction when the company or its
employees deliver a poor service or product (Harris
& Ogbonna, 2013Harris, L. C., & Ogbonna, E. (2013). Forms of employee negative
word-of-mouth: a study of front-line workers. Employee
Relations,
35(1), 39-60. doi: 10.1108/01425451311279401
https://doi.org/10.1108/0142545131127940...
; McColl-Kennedy,
Sparks, & Nguyen, 2011McColl-Kennedy, J. R., Sparks, B. A., & Nguyen, D. T. (2011).
Customer’s angry voice: targeting employees or the organization? Journal
of Business Research,
64(7), 707–713. doi:
10.1016/j.jbusres.2010.08.004
https://doi.org/10.1016/j.jbusres.2010.0...
; Santos &
Fernandes, 2008Santos, C. P. dos, & Fernandes, D. V. D. H. (2008). Antecedents
and consequences of consumer trust in the context of service recovery.
Brazilian Administration Review,
5(3), 225-244. Retrieved from
http://www.scielo.br/pdf/bar/v5n3/v5n3a05.pdf. doi:
10.1590/S1807-76922008000300005
http://www.scielo.br/pdf/bar/v5n3/v5n3a0...
). Consumers that receive any negative information from a
third-party source about a product or service tend to have lower attitudes towards
the company, especially when compared to those receiving no information at all
(Matos & Veiga, 2005Matos, C. A. de, & Veiga, R. T. (2005). How to deal with
negative publicity: the importance of consumer involvement. Brazilian
Administration Review,
2(1), 57-72. Retrieved from
http://www.scielo.br/pdf/bar/v2n1/v2n1a05.pdf. doi:
10.1590/S1807-76922005000100005
http://www.scielo.br/pdf/bar/v2n1/v2n1a0...
). A brand with a
high number of complaints indicates a low level of satisfaction with a company’s
offering, diminishing the capacity to attract and retain customers and consequently,
impacting the company’s future expected cash flow (Luo, 2007Luo, X. (2007). Consumer negative voice and firm- idiosyncratic
stock returns. Journal of Marketing, 71(3), 75–88. doi:
10.1509/jmkg.71.3.75
https://doi.org/10.1509/jmkg.71.3.75...
). By raising their client retention level by 1%, a company is
able to increase market value by 3% to 7% (Gupta,
Lehman, & Stuart, 2004Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing
customers. Journal of Marketing Research, 41(1), 7-18. doi:
10.1509/jmkr.41.1.7.25084
https://doi.org/10.1509/jmkr.41.1.7.2508...
). Also, the customer base and their level of
satisfaction may be considered as a company’s intangible assets (Rust et al., 2004Rust, R. T., Lemon, K. N., & Zeithaml, V. A. (2004). Return on
marketing: using customer equity to focus marketing strategy. Journal of
Marketing,
68(1), 109-127. doi:
10.1509/jmkg.68.1.109.24030
https://doi.org/10.1509/jmkg.68.1.109.24...
).
Complaints damage intangible assets, because they increase the costs of attracting
and retaining customers (Anderson et al., 2004), and also diminish
a company’s ability to maintain revenue and garner repeat consumers (Luo, 2007Luo, X. (2007). Consumer negative voice and firm- idiosyncratic
stock returns. Journal of Marketing, 71(3), 75–88. doi:
10.1509/jmkg.71.3.75
https://doi.org/10.1509/jmkg.71.3.75...
), reducing customer tolerance toward
price increases (Chevalier & Mayzlin,
2006Chevalier, J. A., & Mayzlin, D. (2006). The effect of word of
mouth on sales: online book reviews. Journal of Marketing Research,
43(3), 345–354. doi: 10.1509/jmkr.43.3.345
https://doi.org/10.1509/jmkr.43.3.345...
). Complaints also increase the risks associated with future cash
flow. Positive customer satisfaction gives companies greater protection from
external shocks and/or competitor maneuvers reducing cash flow loss (Gruca & Rego, 2005Gruca, T. S., & Rego, L. L. (2005). Customer satisfaction, cash
flow, and shareholder value. Journal of Marketing,
69(3), 115–130. doi: 10.1509/jmkg.69.3.1.66358
https://doi.org/10.1509/jmkg.69.3.1.6635...
