Customer Retention in Business Services: Determinants of Duration in Customer-Supplier Relationships

Douglas Bowman Purdue University ISBM Report 24997

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Douglas Bowman

January 1997

Douglas Bowman is Assistant-Professor of Management at the Krannert Graduate School of Management, Purdue University, West Lafayette, IN 47907. Email: 317-494-4446 (fax:9658) Thanks to Greenwich Associates for making their data available. Support was received from the Purdue Research Foundation (Summer Faculty Grant), the Center for the Study of Manufacturing Management Enterprises, the Huntsman Center for Global Competition and Innovation, the Fishman-Davidson Center for the Study of the Service Sector, the Richard D. Irwin Foundation, and the Institute for the Study of Business Markets. Helpful guidance from John Farley and Dave Schmittlein, and comments from seminar participants at the University of Toronto and at DartmouthCollege on an earlier version of this paper is appreciated.

the research also answers the question of how much of (apparent) age dependence in interorganizational relationships found in previous studies is really caused by marketing actions. A semiparametric estimation methodology for a generalized accelerated failure time model appropriate for analyzing duration data from industrial panels is developed. and the explanatory variables of interest (e. . This study examines the observable dropping (or retaining) of a supplier. To date. and competitor solicitation efforts on the continuity of a business-to-business services customer-supplier relationship. how actions that managers can and do take influence the likelihood that a supply relationship continues or is terminated. In doing so. pricing actions..CUSTOMER RETENTION IN BUSINESS SERVICES: DETERMINANTS OF DURATION IN CUSTOMER-SUPPLIER RELATIONSHIPS ABSTRACT This study investigates the relative effectiveness of relational selling / relationship building efforts. A number of recommendations for suppliers seeking to reduce the probability of being terminated is presented. Durations in industrial marketing panels are typically observed in grouped intervals.g. managerial actions) are time-varying. that is. the limited number of studies that have examined the influence of managerial actions or perceptions of managerial actions on the continuity of a business marketing relationship have been cross-sectional studies where the dependent variable is an (assumed) correlate of future behavior. Previous studies have controlled only for structural characteristics such as firm size. and it is not clear whether the age dependence found is really due (in part) to a neglect of the influence of marketing actions.

persist. Trust and commitment take time to develop and hence. Stinchcombe 1965.. Termed the liability of adolescence. declines monotonically with time (e. psychological commitment).g. From the seller’ s perspective. it has been suggested that duration dependence is more often nonmonotonic. Frazier 1983. Singh.g. Carlton (1986). for example. past exchange relationships increase the likelihood of future exchanges. Fichman and Levinthal 1991). Hall et al. independent sales representatives in an industrial channel. Carroll 1983. As they accrue. has been studied previously. Duration may also influence elements of the marketing mix. While the dynamics of duration are important. Anderson and Weitz 1989) and their continuity plays an important role in the effectiveness of the channel. Tucker and House 1986). Recently. The general dynamics of duration. the likelihood of interorganizational failure is increasing for an initial period and then declining (Levinthal and Fichman 1988. the conditional likelihood of a relationship terminating given that it has survived thus far. In advertising agency-client relationships. Schurr and Oh 1987). in a study of purchases by Fortune 500 companies. are more likely to assist the manufacturer in new product development. Since these assets reduce the risk of the relationship dissolving during some initial period.g. 1977. Given the expectation of continuity. favorable prior beliefs. and provide more informal market research (Anderson and Weitz 1989). defined as the influence of age on the likelihood that a relationship will dissolve (age dependence). Brtiderl and Schiissler 1990. the interest in this paper is in understanding the determinants . Early studies suggested a liability of newness effect. these assets become increasingly valuable and hence. the more rigid are prices. it is argued that many relationships may start with an initial stock of assets (e. longer lasting relationships tend to persist. engage in activities such as customer education that have a longer term payoff.CUSTOMER RETENTION IN BUSINESS SERVICES: DETERMINANTS OF DURATION IN CUSTOMER-SUPPLIER RELATIONSHIPS The importance of understanding how dyadic interorganizational relationships are created. the discontinuity in promotional strategy resulting from a change in agencies can weaken the brand image (Buchanan and Michell 1991).. Since specialized investments lose their value when applied to another relationship (Williamson 1985) the parties become locked into an existing relationship. They argue that assets specific to a relationship take time to develop. reported a negative correlation between price rigidity and length of buyer-seller association. a honeymoon period exists where the relationship is shielded from negative outcomes. Relationships in distribution channels have been viewed as dyadic in nature (e. and are destroyed has been raised in a number of contexts. the relative cost of generating a new customer versus retaining a current customer (Fornell and Wernerfelt 1988) suggests that actions that promote continuity can be more profitable. the shorter the length of association.. goodwill. Understanding the determinants of continuity is of particular interest in buyer-seller relationships (Dwyer.

the baseline hazard function captures the dynamics of duration how the time since the relationship was established affects the likelihood that it will fail. Kalbfleisch and Prentice 1980. the ability to predict which relationships are likely to be at risk and to understand the relative effectiveness of specific marketing actions in fostering the continuity of a supply relationship with a customer provides managers with an additional competitive “weapon”.g. we examine reasons which increase or decrease the likelihood that the buyer will break off the relationship. While an understanding of how and why supply relationships persist or break down is managerially important. we control for unobserved heterogeneity caused by potentially important missing variables. we consider covariates including observed organizational characteristics. It is useful to distinguish between co-productive relationships such as joint ventures (e. The liability of newness hypothesis for example. First. As such. continuity is not necessarily a positive goal. results that seem to support it are equally consistent with that which would be observed from a sample of firms that have a different. That is.g. The major contribution is substantive.g. Kogut 1991) and customer-supplier relationships. sometimes divorce is the best option economically (from the standpoint of the instigator at least). Secondly.. Thirdly.of the dynamics and what actions managers can and do take to increase or decrease the likelihood that a supply relationship continues or is dissolved. a service provider’ s marketing and relational selling efforts. we identify actions that managers can and do take (in the context of a particular business-to-business service) to influence the likelihood that a supply relationship persists or is destroyed. We examine vertical relationships such as those that exist between customers and suppliers. we investigate how much of the (apparent) age dependence in interorganizational relationships found in previous studies is really caused by marketing actions. We model the rate at which customer-supplier relationships dissolve as a function of three components. Levinthal and Fichman 1988) is really due (in part) to a neglect of the influence of marketing actions. takes the position that continuity is always good for the seller. Kogut 1991). The first is whether and how the general form of duration dependence differs across firms. unobserved.. current knowledge. and competing suppliers’ solicitation efforts. supported by empirical 2 . Our interest is in uncovering the effects of a number of cross-sectional and time-varying covariates on duration. vulnerability to failure. a hazard rate model is appropriate and has been used previously in studies on duration effects (e. This study however. has never been proven. In particular. Three important issues are investigated. Thirdly. Secondly. A number of hypotheses are developed and then tested using syndicated panel data from a business-tobusiness financial services industry. In some instances. it is useful to know if readily identifiable clusters of firms tend to be more or less susceptible to relationship breakdowns and in what way.. Hence. It is not clear whether the age dependence found in earlier studies (e.

The influence of marketing actions and perceptions of important relationship development factors such as commitment are not considered. which is supported by the data. Seabright. Tucker and House 1986.g.. suggest a direct link between their measure of the likelihood of future behavior (intention to drop a manufacturers’ representative and integrate into direct selling) and actual behavior (i. We then present the conceptual development. propensity to leave studied by Morgan and Hunt 1994). A model is developed for testing the hypotheses.’ The most relevant studies are by Anderson and Weitz (1989) ’ The relationship between the unobserved (assumed) correlates of future behavior such as intentions or satisfaction that serve as the dependent variable of interest and actual behavior is assumed to be perfect and direct . The next section reviews previous studies on the continuity of vertical marketing relationships. likelihood of termination studied by Anderson and Weitz 1989. Hypotheses were empirically tested using (cross-sectional) survey data where the dependent variable of interest is an (assumed) correlate of future behavior. a number of studies have examined dependent variables related to the future effectiveness (e.g. Weiss and Anderson ( 1992).. Singh. taking or avoiding an action): “Our central hypothesis. In the channels literature. is that managers avoid converting from a rep to a direct 3 .K. PRIOR EMPIRICAL STUDIES A limited number of empirical studies have examined factors that influence the duration of interorganizational relationships.studies by Weiss and Anderson ( 1992) and Anderson and Narus (1990) are indicative. Longitudinal studies of the observed duration of customer-supplier relationships are limited to a series of studies on the duration of auditor-client relationships (Levinthal and Fichman 1988. Hypotheses are developed for how buyer characteristics. Levinthal and Fichman 1988. (Buchanan and Michell 1991).g. The hypotheses are tested using syndicated panel data for a business-to-business financial services industry. nor considered unobserved heterogeneity. These studies are summarized in Table 1. While a number of previous studies (e. We conclude with a discussion of the results and the implications of our findings. supplier performance and marketing actions. and competitor solicitation efforts influence the likelihood that a customer-supplier relationship terminates. Fichman and Levinthal 1991.I evidence is limited.e. Because the data were compiled a’ posteriori. they have not allowed for time-varying covariates nor explicitly dealt with the grouped data typical of marketing applications. Levinthal and Fichman 1992) and to a study of client-advertising agency relationships in the U. Fichman and Levinthal 1991) have demonstrated the usefulness of using hazard rate models. these studies consider only structural factors such as firm size and publicly reported measures such as financial metrics as covariates. in discussing the results of their study... A second contribution is the use of a semiparametric estimation method appropriate for analyzing grouped duration data when time-varying covariates are present. satisfaction studied by Anderson and Narus 1990) or the future continuity of a relationship (e.

