Service quality and customer lifetime value in professional sport franchises
The economics of professional sports in the 1990s, coupled with increased competition for the entertainment dollar, has resulted in a shift of emphasis from acquiring customers to retaining customers. One method to improve retention is through developing strong relationships with customers by constantly striving to provide high quality service.
Inability to control the core product, a severe obstacle not faced by other industries, serves to further heighten the need to provide high quality service within this context. With winning in professional sports being cyclical by nature, service quality is one area under the sport marketers control which can be utilized to gain a competitive advantage. Therefore, as in other industries, sport managers are searching for tools to effectively measure service quality.
In addition to measuring service quality, marketers have also started to measure the value of individual customers. The availability of information technology has enabled marketers to store information on consumers, assess their value to the organizations, and create individualized marketing efforts. Nonetheless, efforts toward measuring customer relationship value are scarce in the literature.
The standard approach for measuring relationship value is customer lifetime value (LTV). LTV is "the present value of expected benefits (e.g. Gross margin) less the burdens (e.g., direct costs of servicing and communicating) from customers" (Dwyer, 1989). While this model focuses on estimated income streams from the relationship, it does not account for the added benefits from the relationship.
This study developed and empirically tested a model of expanded LTV. Besides measuring a discounted revenue stream, the model measured the strength of the existing relationship and expanded relationship dimensions, as well as an individual's opportunity cost for being in a relationship with a professional franchise. The sensitivity of model parameters was tested and comparisons were made to the standard LTV model. The model was validated by segmenting customers into LTV deciles, and comparing these segments on their ratings of overall service quality, as measured by SERVQUAL (Parasuraman, et. Al., 1988).
This model was empirically tested based on a survey distributed to 5000 season account holders of a professional basketball team (n = 1,380). The expanded LTV model was sensitive to alterations in the inflation rate and discount factor (discount rate adjusted for opportunity costs), but relatively insensitive to changes in ticket price and marketing costs. Additionally, the expanded model captured more information about the relationship between customers and franchises than the standard model.
Perceptions and expectations of service quality increased with higher levels of customer investment for both dimensions of service quality and service areas. However, the overall impact of LTV on service quality gap (perception expectation) scores was negligible.