). Such positive effects
reduce a company’s cost of capital. Smith, Smith and
Kun (2010)Smith, K. T., Smith, M., & Wang, K. (2010). Does brand
management of corporate reputation translate into higher market value?
Journal of Strategic Marketing, 18(3), 201-221. doi:
10.1080/09652540903537030
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and Andreassen and Lindestad
(1998)Andreassen, T. W., & Lindestad, B. (1998). The effect of
corporate image in the formation of customer loyalty. Journal of Service
Research,
1(1), 82–92. doi: 10.1177/109467059800100107
https://doi.org/10.1177/1094670598001001...
found that reputation is positively correlated with satisfaction
and brand loyalty. A company’s market value may be damaged by a high complaint
level.
Second, the mechanism of negative tradeoffs is also associated with a speedy and
intense diffusion over the social networks. There has been a rapid spread of
broadband internet connections and a proliferation of blogs, interactive websites
and multiuse cell phones (Santos & Fernandes,
2011Santos, C. P. dos, & Fernandes, D. V. D. H. (2011). Perceptions
of justice after recovery efforts in internet purchasing: the impact on consumer
trust and loyalty toward retailing sites and online shopping in general.
Brazilian Administration Review,
8(3), 225-246. Retrieved from
http://www.scielo.br/pdf/bar/v8n3/a02v8n3.pdf. doi:
10.1590/S1807-76922011000300002
http://www.scielo.br/pdf/bar/v8n3/a02v8n...
). The negative response of a bad experience intensifies and spreads
quickly over this high level of interconnectedness among consumers (Goldenberg et al., 2009Goldenberg, J., Han, S., Lehmann, D. R., & Hong, J. W. (2009).
The role of hubs in the adoption processes. Journal of
Marketing,
73(2), 1-13. doi: 10.1509/jmkg.73.2.1
https://doi.org/10.1509/jmkg.73.2.1...
). This
interconnectedness allows consumers to exert a growing influence on brand
reputation. In the past, consumers expressed their perceptions of brands by talking
with friends or relatives; nowadays consumers use internet sites to disseminate
their positive and negative experiences (Ward &
Ostron, 2006Ward, J. C., & Ostrom, A. L. (2006). Complaining to the masses:
the role of protest framing in customer-created complaint web sites.
Journal of Consumer Research, 33(2), 220-230. doi:
10.1086/506303
https://doi.org/10.1086/506303...
). Consumers also have control over the wide variety of media
available, including the option to act as an online referral (De Bruyn & Lilien, 2008De Bruyn, A., & Lilien, G. L. (2008). A multi-stage model of
word-of-mouth influence through viral marketing. International Journal of
Research in Marketing, 25(3), 151-163. doi:
10.1016/j.ijresmar.2008.03.004
https://doi.org/10.1016/j.ijresmar.2008....
). They are prone to accept
information about a brand when the origin is another consumer that might be friend
or an unbiased informant, and consequently are likely to accept information about
the product (Dichter, 1966Dichter, E. (1966). How word-of-mouth advertising works.
Harvard Business Review,
44(6), 147-166.).
The central hypothesis of our study thus posits a non-linear effect of complaints on a company’s market value. Low levels of complaints are positive for a company’s market value because of the positive tradeoffs. Not incurring costs and investments necessary to further reduce these levels compensate for the impact of complaints. However after a certain level, as complaints increase and are increasingly and more rapidly spread, there are greater negative effects on customer satisfaction and loyalty as well as reputation and brand value, reducing future cash flow and increasing cash-flow risk. Thus, we can enunciate the central hypothesis of our study:
Hypothesis: Complaints have a negative, non-linear effect on company market value: at low levels, positive tradeoffs occur which increase a company’s market value and as complaint grows beyond a critical level, its effect on company market value becomes increasingly negative.
Method
We collected data from cell phone service providers in Brazil. The cell phone market reached 136 phones per 100 inhabitant in December 2013 and has doubled in size over the past five years according to ANATEL (the National Telecommunication Regulatory Agency). Quarterly data from 1Q/2005 to 2Q/2013 was collected from the three leaders in the cell phone industry, giving a total sample size of 102 measurements. Another cell phone service provider that operates in this market could not be included in this study because its headquarters is overseas and the financial data for the local operation is not publicly available. According to ANATEL, the three selected companies at the end of 2013 represented 72.4% of the Brazilian market, which provides an interesting setting to study complaints.