find that the age of a relationship had no influence on perceptions of switching costs. Over time however.and Weiss and Anderson (1992). Since prior studies typically form a hypothesis as a one-sided test (versus a null of no influence). A number of frameworks and theories have focused on identifying those factors which favor continuity over break down. Levinthal and Fichman (1988). the rate at which relationships end should eventually be decreasing with salesforce when . structural economics. The explanations are grouped according to their plausible association with age (increasing. and ecological theory. assets specific to the relationship develop. Unfortunately. An interesting finding relates to the influence of age. and Briiderl and Schtissler (1990) provide a rationale for the observed dynamics of duration. which in turn was positively associated with expected continuity. they study the determinants of continuity in a channel relationship (in particular. it seems unlikely that a new provider would ever be hired if the client felt that the supplier could never be trusted. industrial organization. AGE DEPENDENCE While only a limited number of empirical studies have tested explanations for the continuity of a businessto-business relationship. Anderson and Nat-us (1990) motivate their use of unobservable dependent variables in modeling manufacturer-distributor partnerships by noting that “satisfaction has been found to lead to longterm continuation of relationships (Gladstein 1984)“. (p. They hypothesize that some relationships may start with an initial stock of assets. many studies have discussed factors that are thought to be important. They did however. Weiss and Anderson (1992) did not consider the direct influence of age on continuity. Thus. Some sort of initial “benefit of doubt” is an example of a factor whose effect should diminish with age. The age of a relationship is typically used as a proxy for a large number of unobservable influences on the duration of a relationship. Drawing on theory from social exchange. . 4 . For many explanations. decreasing. the table distinguishes between factors which encourage continuity and factors that suggest why (and when) a particular relationship may break down. the propensity to replace an existing outside distributor or salesforce with an in-house sales force) in the context of the electronic parts and components industry. constant). social exchange. channel research. Even intangible factors such as trust likely begin with some “benefit of doubt”. Table 2 summarizes determinants of continuity (or switching) identified in previous studies. and according to the literature from which they are drawn: perceptual or decision processes. 110)“. their relative influence is thought to be related (at least directionally) to the age of the relationship. These “assets” serve to insulate a dyad from any negative outcomes that occur in the initial stages of the relationship and suggest that the likelihood of breakdown should be initially increasing with duration. . Anderson and Weitz (1989) find a positive influence of age on the continuity of a relationship. in their study of auditor-client relationships. Further. negotiation. or marketing / strategic explanations. even after controlling for its influence through the building of trust over time.

Similarly. For example. some supplier evaluation criteria can only be evaluated based on a series of encounters (Brtiderl and Schiissler 1990). individual decision makers within an organization. Hence. has received industry wide publicity or has created significant obligations to major 5 . The literature on escalation of commitment in organizational behavior focuses on determinants of a continued commitment ta the current course of action. (1991) study factors which discourage reversing an action once it has been implemented. Customers who establish a reputation for frequently switching suppliers during the initial stages of a relationship may be at a disadvantage since new (or potential) suppliers may be reluctant to devote significant resources to servicing these customers until their status becomes clearer. Also. In addition.age.. Staw and Ross 1987). Chen et al. Finally. Much research on organizational buying indicates a different decision process for selecting a new supplier versus a straight rebuy (e. there is a time lag in implementing a new strategy (Ghemawat 1991) that necessarily prohibits the immediate replacement of a supplier. an organization may start with a set of initial expectations and/or a desire to not terminate quickly and risk establishing a reputation for flippantly switching suppliers. there are psychological costs to changing a particular course of action.g. internal irreversibility which is based on organizational inertia and external irreversibility which is based on the degree of top management commitment and public exposure. They identify two types of irreversibilities. an initial stock of “assets” together with a relatively limited time in which to gather information necessary to make a rational decision suggests that the highest risk of disbandment should not occur at the point of initial commencement of a customer-supplier relationship (Brtiderl and Schtissler 1990). For example. Decision processes and biases may also contribute to observed patterns of duration. decision makers within an organization may feel a need to “save face” (Brockner. at least in the initial stages of a relationship. including commitment that may extend beyond economic rationality. sunk costs may loom large in a decision to terminate a recently hired supplier. For example. decision makers may be reluctant to change or reverse a decision quickly. In addition to economic costs. the relative increase in time and effort to select a new supplier may favor continuity. Ghemawat (1991) argues that both the sunk cost fallacy (Kahneman and Tversky 1979) and excessive discounting of future consequences (Ainslie 1975) contribute to an inertia to preserve the status quo. For example. A rational customer. a move that has been formally announced by top management. Lilien and Kotler 1983). wishing to avoid establishing a reputation for switching may benefit from ensuring that at least some of their relationships last beyond their initial stages. The relative influence of a number of factors in shielding a customer-supplier relationship from negative outcomes and promoting continued exchange is thought to diminish as a relationship matures. not wanting to admit to others that they made a bad decision. Hence. Rubin and Lang 1981) and the need to justify and/or rationalize their behavior (Staw 1981. Rubin and Lang 1981). may be reluctant to quickly terminate a relationship they helped to establish (Brockner.

the continuation of a voluntary pairing such as that between buyer and seller is the outcome of a “performance sampling” process.stakeholders would be viewed as one with high external visibility. the fee may be re-evaluated (possibly as part of a periodic renewal process initiated by the customer). Matches are formed on the basis on imperfect information. Size 6 . March and March (1978) propose that. Additional information is provided by experience in the match. at a minimum. and four that capture the important processes in business services marketing: Customer characteristics. argue that. and develop hypotheses for the key constructs tested. Below. the likelihood of termination is also influenced by actions that managers take. Pricing tactics. Customer Characteristics. Relationship building actions. In addition to age. in a world of imperfect information. Previous studies on duration have identified the need to control for heterogeneity in firm characteristics. These are variables which may suggest readily identifiable customer groups that have a higher or lower propensity to switch suppliers. one that describes buyer characteristics. They are factors thought to influence continuity. Even if the service does not change. but that are either difficult to observe or difficult to test with a large sample. The above provide a rationale for expected age dependence. The information gained through experience then affects subsequent assessments of the attractiveness of the match. 5. These are variables which capture the effect of prospecting efforts by competitors seeking to displace the incumbent supplier. Performance sampling refers to the experiential observation of partners in a match. we elaborate on each of these factors. one should control for firm size. When winning the business. Size is a proxy for the complexity of the services the buyer requires (Levinthal and Fichman 1988). CONCEPTUAL DEVELOPMENT Customer retention refers to efforts to build loyalty and inoculate supply relationships against competitor appeals. a covariate that should be relatively easy to measure. Competitive solicitation efforts. and a fee. Efforts to develop structural and/or relational ties that act as possible barriers to switching and/or provide the incumbent supplier with an information advantage over competitors. Brtiderl and Schtissler (1990) for example. the incumbent supplier typically negotiated both a description of the service to be provided. The next section develops the important covariates tested here that influence the duration of a business services supply relationship. Service quality. Customer perceptions of the competitive performance of the incumbent supplier on the important service features. We model retention as a function of five types of variables.

higher perceptions of performance should lead to longer expected duration. we state it as a formal hypothesis since size has never been tested in a model that also includes marketing variables. Major changes upset the established order and patterns of interaction. the time and effort needed to coordinate and implement the substitution of a major supplier should increase with firm size. the preferred bureaucratic response to organizational change is via incrementalism. since by definition. As would be expected. and standard routines to coordinate and control an organization and its multiple actors (e. In addition. it is important to control for customer perceptions of the competitive performance of the service delivered.may also signal a bureaucratic decision making process. Service Quality. The key idea is that there is a need for policies. The effect (positive) of customer size on continuity has been demonstrated previously and could be considered as a covariate here.g. Service offerings consist of the basic core service and. Larger clients tend to be more complex and more complex requirements typically require specialized investment on the part of both the client and the provider. In advertising agency-client relationships. larger firm size is associated with greater expected duration of a customer-supplier relationship. Hence. However. we hypothesize. Buchanan and Michell(l991) found that stability was positively associated with the size of the organizations involved. possibly.. A significant literature studies organizational decision making as the outcome of a bureaucratic process. organizations themselves are a collection of powerful internal groups. McCaffery and Van Wijk 1985). Relationship Building Actions. Hl: All else being equal. these investments lose their value when applied in another context (Williamson 1985). In sociology. a number of peripheral components or amenities.g. Simon 1947. procedures. Hence. changes from established order should be small (MacMillan. higher perceived supplier service quality is associated with greater expected duration of customer-supplier relationships. Cyert and March 1963).. MacMillan 1978). Firm size is a proxy for the complexity of the services required and provided. H2: All else being equal. to accurately understand the influence of the other factors in the model. Cook and Emerson (1978) see commitment as the central construct differentiating social 7 . Also. At a minimum. The likelihood of continuation should also increase with the level of transaction specific investment. Hence. Perceptions are appropriate given the intangible nature of services (Zeithaml 1988). each with interests in various issues that arise in an organization (e. March and Simon 1958. size is a variable that suppliers could use to qualify those potential customers it wishes to pursue.

