Pricing e-service quality risk in financial services

E-service quality is crucial for differentiating e-commerce offers and gaining competitive advantage. E-service quality risk is the risk that a firm's e-service quality will drop, or improve, relative to competitors. There is evidence that benchmark ratings of e-service quality that are published regularly by third-parties can impact the market value of rated firms. Firms therefore continue investing in IT-related determinants of e-service quality. However, they do so without knowing: (1) the cost or return associated with a unit relative deterioration, or improvement in e-service quality ratings, and (2) how this cost or return may vary across firms. To answer these questions, we adapt a well-established financial risk pricing approach for the case of pricing a single idiosyncratic IT investment risk, where an event study is used to generate the market data needed to price risk (Thompson 1985). We then apply the approach with Keynote's bi-annual e-service quality ratings for firms in six financial services sectors. We find that firms' sensitivity to e-service quality risk depends primarily on the sector to which they belong, and also on their size and growth potential. Our results suggest a cap on the amount that different firms ought to spend to achieve a unit improvement in relative e-service quality ratings. The risk pricing approach presented can be applied for other important IT investment risks, and the risk pricing information it yields may open up new ways to approach fundamental IT investment problems.