Study variables
The dependent variable for the company market value was estimated based on Tobin’s Q
Ratio. This Q Ratio has been used in marketing literature in studies related to
brand equity (Simon & Sullivan, 1993Simon, C. J., & Sullivan, M. W. (1993). The measurement and
determinants of brand equity: a financial approach. Marketing Science,
12(1), 28-52.),
service evaluation (Fang et al.,
2008Fang, E., Palmatier, R. W., & Steenkamp, J.-B. E. M. (2008).
Effect of service transition strategies on firm value. Journal of
Marketing, 72(5) 1-14. doi: 10.1509/jmkg.72.5.1
https://doi.org/10.1509/jmkg.72.5.1...
) and customer satisfaction (Anderson
et al., 2004Anderson, E. W., Fornell, C., & Mazvancheryl, S. K. (2004).
Customer satisfaction and shareholder value. Journal of Marketing,
68(4), 172-185. doi: 10.1509/jmkg.68.4.172.42723
https://doi.org/10.1509/jmkg.68.4.172.42...
). We followed the method proposed by
Chung and Pruitt (1994)Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of
Tobin’s Q. Financial Management, 23(3), 70–74. to calculate the
ratio. Formally, we measure Tobin’s Q Ratio as follows:
where total asset value and liabilities are drawn from the balance sheet of the
company. The share market price at a determined moment in time is an important
component of the formula. To reduce the volatility of a single measurement of share
price, R. P. Lee and Grewal (2004)Lee, R. P., & Grewal, R. (2004). Strategic responses to new
technologies and their impact on firm performance. Journal of Marketing,
68(4), 157–171. doi: 10.1509/jmkg.68.4.157.42730
https://doi.org/10.1509/jmkg.68.4.157.42...
recommend
that the average share price of previous periods be used at the time that Tobin’s Q
Ratio is calculated. In our study we used a quarterly average, where the average is
the closing price for each month within the quarter based on the historical data
drawn from BM&F Bovespa (the Brazilian Stock Market).
Complaints were collected and analyzed according to Singh’s protocol (1988). Singh and Wilkes (1996)Singh, J., & Wilkes, R. E. (1996). When consumers complain: a
path analysis of the key antecedents of consumer complaint response estimates.
Journal of the Academy of Marketing Science,
24(4), 350-365. found evidence that
complaints to third parties are a solid objective measure because it comes after any
kind of previous complaint to either the company or family and friends. Previous
study has employed complaints to third parties as a measure to study consumer
dissatisfaction (Ruyter & Brack, 1993Ruyter, K. de, & Brack, A. (1993). European legal developments
in product safety and liability: the role of customer complaint management as a
defensive marketing tool. International Journal of Research in
Marketing, 10(2), 153–164. doi:
10.1016/0167-8116(93)90002-G
https://doi.org/10.1016/0167-8116(93)900...
).
The complaint type made to a regulatory agency denotes a serious issue and high
degree of frustration with the bad experience with the product or service (Cronin & Fox, 2010Cronin, J. J., & Fox, G. L. (2010). The implications of
third-party customer complaining for advertising efforts. Journal of
Advertising,
39(2), 21-34. doi: 10.2753/JOA0091-3367390202
https://doi.org/10.2753/JOA0091-33673902...
). We draw from the
ANATEL records to compute the independent variable, which account for the relative
number of complaints for each company in the given quarter. The complaint variable
also accounts for possible differences in complaint volume due to customer base
size. For the non-linear effect of complaint we employed a squared variable.
According to Shaver (1998)Shaver, J. M. (1998). Accounting for endogeneity when assessing
strategy perfomance: does entry mode choice affect FDI survival?
Management Science,
44(4), 571-585., to capture the
effects of a particular variable on company performance it is important to include
control variables. Companies eventually face random errors when making decisions. We
therefore included three control variables that affect a company’s performance. The
first is the level of financial debt or leverage, which has been used
in various studies related to corporate finance (P.
G. Berger & Ofek, 1995Berger, P. G., & Ofek, E. (1995). Diversification’s effect on
firm value. Journal of Financial Economics, 37(1), 39–65. doi:
10.1016/0304-405X(94)00798-6
https://doi.org/10.1016/0304-405X(94)007...