a high level of perceived expertise or skill is associated with greater expected duration of a customer-supplier relationship. While some price increases may be justifiable to the client. Price is visible and in some instances may be the only factor that is directly comparable across competing suppliers. We propose that higher perceptions of provider commitment to the client lower the risk of the relationship breaking down. H3: All else being equal. Higher levels of competence could lead to a higher quality of communication (Anderson and Weitz 1989). When the business is first bid. Secondly. and Oh 1987). Once won however. A price increase may be necessary in order to continue to profitably service the client. The intangible nature of services may encourage at least some customers to weigh fees or price heavily when selecting and evaluating providers. Hence. greater perceptions of the commitment of the partner in an exchange relationship have a positive influence on the commitment of the party under study. buyers may begin to devise their own solutions to problems. Schurr. Administrative and other support staff impact how a service is provided. H4: All else being equal. That is. higher perceived commitment of supplier senior management is associated with greater expected duration of a customer-supplier relationship. One measure of the perceived commitment of the supplier firm is the perception of their senior management involvement. the provider realizes the true cost of fulfilling its service commitments. including the supplier firm’ s willingness to assign competent staff to work with the client. It identifies relationships where at least one party believes that the ongoing relationship is so important as to warrant maximum efforts at maintaining it (Morgan and Hunt 1994). When liaison personnel are perceived as ineffective. Commitment represents the highest level of relational bonding (Dwyer. Etgar 1979) and is essential for the implementation of long term initiatives such as goal setting. we still expect that a price increase will increase the likelihood of substitution. it may be driven by the cost of providing the service. A price increase may be initiated for a number of reasons. Anderson and Weitz (1992) found that commitment in channel relationships is enhanced by idiosyncratic investments and by the perceived commitment of the other party.. and reduce their reliance on the supplier. First. Pricing Tactics. it is based on limited information available to the provider from economic exchange. higher levels of perceived competence should reduce the likelihood of breakdown. Any review of a services supply relationship involves price. it may be opportunistic in that the incumbent supplier perceives the buyer to be “locked-in” due to high switching costs and seeks to capitalize on this. 8 . Communication improves trust by resolving disputes and misunderstandings (e.g. particularly when one considers that competitor suppliers are constantly making sales presentations and solicitations to the customer.

and legal restrictions. the greater the risk of being terminated. there is a need to explicitly address the role of competition (Weitz 1985). This is true of the industry studied in the application. we favored the latter because discussions with practitioners suggested that this was the more common motivation. Hence. In forming the hypothesis. recent research on decision speed has found that the number of alternatives considered is positively associated with decision speed (Eisenhardt 1989. access to resources. Further. Alternatively. All else equal. From the perspective of the alternative supplier.H5: All else equal. organizations that are considering switching suppliers or are in the process of selecting a new supplier are more likely to arrive at their 2 We consider only environments where bringing the work in-house is not feasible due to the specialized skills required. Judge and Miller 1991). more solicitations should lead to a greater chance of seeing an effective solicitation. customers may not necessarily restrict their consideration set to include only alternative suppliers who have recently visited. the complexity of individual customer requirements and associated fees necessitate a significant personal selling effort. The number of solicitations a client receives is an important indicator of competitor activity. In high involvement decisions. and hence a greater likelihood that the buyer both recognizes the weaknesses of their current supplier and is exposed to an alternative supplier who is perceived as offering greater long term benefits. While the possible impact of a price increase is clear. Number of sales solicitations directly measures recent competitive activity. and are unsuccessful in achieving these objectives. Price drops may have a negative (counter intuitive) impact on continuity if they are driven by a need to counter an effective appeal from a competitor or are an attempt to correct a client’ s realization that past pricing was “unfair”. elaborate solicitations are the favored approach to winning new business (by displacing the current provider2). or as a willingness to limit the supplier to a “fair” profit. This suggests that. the greater the number of competitive solicitations over a period of time. a price decrease may be positively associated with continuity if it is viewed as a sincere attempt to retain the client against a strong competitor. 9 . all things equal. H7: All else equal. Providers operate in an environment where competitors would be more than willing to displace them. a price increase will be associated with an increased likelihood of switching suppliers. the effect of a price decrease is not and likely depends on the reasons for the change. Alternative Suppliers’Marketing EfSorts. In addition to understanding the importance of satisfying customer needs and considering customer responses in the development of marketing programs. For many business-to-business services. H6: All else equal. a price decrease will be associated with a decreased likelihood of switching suppliers. Hence. sales solicitations are explicit attempts to enter or remain in a potential customer’ s consideration set and ultimately to displace the incumbent supplier.

(1) where. Alternatively. which can be expressed in “regression” form as. The literature does not. In addition. This section has identified factors that we expect will influence the duration of business services customersupplier relationship. This class of models encompasses virtually all standard parametric duration specifications such as log-normal or log-logistic and various proportional hazards specifications.33-35. proponents of a liability of adolescence 10 . p. provide any guidance as to the relative size or importance of these various effects. Appropriate choice of & and letting g(X. customers with larger consideration sets should have a greater propensity to substitute suppliers.( s )d s. h is monotone increasing transformation function. 169). A contribution of this study is to offer conclusions along these lines (for a particular businessto-business service). likely also consider a wider set of possible alternatives. Buyers who devote proportionately more time to picking and choosing suppliers versus taking the time to consider which providers really work well with them.decision sooner when more alternatives are considered. The PH model results when h(T)= logjh. %T. For example. Ridder 1990 p. proponents of a liability of newness phenomenon have used the Weibull for the distribution of the failure times. however. Under this approach. is specified as the product of a term that depends on the elapsed duration and a term that captures the effect of the covariates. p. p. = &(7’) g(X. Generalized AcceLerated Failure Time Model The PH specification is a special case of the Generalized Accelerated Failure Time (GAFT) model (Ridder 1990). the hazard rate. = exp(X’P) ensures a non-negative hazard. X. T is a non-negative random variable representing duration. Buyers who devote more time to picking and choosing suppliers. customers both pick and choose suppliers and then subsequently work with them to achieve desired objectives. or conditional probability of exiting a relationship with a supplier at time t given the relationship’ s survival up to time t. and E is distributed as a Type-I extreme 0 value random variable (Kalbfleisch and Prentice 1980 p. and E is an error term. MODEL DEVELOPMENT A widely used method to analyze duration data is the semiparametric or proportional hazards (PH) approach (Cox 1972). a distribution that accommodates a monotonically decreasing hazard function. H8: All else equal. could be more likely to change managers sooner.. h(T)= -X’ P+&. This suggests the following hypothesis. A parametric approach requires the analyst to use theory to specify an appropriate distribution for the duration variable (or its logarithm).

K. Since the observation periods are 11 .1 ) S ( t . S = 1-F is the survivor function associated with the cumulative distribution function of the duration. spell-specific heterogeneity. Conditional Survivor Function Each customer in the panel reports on their supplier relationship at regular intervals. fully nonparametric approaches are difficult to estimate with the panel data typically available in industrial marketing applications.1 ) (3) (2) where. k=l. Prentice and Gloeckler (1978) discuss methods for estimating h when the distribution of E is known.. unobserved. A common way of generalizing the PH model is to add an additional error term representing independent.phenomenon.. and Truong 1993). The estimator discussed below is based upon this decomposition. Stone. Ideally.. In practice however. the GAFT specification is expressed as P+q+8= -x’ P+& h(T)=. Any arbitrary GAFI’ specification with error E can be decomposed into a model with a PH component and an artificial mixture component 9 (Sueyoshi 1994). one would like as few restrictions as possible on the transformation h and on the error distribution]. Heckman and Singer (1984) estimate the distribution of E nonparametrically when h is known.F ( t . performing the error decomposition simplifies the estimation problem greatly by allowing the focus to be on departures from an extreme random variable.X’ where. However.g. 8 represents the unobserved heterogeneity. IJ is an extreme value variable capturing the PH portion of the model. a(t)=F’ r(T>tIT>t-I)= l-F(t) S ( t ) l.. where the hazard rate of the relationship ending increases for an initial period and then declines. That is. given survival to the beginning of the interval. Nonparametric approaches which place no restrictions on both the transformation h and the error distribution have recently been discussed (e.1. have used a log-normal distribution. Survival to time rK is the same as surviving each of the K intervals (tk_l. one gains all the computational simplifications associated with the PH class of models. and E is the convolution of the distributions of q and 8. Techniques that nonparametrically estimate the distribution of 8 under the assumption of an extreme value TJ are equivalent to nonparametrically estimating E. Conversely. the data are grouped since respondents are observed at regular. Hence. Kooperberg. discrete intervals and there are often a large number of explanatory variables of interest. The discrete conditional survivor function provides the probability that the supply relationship survives the half-open interval (t. t].

