Service contract type and consumer choice behavior: the contributory roles of perceived value, brand reputation, and consumer incentives

To minimize customer churn, many service providers offer consumers the option of automatic contract renewal at the end of a contract period. Such agreements are known as Rollover Service Contracts (RSCs). This research quantifies the effect of RSCs, and other related factors such as incentives, on consumers’ service choice decisions.

The study adopts choice-based conjoint analysis to assess the effect of RSCs on consumers’ choices and to determine whether effect size varies when selecting a cell phone network or gym/leisure club provider, which represent lower-priced utilitarian and higher-priced hedonic services.

It was found that RSCs produce negative perceptions and intended behaviors for the majority of consumers across different product types. Nevertheless, as explained by social exchange theory, many individuals may be persuaded to enter into a RSC on the basis of reciprocity if they are offered an incentive such as a price discount or free product add-on.

In the marketing domain, this is the first comprehensive study to quantify the role of contract type among a range of other factors in consumers’ decision making when selecting a service. Our results offer context-specific implications for service marketers. First, RSCs are perceived more negatively in high-priced hedonistic categories, especially among those with lower incomes. Second, price discounts are more effective than product add-ons for motivating hedonic purchases while product add-ons work better with utilitarian services.