). A company’s total debt divided by the value
of all of its shares is used as a measurement of a company’s debt situation. The
second is the stock market index that considers the variation in return
offered by this segment of the market which in turn is reflected in stock prices.
This index also reflects any variations in country risk as well as risk free levels
that can also affect stock prices. The Ibovespa Index is included as a control,
because it is the most important average performance indicator for stocks on the
Brazilian stock market. The third is the customer base size which was
considered a control variable for company size. Some previous studies that used
Tobin’s Q Ratio also used company size as a control variable (Fang et al., 2008Fang, E., Palmatier, R. W., & Steenkamp, J.-B. E. M. (2008).
Effect of service transition strategies on firm value. Journal of
Marketing, 72(5) 1-14. doi: 10.1509/jmkg.72.5.1
https://doi.org/10.1509/jmkg.72.5.1...
; Sorescu & Spanjol, 2008Sorescu, A. B., & Spanjol, J. (2008). Innovation’s effect on
firm value and risk: insights from consumer packaged goods. Journal of
Marketing, 72(2), 114-132. doi:
10.1509/jmkg.72.2.114
https://doi.org/10.1509/jmkg.72.2.114...
).
Results
The model estimation followed the balanced panel structure of our data that contains time series of observations for three companies in a multiple, cross-sectional method. This requires attention to several estimation issues (Gujarati, 2003Gujarati, D. N. (2003). Basic econometrics (4th ed.). New York: McGraw-Hill.). First, serial correlation of Tobin’s Q can be problematic because it may bias parameter estimates. In our sample, a panel Durbin-Watson statistic was calculated for the panel data and no significant autocorrelation was observed (p<0.05). To control for any unobserved firm heterogeneity, we included control variables that account for firm-specific effects in the model. Second, we conducted a Hausman specification test and found it significant (1.28, p<0.05), which indicates that a random effects treatment of unobserved heterogeneity is not tenable. This test assessed non-observed effects that are related to factors intrinsic to the cross-sectional method, which may vary over time. These effects may include each company’s management model, management ability or cultural aspects. The Hausman test allow us to consider that these non-observed variables do not affect the dependent variable under analysis. Therefore, we adopt the two-way, fixed-effects panel regression model that allows using within group (i.e. companies) regression estimators.
Consistent with our central hypothesis, we specify a quadratic parameter of complaint to assess the non-linear impact on company market value. We expect that complaints begin to decrease market value only after a critical level, and thus we anticipate that the linear effect will be significantly positive and that the quadratic effect will be significantly negative. If both effects are negative, complaints decrease market value at all levels of complaints. Table 1 presents the results obtained for the proposed model, where Tobin’s Q Ratio is a dependent variable and complaint is the independent variable. The quadratic variable and the control variables are also included. Residual plots of the estimation presented a random pattern as expected.
The results confirm the proposed central hypothesis. The significant negative effect of the square of the complaint variable (β= -1.08; p<0.01) indicates that the negative effects of complaints on company market value are not linear and do indeed decrease market value only when higher levels are reached. As expected, the significant positive result for the linear term (β =1.39; p<0.01) indicates that at low levels the impact of an increase in complaint is positive for a company’s market value.
All control variables present statistically significant results. For company size
(their customer base), the coefficient sign was negative, contrary to the results of
past research done in other contexts (Fang
et al., 2008Fang, E., Palmatier, R. W., & Steenkamp, J.-B. E. M. (2008).
Effect of service transition strategies on firm value. Journal of
Marketing, 72(5) 1-14. doi: 10.1509/jmkg.72.5.1
https://doi.org/10.1509/jmkg.72.5.1...
; Sorescu & Spanjol, 2008Sorescu, A. B., & Spanjol, J. (2008). Innovation’s effect on
firm value and risk: insights from consumer packaged goods. Journal of
Marketing, 72(2), 114-132. doi:
10.1509/jmkg.72.2.114
https://doi.org/10.1509/jmkg.72.2.114...