S(t) = fi a(k). Kiefer 1988. the overall survivor function at the durations of interest can hence be expressed as the product of successive interval survivals. the survivor function for equation (2) may be written as L$ (t.(S(lag(~~~exp~x~~-e)))) with the expectation is taken based on the distribution of 8. p.constant across time (annual in the application presented here). the duration interval can be normalized to unity so that tj=j..e. the additive separability in the GAFI’ expression in equation (1) does not hold. e) = exp( . the same simple expression for the conditional survivor function is obtained (Sueyoshi 1994). the associated conditional survivor functions are given bY p-e)) a.(6 X. Conditioning on both X and the artificial mixture term 0. its cdf is F. VanHuele et.FE (lo&. That is. k=l Since we specified rl as an extreme value variate.)=exp(-exp(Y. and unobserved heterogeneity.. Hence.p.e)) . K(t) = log( ehtr) -eh@-‘)) .y. Using equation (3). The associated survivor function is given by s(f) = 1 .exp( h( t) + X’p . Fortunately however. (5) When the explanatory variables can vary over time as in this study. Prentice and Gloeckler 1978). t = 1. if the changes in X occur only at a frequency that is less than the sampling (or grouping) frequency. the GAFT equivalent of equation (1) may be written as log( /:7(s) exp( X( s)p)ds) = E .( lot& exp(XJ . Han and Hausman 1990. p. the conditional survivor function is expressed as a function of a set of time specific dummy variables.. W)=exp (-exp(@)+ X’ where.0. the explanatory variables. we model time dependence nonparametrically in order to allow for a very general pattern (e. . the conditional survivor function may be written as 12 . Given knowledge of the data and of 8.+X’ P-e)). The most flexible parameterization is to estimate i(t) for each period using an interval specific constant term.= 1-exp(-exp(s)). yt. X. . (4) a&t X. In the case of time-varying explanatory variables. For a maximum duration of interest equal to M periods.g. w exp( X(s)P)ds)) * The discrete survivor function may be written as w= s.aZ 1995. A4.)) (6) =E.

the first t-l indicators take a value of 1 (i. The specification presented below differs from the standard binary response likelihood in that the probabilities based upon the cdf of the normal (probit) or logistic (logit) are replaced by the conditional survivor functions o+ For each “trial”.. Alternatively. A relationship (right) censored at t provides t binary indicators. and Fo is the mixing distribution. survival) with probability a. Heckman and Singer 1984) estimate the distribution of 8 simultaneously with the parameter vectors y and p by assuming Z points of support v=(vi. y ) =exp(--exP(Y.a. rrz). one can nonparametrically (e. numeric integration can be used to derive the likelihood function (Butler and Moffitt 1982). all which take the value 1. each provides Ti records of the form (Yi. where a( t.. =*=exp(-r. and Xi. Many researchers have assumed the distribution of 8 to belong to a particular parametric family. Estimation The data can be thought of as a series of no switch / switch “trials” for each customer. The number of support points is allowed to approach infinity with 13 . the expression is identical to equation (5) with X being replaced by its time- (7) varying counterpart. are the explanatory variables for the dyad in the t’h period. the specification is complete once Fe is considered.g.). Xi. is the indicator of whether or not the dyad survived period t.(t). log gamma is often used since it yields a closed form solution for the random effects estimator. The mixing term can be thought of as generating a correlation between the no switch / switch binary responses across time for a given customer-supplier dyad.. the analyst observes a (0.. p.. the last indicator is a 0 indicating that the supply relationship was terminated with probability l. For a sample of N dyads.p-6)) When log zt is parameterized as yt. +X...e. where Yi. The artificial mixing term 0 is much like the individual specific heterogeneity in panel discrete choice models.(j)..vz) for the distribution 8 with associated probability vector n=(x.P-0)) S&-l) = exp(-exp(logo..a.. the log-likelihood is given by. +x&P-e)) is the conditional survivor function. If the distribution of 8 is assumed to be Gaussian. X.. 0. As with any random effects model.exp(X. A supplier switch in the ?’ period provides t observations.l) binary outcome indicating whether or not the current supplier relationship survived that interval. Following Lancaster (1979).. For a total number of binary outcomes given by C$ti .

Over 90% of the client organizations surveyed indicated that they used only a single service provider. and competitive structure are similar to those found in many business-to-business services. after five years 24% of these customers had reported at least one switch. 388 of the 1. Though specific identification is not possible. + X. buyer-seller relationships and interactions. Annual interviews were conducted with the senior financial managers at the client organizations of over 70% of the largest purchasing firms in the U. (Xi) = ~:=~cx(Y. Lv. In their study of failure in agency-client relationships.935 respondents participated all seven years. the lead supplier typically provides all the critical services. only 33% (623 of 1884) of the U. the likelihood is given by (9) where. 1. most researchers add terms of support until the additional terms do not contribute substantially to the likelihood or until the distribution collapses to a lower dimensionality. and collects the highest fees. (non-financial services) firms they studied switched auditors at least once over a thirteen year period ending 1985.935 respondent firms participated at least once (and indicated their supplier firm).935 respondents. Levinthal and Fichman (1988) report a much lower switching incidence. In practice. Switching Incidence and Empirical Hazard The aggregate switching incidence in these data is within the range of values reported for other business-tobusiness services.. With Z points of support for Fe. Suppliers provide a variety of services including administration. Of the 388 firms who participated in all seven years of interviewing.500 in any one particular year). Seven years (1989-1995) of interviews are available3. 3 2. 159 respondent firms did not identify the supplier used. the integral in equation (8) is replaced by a weighted (finite) sum. the industry’ s influence on the economy is significant.222) of the major accounts in the United Kingdom switched at least once over a five year period ending in 1985.094 client firms were interviewed at least once over the seven year period (approximately 1. is awarded the most business. 14 . and reporting. leaving 1. 41% (159 of 388) reported at least one supplier switch. These respondent firms were deleted from the analysis.S. the business processes. While client organizations may choose to deal with a number of providers. In this case. +X. As the table below shows.the sample size. Buchanan and Michell(l991) report that 55% (672 of 1. Also.S. approximately 20% of these (388 of 1. DATA The data are syndicated panel data for a major business-to-business financial service provided (typically) by banks to client organizations that include all Fortune 500 firms.$-v)” (l-a(~.935) participated all seven years.$-v))l-y”. consulting.

1989-91 . on average. 1989-92 . 3881 43 ) 8_1 3881 -I I 4% 24 I l I 3881 I 59 30 f I 21 1 3881 I I 47 91 . 1989-93 ’ 1989-94 . no missing explanatory variables). only 5 1% of the size of the included firms.163 respondents who joined the panel late. The 1. complete history of any time-varying covariates is known. 296 ’ 241 I 229 29 . Hence. This left-censored data can not be used since we do not know when the relationship began4. our results are more likely to be generalizable to supply relationships involving larger (greater assets) customers. The empirical hazard (often called the Kaplan-Meier estimates) is shown below. They consist of 229 relationships that were observed to remain stable for all seven years of the sampling window and 1. I 71 3881 21 I 93 53 9 4 388 I * sample is the 388 respondents who provided data all seven years. Removing the leftcensored data resulted in a total of 543 useable spells. Censoring refers to whether or not we observe when a particular relationship began and/or when it was terminated. At the first observation period each client organization was in a previously established relationship. use both uncensored (complete spells were observed) and right-censored data. The spells excluded (left-censored) from the analysis represent respondent firms that are. but the switch occurred sometime during a period in which they did not participate in the survey. For respondents reporting multiple spells. no unexplained heterogeneity (i. Left-censored spells are those for which the starting period is not known.. The included observations are all single spells (one spell per respondent customer). only that the relationship was (or will be) terminated some time after the measurement period is known. 15 . the earliest occurring observed spell was retained (including multiple spells per respondent has the effect of “over-sampling” those relationships that are at greatest risk of being terminated). A useable switch is defined as one which the buyer is observed using two different suppliers in two consecutive observation years. or missed at least one survey period during the sampling frame and for which no useable switch was observed. In the latter case.163 respondents not used includes buyers who did switch suppliers. 4 Necessary conditions for including left-censored observations so that the estimators are not biased: baseline distribution is known or is exponential. We can however.e.In the financial services data examined here. Frequency of Observed Supplier Switches After Each Observation Period Number of observed switches 0 :. dropped out. 33% of the buyers have switched suppliers within approximately the first 5% years. 1989-95 (2 periods) 1 (3 periods) 1 (4 periods) 1 (5 periods) 1 (6 periods) I (7 periods) 362 I 337 ’ 319 . 3 4 Total* Observation Period 1989-90 .

000 (. Consistent with Peterson (1986a. To see this.024) 53 . may suggest an initially increasing duration dependence that may not exist since. Conversely.019) 134 ! 274 . Weekly observations for example. This also assumes that more than one switch does not take place between observations. then indicated provider B for two consecutive measurement points. An inverted-U is also not consistent with a liability of newness (monotone decreasing) hypothesis.000 (. except for unusual circumstances. number of alternatives considered). we assume that the observed (time-varying) covariate values hold relatively constant throughout the twelve month period centered on the observation point.07 1 (. Descriptive Statistics for Covariates Table 4 presents the means and correlations of the explanatory variables for period 1.015) 113 1 8 1 0. then decreasing) hypothesis. An appropriate observation interval is monthly. the annual observations available for use in this study are sufficient. Depending on when the switching took place. The observed hazard rate is influenced by the choice of observation period. commitment of supplier senior management. provider B could have been used for a length of time anywhere between just over one year and slightly less than three years.ooO) The data indicate a very high probability of failure during the first year. Number of solicitations 16 .069 (. competence of supplier’ s interface personnel). Error) 543 f 0. and three measures of competitor activity (number of solicitations. The termination rate is at its lowest point at year two.Empirical Hazard Rate Period 1 2 3 4 5 6 Risk Set f Number Failing 1 Hazard (Std. number of solicitations deemed effective. then was found to be using provider C (or A again) the following measurement point.094 (. though the size of the errors do rule this pattern.the respondent was initially using provider A. three measures of customer perceptions of supplier performance and actions (service quality. It then increases slightly in year three and again in year four. Consider a spell of length two . 51 0. two measures of pricing tactics (increase or decrease in fees). The variables consist of a measure of buyer characteristics (size). 0. 1986b). In addition. assume a hypothetical process where switching decisions are made every month. an annual observation interval would mean many switches may not be observed.ooO) 11 1 0 I 0. Measurements are taken at discrete points in time (annually).040) 23 I 01 0. Since the planning cycles in the client organizations used in this study are typically twelve months in duration.247 (. we treat any switches as taking place at the midpoint between observation points. 19 . This inverted-U shape is not consistent with a liability of adolescence (increasing. no terminations should be observed during the first three observation periods.

