A dynamic service quality cost model with word-of-mouth advertising

Abstract

<p>A dynamic cost model is developed which describes the evolution of demand for a service from. its beginning transient phase to its long - term equilibrium. The model includes parameters which relate to word- of-mouth advertising, and repeat demand at different rates from satisfied and dissatisfied customers. The demand behaviour of the model is consistent with published data and models for new consumer products with short re- purchase periods. Model simulations reveal some generally useful guidelines for service providers: 1) service operations should not expand excessively to handle strong demand during the early phases of the service offering, 2) cutting service quality in order to reduce costs is a poor policy, and 3) a good strategy is to adopt a high service quality from the beginning of operations, rather than improving it later.</p>