). One might suggest that the high rate of
market growth during the study period could have influenced the analysis. In order
to meet the needs of an ever growing customer base in the cell phone service
industry, constant investments in infrastructure are necessary to guarantee access
to service provider networks for all customers (Fleury & Fleury, 2003Fleury, A., & Fleury, M. T. (2003). The evolution of strategies
and organizational competencies in the telecommunications industry.
International Journal of Information Technology & Decision
Making,
2(4), 577-596. doi: 10.1142/S021962200300080X
https://doi.org/10.1142/S021962200300080...
). Thus, the result of these investments is the
fast growth in the assets of each of these companies which, according to the model
proposed by Chung and Pruitt (1994)Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of
Tobin’s Q. Financial Management, 23(3), 70–74., can
negatively affect Tobin’s Q Ratio when share prices do not accompany this same
accelerated rhythm. Such issues may be addressed in future studies. The other
control variables, company’s leverage and stock market index, were positive as
expected.
Figure 2 illustrates the results in a scatter plot and a graph plotting complaints against company’s market value (Tobin’s Q Ratio) and shows the quadratic effect. The sample, model and period considered in this study indicates a break point of 0.49 complaints per thousand consumers in a company’s customer base. The effects on market value become increasingly negative when trying to make reductions to move below this level due to the negative tradeoffs – in terms of company market value vs. complaints.
Figure 3 provides a descriptive analysis of the break point in our sample. Comparing the break point determined by the estimated coefficients of our study with the individual service provider data, we find that company B on average operated close to this break point level of complaints, indicating an effective way to manage this issue. Company C, on the other hand, operated most of the time at levels below the threshold, suggesting, according to our model, idle capacity or excessive customization for the consumer, which can negatively affect market value. Finally company A, beginning in 2007, showed great variability in its complaint level and had relatively high points in relation to the estimated break point, indicating possible growing dissatisfaction with the brand’s reputation and decreased customer loyalty.
Final Considerations and Implications
The aim of this study is to test a non-linear effect of complaint on company market
value. The results support the posited hypothesis, with relevant implications for
marketing practitioners as well as researchers. Previous studies in marketing showed
that complaint affects marketing program effectiveness (e.g.
Cronin & Fox, 2010Cronin, J. J., & Fox, G. L. (2010). The implications of
third-party customer complaining for advertising efforts. Journal of
Advertising,
39(2), 21-34. doi: 10.2753/JOA0091-3367390202
https://doi.org/10.2753/JOA0091-33673902...
; Tax, Brown, & Chandrashekaran, 1998Tax, S. S., Brown, S. W., & Chandrashekaran, M. (1998). Customer
evaluations of service complaint experiences: implications for relationship
marketing. Journal of Marketing, 62(2), 60–76.). Our study contributes
to this stream of research by providing a negative vs. positive
tradeoff rationale and empirical evidence that it can be productive to reduce the
complaint level to certain break point level. The monitoring complaint levels become
very important to the process of planning and executing marketing programs and
meeting budgets requirements.
Previous studies have shown that poor complaint management has a detrimental effect on customer satisfaction (Bitner, Booms, & Tetreault, 1990Bitner, M. J., Booms, B. H., & Tetreault, M. S. (1990). The service encounter: diagnosing favorable and unfavorable incidents. Journal of Marketing, 54(1), 71-84.; Dixon et al., 2010Dixon, M., Freeman, K., & Toman, N. (2010). Stop trying to delight your customers. Harvard Business Review, 88(7/8), 116-122.). Our study contributes to the understanding of the mechanisms that allow companies to weigh the pros and cons of reducing complaints filed with a public agency to a very low level. The evidence shown in this paper suggests that companies can tolerate a certain level of complaint with no loss in market value. It is critical to allocate resources to keep the level of complaints close to the break point so that the spread of negative information has no affect on performance. This is the opposite of what managers tend to do: managers use complaint rates as an indicator for consumer satisfaction and assume that if rates are very low, overall market value increases. Our findings provide important guidance for marketing practitioners especially in relation to the process of planning, controlling and executing marketing activities in a context of a highly competitive and relatively homogeneous value proposition.
The managerial implications of our study fall into two main issues. First, measuring
and monitoring the number of complaints are critical tasks for marketing
departments, especially regarding complaints made to third parties, such as
regulatory agencies. Closely assessing the level of such potential negative word of
mouth and making an effort to handle consumer response may increase loyalty and
customer satisfaction after a successful failure recovery (Santos & Fernandes, 2008Santos, C. P. dos, & Fernandes, D. V. D. H. (2008). Antecedents
and consequences of consumer trust in the context of service recovery.