number of alternatives considered) are minimal. As would be expected. Such a pattern of multicollinearity is not 17 . respondents. customers who are dissatisfied with their current supplier may have larger consideration sets since they are more likely to be actively examining alternatives. Confirmatory factor analysis indicated a single factor for these constructs.deemed effective is a subset (p=O. In addition. choose to rate the supplier they use highly on all dimensions (why else would they be using that supplier?). however. and the measures of competitor / alternative supplier activity (number of solicitations. That is.52 for service features and supplier management commitment to . Composite measures were created as the simple average of the item scores. range from .either customers only select suppliers they perceive to be superior performers on all relevant dimensions. Two constructs. Solicitations represent a customer acquisition attempt by a competitive supplier. In some industries. For these data. Similarly. are multiple item measures. The implications of these high correlations for analysis is discussed below. or conversely. the correlations between customer perceptions of supplier performance and the number of solicitations or the number of alternative suppliers considered are (with one marginal exception) not significant. This would suggest multicollinearity with other explanatory variables that may be observable to competitors.37). A solicitation represents an explicit attempt to enter (or remain in) the consideration set. and the number of suppliers who visited and were perceived to be particularly effective at explaining their capabilities. Correlations among explanatory variables involving size. and at least some of the attempts will likely be successful. It was not developed above as a separate hypothesis.76 for both constructs. There are two possible explanations for such highly correlated performance ratings .33) and the number of effective solicitations (p=. The correlations among the measures of perceptions of supplier performance however. The two measures of competitive (alternative supplier) activity are the number of suppliers who visited during the past twelve months to solicit business. Since it is not clear which measure should be most relevant and useful. but who would be seriously considered. the number of solicitations a client firm receives may be influenced by their perceptions of the competitive performance of the supplier currently used. we also examine a measure of consideration set size . dissatisfaction with the current supplier may invite or entice alternative suppliers to direct additional resources towards trying to displace the incumbent supplier. number of effective solicitations. consideration set size is somewhat correlated with both the number of solicitations (p=.79) of the total number of solicitations. service quality and competence of the supplier’ s interface personnel.70 for service quality and competence of interface personnel. feeling it necessary to justify their behavior. More solicitations may signal that competitors have done a diagnosis that the relationship is at risk. The reliability alpha was . both will be examined.a count of the number of suppliers mentioned as not used.

However.. it is preferable to understand their separate impact. Correlated predictors cause convergence problems in the model. Estimates of the Effects of the Covariates Table 5 presents the results for the PH specification. and for the PH with both parametric (Guassian) and nonparametric (two points of support) heterogeneity. Correlations among the measures of competitor / alternative supplier activity (number of solicitations.e. Similar to the perceptions data. For analysis.X. 5 Standardizing was done using the data pooled across all respondents and periods. since the measures are not perfectly collinear. One alternative would be to create a composite measure labeled as say “overall satisfaction”. With the exception of customer size._. these variables were standardized and then each was examined separately in a model that included the other explanatory variables of interest. The excluded variables were tested as described in the analysis plan above. number of effective solicitations) were also significant.70 with service features). but the full tables are left out to conserve space. the consecutive period correlation for all variables ranges between . The low correlation is evidence of the importance of treating the covariates as time-varying and suggests the need for suppliers to regularly monitor the status of their relationships.evident from the correlations reported in Table 4. the correlations among the perceptions data (service quality. 18 . supplier management commitment. The model presented in Table 5 excludes the measure of competence of interface personnel (which has a correlation of 0. Asymptotic t-statistics (two-sided) are in parentheses.45.Ol and . the perceptions data were standardized5. Corr(X. and since the interest in this research is in understanding the relative impact of various actions that suppliers can take. The far right column of Table 4 presents the consecutive period correlation for each variable (i. negative coefficients mean longer expected duration. The results using these variables are discussed in the text. Positive coefficients mean shorter expected duration and a higher risk of termination. competence of interface personnel) are significant. Since a small number of respondents did not provide complete perceptions data this approach also helped to reduce the number of respondents who were dropped from a particular analysis.)) for all spells of length greater than or equal to two.. EMPIRICAL ANALYSIS Analysis Plan As discussed above. and then when collinearity caused convergence problems. examined independently in a model that retained the other explanatory variables of interest. and includes number of solicitations as the measure of competitor selling actions. The substantive results discussed below were not sensitive to standardizing separately within duration years.

the coefficient for size is negative and significant. or is possibly amplified by competitor actions. We examined two measures of the relationship building efforts of suppliers: perceptions of supplier management commitment (H3). Higher perceptions of service quality leads to longer expected duration. As expected. raising fees increases the probability of being terminated.g. though only for the PH specification and for the PH with parametric heterogeneity. we added two variables to the model reported in Table 5 describing the interactions between i) the indicators that fees were changed. We expected (Hl) the coefficient of size to be negative. and perceptions of the competence of interface personnel (H4). The results from this model are reported in Table 6. These variables were examined separately in a model that included the other variables of interest. To investigate this further. We were less certain about the coefficient of the indicator for whether the supplier lowered its fees. we tried omitting some of the variables with significant coefficients from the model. but their effect is rendered not significant after controlling for pricing actions and perceptions of service quality. Levinthal and Fichman 1988. the coefficient was in the expected direction. As expected (H2). Consistent with other studies (e. To test this. larger customers should have a lower propensity to substitute. The signs and statistical significance of the other coefficients in the model are not changed. Two measures of supplier pricing tactics were included in the model: whether or not the provider increased its fees during the past 12 month period and whether or not the supplier decreased its fees during the past 12 month period. The interactions terms are negative (decreasing propensity to 19 . Relationship Building Actions.Customer Characteristics. In all cases however. the coefficient of service quality is negative and significant. the sign for whether fees were lowered was negative (decreased probability of substituting) for the PH and PH with Gaussian heterogeneity. The coefficient of the indicator of whether the supplier raised its fees is positive and significant in all specifications supporting H5. It is interesting to ask whether the effect of raising prices can somehow be attenuated by superior performance.. Buchanan and Michel 1991). however is not significant with nonparametric heterogeneity. but positive (increased probability of substituting) for the specification with nonparametric heterogeneity. the coefficient was not significant. In both cases. Size. and ii) perceptions of service quality. suggesting that the influence likely had to do with the reason for the change. Service Performance. As reported in Table 5. It seems that relationship building actions do contribute to longer expected duration. Pricing Tactics. but was not significant.

Since the correlation among these variables were significant (p=. customer perceptions of a supplier’ s competitive performance.substitute). Alternative Suppliers’ Marketing Efforts. Table 5 shows the results of a model that examines the effect of number of solicitations (H7) and consideration set size (H8). number of solicitations deemed effective. each was examined separately in a model that included all the other relevant explanatory variables. The coefficients are not significant. Two different measures of alternative supplier efforts were examined. nor does it seem that buyers consider a greater set of customers following a price increase. They were then asked to indicate which of those suppliers did a particularly good job at explaining their capabilities. Two s business measures of competitor solicitations were examined . For consideration set size. respondents were asked to identify those suppliers not currently used who would be seriously considered. An incorrect sign could be a suggestion that “good” customers defined as ones who have a known propensity to not flip suppliers attract more solicitations than ones with a (unobserved) reputation for switching. The model would not converge when heterogeneity was included. or size of consideration set (Table 4). Respondents were asked to indicate which suppliers. It is worth noting that raising fees was not correlated with number of solicitations. Unobserved Heterogeneity ( Estimates of Fo) Two specifications that included heterogeneity were examined: a parametric approach based on a Guassian distribution. visited their firm during the observation period to solicit their business. The sign of the coefficient for number of solicitations is not in the expected direction for the specification with nonparametric heterogeneity. Hence.79. and the supplier’ s pricing actions.the total number of suppliers who solicited the firm’ during the observation period and the total number of suppliers who solicited the firm’ s business during the observation period and were deemed to have given an effective presentation. alternative suppliers do not seem to be finding out about the price increase and/or treating it as a reason to visit the customer. not currently used. In no case was a measure of alternative suppliers’ actions significant in a model that included variables that capture the effects of customer characteristics. The consideration set size measure is a count of the number of alternative suppliers mentioned. The interaction of raised fees and service quality is not significant. and a nonparametric approach in which the distribution of 8 was estimated simultaneously with the 20 . one is a subset of the other). The interaction of lowered fees and service quality is significant only if one uses a one-sided test. We also tested separately (from the interactions described above due to collinearity) the model reported in Table 5 with two variables describing the interaction between the indicator that fees were raised and number of competitor solicitations.

