Exit, Voice, and Loyalty

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Overview

This was a interesting study of error correction mechanisms that are present in a firm, and the implications of those mechanisms.

Short but super dense (written in the 1960s/70s and uses arcane language and sentence structures). Would recommend reading to anyone interested in understanding businesses – but specially if you’re interested in understanding two-sided platforms/marketplaces (where the presence of multiple parties is critically important to the value of a platform). If you’re short on time, just read Chapters 1, 2, 3, and the first half of Chapter 7 and figure out their implications yourself

My main takeaways were:

  1. When stakeholders of a service are unhappy with it – they have 3 choices: switch over to another service, voice their complaints to management, or suffer in silence

  2. Management becomes aware of an absolute or relative deterioration in quality if users complain to them or if there is a drop in revenue. Without these mechanisms, it can be difficult for management to even know what’s going wrong and solve for it

  3. In markets where competing services are easily available, customers can just leave without telling management why. This results in a loss of valuable learning opportunities. Management can know that something is wrong, but might not know exactly what. And if management doesn’t care about decreasing revenues (like government managed airlines or railways), a lack of customers that would’ve otherwise “raised hell” leads to crappier products

  4. Inculcating “loyalty” – an almost irrational feeling of attachment to an organization – is a really important tool for management in competitive markets. If customers are loyal, they are more likely to voice their discontent before choosing the “exit” option – therefore giving management valuable feedback on how to improve a product

  5. Listening to what customers are saying – before they even think about exiting – and improving products based on that becomes super important for businesses operating in competitive markets. The same applies for political parties, sport clubs, and other organizations