Brazilian Administration Review,
5(3), 225-244. Retrieved from
http://www.scielo.br/pdf/bar/v5n3/v5n3a05.pdf. doi:
10.1590/S1807-76922008000300005
http://www.scielo.br/pdf/bar/v5n3/v5n3a0...
; Webster & Sundaram, 1998Webster, C., & Sundaram, D. S. (1998). Service consumption
criticality in failure recovery. Journal of Business Research,
41(2), 153–159. doi: 10.1016/S0148-2963(97)00004-0
https://doi.org/10.1016/S0148-2963(97)00...
). Our results indicate the existence of a
break point: trying to reduce complaints to very low levels will negatively affect a
company’s market value, due to low detrimental image exposure and excessive handling
costs that are not offset by the positive cash flow generated. However, letting the
level of complaints grow beyond the break point will negatively impact a company’s
market value. This requires managers to make an effort to reduce the number of
complaints. It thus becomes important for every company, in the light of their
specific contextual conditions, to use and improve this model based on the best
information and data available.
A second managerial issue is related to the uncontrollable dynamics of social networks. It is hard to control everything that is said about products and services, particularly, in terms of online communication. There is a daily need for marketing departments to monitor blogs, social communities, and public and private complaint channels. Such monitoring will help managers identify opportunities and important duties related to managing customer satisfaction level and reduce the dissemination of negative viral information about the company’s offerings (Godes & Mayzlin, 2004Godes, D., & Mayzlin, D. (2004). Using online conversations to study word-of-mouth communication. Marketing Science, 23(4), 545-560.).
Our research has some limitations and offers indications for future research. The
results may be generalized with caution due to the particular market characteristics
of the cell phone industry in Brazil as well as the period examined. Further studies
can focus on other sectors, countries and periods. We assumed a continuous U-shape
function that one may think that the increase in the number of complaints is a proxy
for the increase in company value. This discontinuous effect of complaint should
receive attention in future non-linear research. Our rationale of positive and
negative tradeoffs may take different mechanisms in different contexts. Future
studies may look at other consumer and company issues to deepen the understanding of
complaint effects. Future studies may also look into the content of such complaints.
It would be of interest to qualify the different type of complaints that exist by
source, cause, intensity and offer type, among others. Based on Bitner, Booms and Tetreault (1990)Bitner, M. J., Booms, B. H., & Tetreault, M. S. (1990). The
service encounter: diagnosing favorable and unfavorable incidents.
Journal of Marketing,
54(1), 71-84. it would be
valid, if data is available, to segregate the different types of complaints and
their respective impacts on company market value. Following up on this theme, there
is a need to qualify complaints in relation to consumers’ emotions and behavior.
According to Sjödin (2008)Sjödin, H. (2008). Upsetting brand extensions: an enquiry into
current customers’ inclination to spread negative word of mouth. Journal
of Brand Management, 15(4), 258-271., anger is the
negative emotion that leads consumers to engage in negative word of mouth, which is
detrimental to the process of creating brand and company value. Future studies
combining behavioral psychology and marketing can further complement this work by
identifying which specific types of mechanisms underlie these negative emotions
(McColl-Kennedy et al.,
2011McColl-Kennedy, J. R., Sparks, B. A., & Nguyen, D. T. (2011).
Customer’s angry voice: targeting employees or the organization? Journal
of Business Research,
64(7), 707–713. doi:
10.1016/j.jbusres.2010.08.004
https://doi.org/10.1016/j.jbusres.2010.0...
; Romani et al.,
2012Romani, S., Grappi, S., & Dalli, D. (2012). Emotions that drive
consumers away from brands: measuring negative emotions toward brands and their
behavioral effects. International Journal of Research in
Marketing,
29(1), 55-67. doi:
10.1016/j.ijresmar.2011.07.001
https://doi.org/10.1016/j.ijresmar.2011....
).
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Publication Dates
-
Publication in this collection
Sept 2014
History
-
Received
23 July 2013 -
Reviewed
Apr 2014 -
rev-request
2 Apr 2014 -
Accepted
1 July 2014