In all cases. exp( exp( 7 j . Estimates of the Duration Distribution The proportional hazards distribution can be computed for each of the discrete points of interest. then decreases in 21 . The estimated survivor function for PH with nonparametric heterogeneity gains additional flexibility through estimating the distribution of 8. Flexibility in the transformation h comes through the coefficients y. For the PH model the estimated survivor function is computed as S. It is significant for both the PH and parametric heterogeneity specification. the probabilities are such that the support points come very close to collapsing to a single value. and Hannan-Quinn (HQ) criteria all select the nonparametric appoach.))e.parameter vectors y and p by assuming Z points of support.. There are a number of factors to consider when selecting a heterogeneity specification.!?pH_Np (t) = cff. . but they remain not significant (consideration set size is significant using a one-tail test).(t) = I-‘ &. For the nonparametric specification. the estimated coefficients are similar to those from the PH model. The bottom of Table 5 presents the estimates of the implicii mixing distributions. Han and Hausman (1990) later showed that a nonparametric hazard function such as that used here reduces the sensitivity of the estimates to a parametric heterogeneity assumption.352) with associated probabilities (0. Schwarz (BIC). the Akaike (AIC).exp(-exp(j. their signs change for nonparametric heterogeneity. but not significant with nonparametric heterogeneity. Information criteria can be used to select the appropriate model.0. The model would not converge when three support points were examined. Including unobserved heterogeneity does not seem to influence the substantive conclusions for the other variables obtained from a PH specification (for these data). fll=.)). For the parametric specification. The discrete hazard rates are given by 1In all specifications. This can also be concluded from the heterogeneity parameters. The PH with nonparametric heterogeneity suggests that the mixing distribution may be characterized by two points of support (2.05. the estimated discrete hazard rate is approximately 0. The coefficient of size is affected by heterogeneity.398. The estimated survivor function involves weighting by each of the support points as . Heckman and Singer (1984) advocated a nonparametric estimation of the mixing distribution versus parametric since parameter estimates depend heavily on the particular parametric mixing distribution chosen..95). 2.2 in period 1. the heterogeneity coefficient is not significant. For the data studied here. The coefficients for number of soliciations and consideration set size are also affected by how heterogeneity is specified.

715 ( I 0.655 I 0. For these data.7) 1 0. A liability of newness (monotone decreasing hazard) is equally consistent with unobserved heterogeneity where. and a liability of adolescence hypothesis (increasing.6) ’.109 Relationship to Past Studies Based on Distributional Models Prior studies of interorganizational failure have assumed a distribution for the baseline hazard. i(t). Both imply a continuous process. This hazard function is monotone decreasing for p<l . the estimated duration distribution. 3 4 No Marketing Variables I I I i(t) I i(t) 7 -1. then decreasing) is typically specific as a log-logistic or log-normal.598 : 0.50 (7. As can be seen from the table below. A liability of newness hypothesis (monotone decreasing hazard) is typically specified as a Weibull.065 -2.800 0.614 ! 0. and reduces to the constant exponential hazard (no duration dependence) for p=l.079 -2. we compared the estimated duration distribution from the PH specification reported in Table 5 with that obtained from a restricted version of the model in which size is included as the only covariate.323 -2. Effect of Marketing Variables on Estimated Duration Distribution Period :. the duration dynamics is caused by other factors. While our model allows for any form of time dependence.662 (15.241 (5. 0.period 2. which may better reflect the reality of the underlying process than our model. To investigate this further. It is interesting to ask what one might have concluded by assuming a distribution. We suggested that omitted marketing variables may be an important source of heterogeneity unobservable in previous studies.4) I 0. Hence.1) (11. 0. A non-monotone hazard function is accommodated by the 22 . monotone increasing for p>l . possibly including those discussed above that have been suggested (though are difficult or impossible to test) in other studies.200 0. but do not reflect the grouped nature of the available data. the estimated hazard does suffer from the smaller number of relationships at risk available to estimate the distribution semiparametrically at later durations. The two parameter Weibull distribution has the hazard function h(t) = hp(ht)‘ -‘ .0) ! 0.224 0. The Eflect of Marketing Variables on the Estimated Duration Distribution We discussed above that previous studies that had identified a liability of newness effect or liability of adolescence effect for interorganizational failure had controlled only for time-invariant structural covariates such as firm size.1) I.635 (7.079 -2.766 0.689 I 0. before increasing slightly in periods 3 and 4.101 Include Marketing Variables I I I i(t) I i(t) + -1. the heterogeneity results from groups of firms having different propensities to fail.4) I 0.9) (11. changed little (managerially).501 -2.70 (12. 0.748 ’. the estimated duration distribution is not sensitive to the availability of data that captures the effects of marketing actions.16 (4.070 -2.

CUSTOMER RETENTION STRATEGIES The effects of changes in the explanatory variables on the hazard and survivor functions provide insights into the managerial implications of our results. That is. then decreasing) and the sampling frame is sufficiently short relative to the “honeymoon” (monotone increasing) portion of the spell. For p> 1.05cpc1. the hazard function is non-monotonic.71>1) indicates a non-monotonic relationship with a maximum at t=2.28). Consistent with Levinthal and Fichman’ s (1988) finding for auditor-client relationships. the log-logistic distribution is more convenient than the log-normal distribution to use (Kalbfleisch and Prentice 1980 p. Hazard functions of log-normal distributions have a value of zero at t=O. increasing from zero to a maximum at t = (p-l)“P h ’ and decreasing toward zero thereafter. approaching zero as t becomes large.01. pc.4. We discuss the estimated hazard distribution when the distribution is assumed.(l+(ht)P) * MwP-’ The numerator is identical to the Weibull.63-66). this result does not rule out a finding of negative duration dependence for a Weibull distribution if the sampling frame were longer. the Weibull may instead indicate negative duration dependence (liability of newness). For censored data. For the log-logistic distribution. increase to a maximum and then decrease. There are a number of formal and informal methods of selecting a probability model from among several competitors (Kalbfleisch and Prentice 1980 pp. df=1)6.72. Since the generalized F distribution incorporates such distributions as the Weibull and log-normal as special cases. It is monotone decreasing from 00 if pcl and is monotone decreasing from h for p=l . the Weibull distribution indicates positive duration dependence (p=1. There is evidence against the log-normal model (X2=55. It provides a good approximation to the log-normal distribution except in the tail.log-normal distribution and by the log-logistic distribution. 90% confidence interval 1. The lognormal distribution was used previously by Levinthal and Fichman (1988) in their study of the duration of auditorclient relationships.65). if the true duration dependence is non-monotonic (initially increasing. it provides the basis for a formal assessment of fit for discriminating between competing distributional models. As they note. The hazard function for the log-logistic distribution is qt) _ . particularly when the interest is in uncovering the influence of time-varying covariates (simple algebraic expression for the hazard function).36. This is consistent with the empirical hazard discussed above. Were the sampling frame longer. 23 .68). then a Weibull distribution would suggest positive duration dependence. Analyzing the derivatives of the duration distribution with respect to 6 Two times the absolute difference in log-likelihood is distributed X2 (Kalbfleisch and Prentice 1980 p. the shape parameter (p=l.

065 . and with prices held constant.200 . Impact of Service Quality on the Probability of Switching* P e r i o d -20 1 3 4 Service Quality mean +20 .g.. l Superior service can substantially reduce the probability of termination.054 . This switching is driven by variables not observable in this study. the probability of substituting during the first year is approximately 20%. but not without considerable effort. mean size and competitor variables. responsiveness to information requests). The table below shows the probability of substituting by period (PH model) at three possible values for service quality.139 . The table below shows the impact of increasing fees on the probability of switching.096 .044 .the explanatory variables suggests the following guidelines for suppliers seeking reduce the likelihood of termination in their supply relationships. Service quality must increase by over two standard deviations (e.283 . or from the mean to being judged as one of the best) to counter the influence of a price increase. firms achieving the highest service quality (+20) have a termination rate of about half that of the lowest (-20) performing firms.109 . Suppliers are advised to focus on both improving their service features along these dimensions. Suppliers are advised to re-evaluate their actions during the initial stages of a relationship to investigate the influence of factors not observable in this study.. and on the communications directed at customers informing them of their service related performance and initiatives. For all periods. or +20 for all periods. 0 Countering the influence of a price increase by offering superior service is possible. from poorest service quality provider to being near the mean. The first column can be considered a baseline in which there are no fee changes. l All things equal. no price changes. mean. the analysis assumes that service quality does not change across periods.079 . Perceptions of service include perceptions of service reliability (low error rate) and perceptions of responsiveness (quick correction of errors. supply relationships are most vulnerable in their first year of existence. At the mean values for the perceptions and competitor variables. l . and the remaining variables in the model are held at their mean values.159 The influence of price changes is asymmetric.075 *Assumes constant service quality at -20. An example might be not fulfilling expectations created during the solicitation process. Price increases are risky. but price decreases have little influence on the probability of substituting. The second column shows the impact of price increase 24 . For ease of exposition.116 .

123 . The table below shows the probability of switching at three possible values for size.102 .only in period 1.299 .079 .109 .079 . The solicitations in this industry appear to be poorly targeted. the proportion change in probability of failure compared to a base of no increases moves up with each fee increase. Solicitations do not seem to be directed towards customers who may be deemed “switchable” based on other factors. In Periods l-4 . our results also suggest actions that could be taken to improve a supplier’ s prospecting activities. Impact of Customer Size on the Probability of Switching* Customer Size mean P e r i o d -20 +2a 1 . l Solicitations were not significant in a model that includes customer characteristics. For example. However.299 .138 2 .079 . Impact of Price Increases on the Probability of Switching Period : 3 4 No Increase .074 *Assumes constant customer size at -20. For all periods.10. the probability of switching in the largest (+20) firms is about half that of the smallest (-20) firms.053 4 .065 . In addition to actions that suppliers can take to help reduce the probability of switching. l Customer size was significant in two of the three specifications examined.109 Incr.285 . and pricing tactics.168 In an absolute sense. the last column above shows a change of 50% in period 1 and 57% in period 2 (compared to column two).200 . or +20 for all periods.065 . means for the other variables.116 . 25 . no price changes. perceptions.the probability of termination increases by 0.044 3 .096 . fee increases are most risky in the first year of a relationship .160 . Size is an observable characteristic that could be used to qualify those potential customers worth pursuing.065 . mean. The final column shows the impact of increasing fees each year in which the supplier continues to service a customer. In Period 1 Only .I09 Incr.200 .

