When Old Is Gold:The Role of Business Longevity in Risky Situations

Abstract

The authors examine how a service firm's longevity may affect consumers' perceptions of risk in conducting business with the firm. Depending on the nature of information available to consumers, a firm's longevity can act in one of two ways to reduce the consumers' perceived risk: (1) Longevity may act as an extrinsic cue of the firm's quality, or (2) availability of a longer track record of an older firm may allow consumers to make more precise prediction of the firm's future quality. The authors develop a set of hypotheses that relate these two effects to consumers' preferences and test them in a series of four experiments. They find that a firm's age can act as an extrinsic cue of the firm's quality. When consumers also have information about firms' intrinsic attributes, the effect of a firm's age as an extrinsic cue is diminished under conditions of high involvement. The experiments also show that consumers prefer firms with longer track records, especially when firms' performance/quality levels are subject to more variability. However, when consumers have high aspiration levels, they prefer firms with shorter track records, even though the consumers perceive these firms as riskier choices.