For these data. To date. The first was to investigate the general form of duration dependence for customer-supplier relationships. Form of Age Dependence By estimating the duration distribution nonparametrically. the data were a’ posteriori compiled. Hl proposed that larger customer size is associated with greater expected duration. the limited number of studies that have examined the influence of managerial actions or perceptions of managerial actions on the continuity of a dyadic relationships have been crosssectional studies where the dependent variable is an (assumed) correlate of future behavior. we allowed for any form of age dependence. The major contribution is substantive. a proxy for the complexity of services the buyer requires and a factor that may also signal a bureaucratic decision making process. We find a positive 26 . the general form of age dependence is inverted-U shape. The Influence of Buyer Characteristics on Duration We examined size. The advantage of this estimator over approaches based on the conditional probability of failure is that it is analogous to familiar binary panel models and hence contains the computational simplicity of these models and also allows the analyst to use estimation tools developed for that widely used class of models. current knowledge. The second issue was to identify actions that managers can and do take to influence the likelihood that a customer-supplier relationship persists or terminates (in the context of a particular business-to-business service).but empirical evidence to date is limited to a single study of auditorclient relationships (Levinthal and Fichman 1988). We outlined three substantive issues to be investigated that relate the to first contribution mentioned above. The third issue was to investigate whether the age dependence found in previous studies is really due to their neglect of the influence of managerial actions. allowing the studies to consider only structural factors such as firm size.monotonically decreasing (liability of newness) and non-monotonic (liability of adolescence) . Two forms of age dependence have been discussed previously in the literature . This constraint leads to the third objective. supported by empirical evidence is limited. While an understanding of how and why supply relationships persist or break down is managerially important.DISCUSSION We proposed two contributions for this research. Working with the conditional survivor function. The likelihood of break-down of a customersupplier relationship is decreasing and then increasing. The second contribution is the use of a semiparametric estimation method appropriate for analyzing data typical of industrial marketing panels (durations are grouped and time-varying covariates are present). While a limited number of longitudinal studies do exist. the approach estimates both a component that depends on time and an error distribution without functional form restrictions. A positive coeffcient for size on duration was found previously for auditor-client relationships (Levinthal and Fichman 1988) and agency-client relationships (Buchanan and Michell 1991).

suppliers with relatively low error rates or who find and correct an error quickly may choose to convey this fact to their clients. When the correlations prohibited the model from converging. Previous studies did not include unobserved heterogeneity. the nature of competition in their industry. The Influence of Perceptions of Supplier Performance on Duration Three measures of a customer’ s perception of their current supplier’ s performance were examined perceptions of service quality. and perceptions of the competence of supplier interface personnel. The Influence of Price /Fee Changes on Duration We examined two measures of pricing tactics . Perceptions of service features include perceptions of service reliability (low error rate) and perceptions of responsiveness (quick correction of errors. we examined the variables separately (controlling for the other variables of interest). identifies a buyer’ s risk-profile.289) .a proposition that. For this particular business-to-business service. Managing customer perceptions of reliability and responsiveness can include both the actions that suppliers take and communications between the customer and supplier.influence on duration for PH and for PH with parametric heterogeneity. responsiveness to information requests). and whether or not they 27 . For example.either customers use suppliers they perceive to be outstanding performers on multiple dimensions. and the intensity of competitive rivalry in the buyer’ s market.whether or not fees were increased. The coefficient for this variable was not significant in a model that included all the variables of interest. and their past history. has not been tested in any context. Such buyers likely have more short term performance objectives. Buyers often have different risk profiles as a result of factors such as their ownership structure. perceptions of supplier senior management commitment. to our knowledge. These measures are highly correlated . Porter (1985 pp. Others have suggested (though not tested) additional buyer characteristics which may lead to an increased propensity to 1993) identified reliability and responsiveness as the two most important facets of service quality. the background and orientation of management. experience in substitution. these results suggest that supplier efforts are best directed at managing and improving customer perceptions of their service features versus communicating ‘ supplier commitment or the competence of interface personnel. A survey of managers in a number of services industries (Berry and Parasuraman 1991. Porter (1985) suggests that “buyers prone to risk taking are more likely to substitute than buyers that are risk-averse” (p. Service quality was the only perceptions variable that was significant. Higher perceptions of service quality lead to longer expected durations. or respondents feel it necessary to rate the suppliers they use consistently high (or low) to justify their behavior. The coefficient is not significant when we include nonparametric heterogeneity. Zeithaml et.288-289) for example. The financial services panel data includes the proportion of assets in risky investments which could be a proxy for firm level (though not purchasing decision maker) risk aversion.

cross-sectional heterogeneity across relationships. and longitudinal variations within a relationship. Including a measure of supplier performance captures two influences . The coefficient of size of consideration set was not significant. For these data however. However. The baseline hazard is not influenced by the absence or presence of marketing variables as covariates even when it is restricted to follow one of the commonly used distributions (Weibull. the effect of a decrease in fees was not significant (H6). Other studies that have identified age dependence in interorganizational relationships have assumed a distribution. We also examined whether a fee increase could be attenuated by strong service performance . The baseline hazard rate remains essentially unchanged when marketing variables are included in a model that had size as the only covariate. and the total number of suppliers who solicited the firm’ s business during the observation period and were deemed to have given an informative is. log-logistic). The Influence of Number of Solicitations / Consideration Set Size on Duration H7 hypothesized that more solicitations should lead to a greater chance of seeing an effective solicitation. and whether a fee increase is more risky for suppliers who serve customers receiving many solicitations from alternative suppliers .it could not. Two measures of competitor solicitations were examined . Competitor actions were not significant in a model that included customer characteristics. perceptions of a supplier’ s competitive performance. This suggests that consideration set sizes are not necessarily larger because of dissatisfaction with the current supplier. and fee changes.were decreased. H8 hypothesized that a larger consideration set would lead to shorter durations. Limitations Our results are not without limitations. It is worth noting that the correlation between consideration set size and the measures of perceptions of the current supplier’ s competitive performance were negligible. We included unobserved heterogeneity through a mixing distribution for the error term (random effects). and hence a greater likelihood that the buyer both recognizes the weaknesses of their current supplier and is exposed to an alternative supplier who is perceived as offering greater long term benefits. Increasing fees has a strong negative influence on duration supporting H5. The Influence of Managerial Actions on Age Dependence The final question of interest relates to age dependence in dyadic relationships. Is the age dependence found in previous studies really due to their neglect of the influence of managerial actions? The answer appears to be no.the total number of suppliers who solicited the firm’ s business during the observation period. Unobserved heterogeneity or omitted variables is a concern which 28 . Capturing additional crosssectional heterogeneity should depress the (apparent) age dependence (Schmittlein and Morrison 1981. 1983). the attenuation in age dependence is countered by the longitudinal variation in perceptions of performance within a relationship.

leads to a) a bias in the duration effect due to an increasing proportion of customers with relatively low risk of terminating their supplier as duration continues. and hence customers could self-select into different states and/or differ with respect to their timing into a state. Reverse causation refers to the possible influence of the dependent process. Reverse causation is another concern for analysts who work with time-varying covariates. However. While our random effects approach is current practice.k and t&+1.ti. restricts the interpretation of time-varying covariates. We can not generally separate the causal effect of a rate dependent covariate from the consequence of reverse causation. Finally. As with any hazard rate study involving time-varying covariates.I . consideration set size is typically referred to as a rate dependent covariate.k_i . on the process that determines the value of the time-varying covariate.. and b) selection bias in that some common antecedents that influence both the transition in and out of a covariate state. We are concerned with whether a change in the state of a covariate (e. and the hazard rate under study are not included.tik to explain an event that occurs between ti.. Reverse causation would be present if consideration set size was directly influenced by an increase/decrease in the hazard rate of terminating the supplier. differences in the effects of these covariates on the hazard rate (controlling for time) may reflect differences in the groups of customers at different states of the covariates at different times. Our data are observed histories (no randomization of respondents). we have examined data from a single industry. rather than the real effects of states on the hazard rate. While panel data in industrial marketing is rare and costly to collect. Using anticipatory dependent variables are a simple way to remove the effect of reverse causation (Yamaguchi 199 1 p.. 139). time until breakdown of a customer-supplier relationship. In this example. the dependent variables used in this study are anticipatory. In the case of consideration set size for example.. 29 . our hope is that this study will influence more organizations to make their data available to researchers and/or help to stimulate the creation of panels in other business-to-business services or non-services industries. improving or degrading on the customer perceptions of the supplier’ s service feature offerings) influences the hazard of a customer-supplier relationship terminating. we included consideration set size as an explanatory variable that can vary over time.g. Selection bias however. this method can not eliminate selection bias since it assumes independence of the random error term from the covariates included in the model. Consideration set size was operationalized as the number of alternative suppliers mentioned when the customer was asked to identify those they would seriously consider. we use counts for the period times t. For example. the covariate process could depend directly on the rate of transitions of the dependent process.

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92 U.------_____-________--_---__-----------Structural factors (e. monotone. services ---_______--_--__-. with presence of transaction cost switchers matched Fichman individual attachment. incr. ii) deer.g. size) logistic regression. when incentives to change integrate the selling channels are significant. negotiation 95 mfrs on 690 channels expectation of cultivating trust. continuity dyads (electronics) ----______V--_--__-.S. accounts Michell (1991). survey ecology. 170 / non-switching Levinthal and fit. observed switching 3. Buchanan and explain stability 1222 U. raising the stakes. with 170 non(1992). survey Weitz (1989). Anderson and exchange. avoiding a reputation for intentions: mfr sectional). Likelihood of (parametric).K. 883 Fichman transaction cost dyads over 13 year failure declines with (1988). Weiss and impeded by perceptions of sectional). intentions: mfr Anderson high switching costs even transaction cost 258 mfrs intention to (1992).Table 1 Sample of Recent Empirical Studies of the Duration of a Business-to-Business Relationship Study Dependent Process Theoretical Perspective Method / Data Sample Finding social Age dependence is nonobserved switching hazard rate 1. Kogut (1991). function (electronics) 33 . switching.---_--_______________-----___-----------social Stability is enhanced by behavioral 3SLS (cross2. observed such as unexpected market (finance) termination by ITWS joint ventures growth increases likelihood acquisition of acquisition._-_____ --__-__----_____-__---Likelihood of dissolution i) observed switching social logit (cross5. with change in resource exchange. Levinthal and exchange.---_----___---__Intention to integrate is organization 3SLS (crossbehavioral 6. sectional). _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ -__---. 4. Seabright. advertising services _____________________---_-----_~~~~~~--~--~~----~-----~~---Unexpected positive factors option theory hazard rate. complexity of task (buyer’ s auditing period size). switchers auditing services _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ---------__-__-__--.

. 0 . straight re-buy a 0 l 0 I i reputation for switching”* experience in substitution buyer competes using low cost vs. individual decision maker’s reluctance to admit a bad decision --. industrya early “shakeout” period of conflict and influence attempts -____-_--___-------_______-______-___-_ 0 desire not to establish a reputation for switching time to gather information to make a rational decision l different decision process for hiring a new supplier vs.________-___-----------------------l-. benefit of doubt) 0 initially..I seller interface personnel” I t I I Constant With Age 0 l Incteasing With Age 0 less uncertainty about any lack of “fit” between organizations power imbalancea buyer is prone to risk taking change in buyer’s resource requirements” . I time to implement a size of buyer investments in relationship specific 1 organizationa’*ti new strategy . b2 not significant ” significant in agency-client relationships (Buchanan and Michell 1991) 34 . Seabright et. effort / resources to I implement new I directions / strategy I I 0 organizational I bureaucracy . initial relationship specific I knowledgeb2 trust) I 0 individual attachment I / continuity of 1992).e.._-_____-_--------_-_____-__ + a Il 0 trust* “initial relationship 0 assets” (i.Table 2 Determinants of Continuity and Switching Discussed or Tested in Prior Literature Determinants of Continuity Relevant Literature Perceptual / Decision Processes 0 II lncmasing With Age I Determinants of Switching Decreases With Age b Decreases With Age Constant With Age ... the sunk costs in hiring a new supplier loom large . favorable prior beliefs. _-__----m-m-- Industrial Organization / Structural / Institutional _-_------mm-- Social Exchange I Relational ______________. + ___________-__-_------------m------e-StrategiC 0 0 0 perceptions of perceptions of “initial relationship switching costsa switching costsb2 assets” (i... Weiss and Anderson 1992). assetsb”b2 size of seller I 0 difficulty of taskb* organizationa’ I I .. differentiation strategy buyer is under intense competitive pressure ” significant in auditor-client relationships (Levinthal and Fichman 1988.. b’ not significant rz significant in channel relationships (Anderson and Weitz 1989.

but visited during the past 12 months to solicit your business. but visited 1 Sales Solicitations during the past 12 months to solicit your business Effective Solicitations 1 Number of suppliers who are not currently used. and were perceived to have given an informative sales presentation Number of alternative suppliers not used. but you would seriously consider Alternatives Considered 1 35 .Table 3 Constructs and Measures Construct Firm (Buyer) Characteristics: Size Service Performance: Service quality Number of Items 1 3 Measures Log assets under management ($M) Evaluate your present supplier on the following factors: Low error rate (1-5) Quick correction of errors (1-5) Responsiveness to information requests (1-5) Evaluate your present supplier on the commitment of the supplier’ s senior management to this business (l-5) Evaluate your present supplier on the following factors: Capable administrative manager ( l-5) Quality of staff (l-5) --------___-__---_-------~---------Indicator that your present provider raised its fees during the previous 12 months Indicator that your present provider raised its fees during the previous 12 months Relationship Building: Commitment Expertise 1 2 ________----------_-----Pricing Tactics: 1 Raised Fees Lowered Fees 1 ________-------_____-_-_---_--______________--_-------------Competitor Efforts: Number of suppliers who are not currently used.

% ? 7 ___----.-_ ..

162 (4.201 (2.6) I 0.372 (1.171 (0.744 _____‘ 1____5--_---------__--’ Information criteria: log likelihood _---__-.065 (0.9) -0.481 (2.5) ( -0.1) -2. -2.352.4) -2.t _----___ t --_-----I I .501 (12.3) 0.8) + + Y3 Y4 ____ ___*___ ____ -_---__.8) 1 -1.042 (0.809 .173 (0.034 (0.3) -0.856 (7. 0.Table 5 Parameter Estimates (t-statistics in parentheses) Variable Customer Characteristics: In (Size) Customer Perceptions: Service Quality Supplier Management Commitment Competence of Interface Personnel Pricing Tactics: Raised fees Lowered fees Comnetitor Actions: Number of Solicitations Consideration Set Size Period Variables: Yl Y2 Expected Sign PH I -0.0.2) -0. AIC (Akaike) BIC (Schwarz) HQ (Hannan-Quinn) I I I 37 .8) 1 -1.6) .079 (0.7) 1 f I .517 (7.3) .xz) _______.6) : -2.156 (4.5) -0.466 (2.2) 0.3) l -2.728 0.4) 1 -0.6) ( -0.263 (0.201 (2.699 (11.789 f 0.253 (2. -0.034 (0.038 (0.064 (0.204 (2.839 0.4) 1 -I I -0.6) 0.205 (2.047 2.____.953 -365.4) 1 -I -0.769 0.0.498 (7.005 0.459 I ’ 0.456 (0.522 (10.025 (0.9) -2.072 (0.003 (0.2) 1 -0.398.7) 1 I II I II 2.9) + -0.489 1 I I -394.7) ( I PH with PH with 1 Nonparametric I Parametric 1 Heterogeneity 1 Heterogeneity I I I -0.0) 0.095 (1.7) I I 0.724 (2.&_____--+_______ -394.6) f -0.6) I 0.721 (10. Heterogeneitv: ln(sigma) wJh) (vz.1) 1 -0.1.

75 1 _____~--_-_--___----------. -0.367 (1.0) -0.3) 0.5) I -0.028 (0.6) -0.2) .732 0. + + 0.7) ( -0.0.097 (1.210 (2.4! 1 I I -t I 0.4) I I -0.032 (0.034 (0.4) .207 (2..6) : 1 I 1 I +_______-+--------.6) -0. -0.0) -2.7) 1 I I I 2.__----._____. I I 0.850 0.085 (0.117 (0.058 (0.78 1 0.7) ..*___ .2) 0.5) -2...862 (7.5) t -0.------em -1.7) I I 0.038 (0._ _ _ _ _ _ _ -393.1) -2.421 (1.046 (0.003 (0.474 (7.3) -0.843 0.059 (0.2) 0. Information criteria: log likelihood .796 1 ( 0.O) -0. -0.163 (1.I _ .& _ _ .158 (4.-----me Heterogeneitv: ln(sigma) Hal) (V2P2) -1. I 0.180 (0.825 1 I I I I I -393..245 (0. I 1 I I I I II -1. I Y2 Y3 “r’ s ____..492 (7.721 (10.5) -2.2) .152 (4.2) -0.8) I -0._ .699 (11.436 (1.705 (2.116 (0.6) I .5) -0.181 (0.Table 6 Parameter Estimates for Model with Service Quality .Price Interactions (t-statistics in parentheses) Variable Customer Characteristics: In (Size) Customer Percentions: Service Quality Supplier Management Commitment Competence of Interface Personnel Pricing Tactics: Raised fees Lowered fees Raised fees x Service Quality Lowered fees x Service Quality Comnetitor Actions: Number of Solicitations Consideration Set Size Period Variables: Yl Expected Sign PH I PH with PH with I Nonparametric Parametric I 1 Heterogeneity 1 Heterogeneity I I I I I -0.406.814 ) AIC (Akaike) BIC (Schwarz) HQ (Hannan-Quinn) 38 .033 (0.521 (10.8) 1 I I -0.953 -364.792 1 0.0) -2.7) .7) .2) -0.500 (12.0.157 (0.160 (1.8) -2.356.8) .083 (1 .047 2. -0.5) f -0.7) .8) I -0..313 (1.315 (1.472 (0.232 (2.7) ) -0.