Consumer Behavior in Service Marketing

Pre-purchase Stage - Overview

Pre-purchase Stage Service Encounter Stage Post-purchase Stage Customers seek solutions to aroused needs Evaluating a service may be difficult Uncertainty about outcomes Increases perceived risk What risk reduction strategies can service suppliers develop? Understanding customers service expectations Components of customer expectations Making a service purchase decision

Pre-purchase Stage Overview

Need arousal Information search Evaluation of alternatives
Service attributes Perceived risk Service expectations

Purchase decision

Value
Benefits (actual or perceived)
Come from features or product attributes May be economic, social or personal

Costs (actual or perceived)

Economic/Financial
Money Time Resources

Social/Personal
Aggravation, worry, feelings of uncertainty, distress Social embarrassment, inferiority

The Value Equation:

Value = Benefits - Costs

Service Encounter Stage - Overview

Pre-purchase Stage Service encounters range from highto low-contact Understanding the servuction system Theater as a metaphor for service delivery: An integrative perspective Service facilities Post-purchase Stage Personnel Role and script theories

Service Encounter Stage

Service Encounters Range from High-contact to Low-contact

The Servuction System

Distinctions between High-contact and Low-contact Services

High-contact Services
Customers visit service facility and remain throughout service delivery Active contact between customers and service personnel Includes most people-processing services Little or no physical contact with service personnel Contact usually at arms length through electronic or physical distribution channels New technologies (e.g. Web) help reduce contact levels

Low-contact Services

Medium-contact Services Lie in between These Two

Theatrical Metaphor: An Integrative Perspective

Good metaphor as service delivery is a series of events that customers experience as a performance Service facilities
Stage on which drama unfolds This may change from one act to another

Personnel
Front stage personnel are like members of a cast Backstage personnel are support production team

Roles
Like actors, employees have roles to play and behave in specific ways

Scripts
Specifies the sequences of behavior for customers and employees

Post-encounter Stage - Overview

Pre-purchase Stage

Evaluation of service performance

Service Encounter Stage

Future intentions

Post-purchase Stage

Attitudes
Positive or negative feelings concerning objects, people, or events. Attitudes are less stable than values.

Types of Attitudes
Satisfaction
An individuals general attitude toward the service provider

Commitment
A state in which a customer identifies with the service provider, and wishes to maintain relationship with the organization.

Satisfaction/Dissatisfaction Judgments
Disconfirmation Paradigm ___________ Theory ________ Theory

The Disconfirmation Paradigm

Expectations: beliefs we have before usage Performance: evaluation of what happened Disconfirmation: occurs when these two are not equal
positive leads to satisfaction negative leads to dissatisfaction

Example: New movie release Beware of overpromising

Worse-than-expected outcomes have a larger impact than Better-than-expected ones (endowment effect)

Endowment effect
a person's willingness to accept (WTA) compensation for a good is greater than their willingness to pay (WTP) for it once their property right to it has been established. Carmon and Ariely (2000) found that participants' hypothetical selling price (WTA) for NCAA final four tournament tickets were 14 times higher than their hypothetical buying price (WTP) The good here is satisfaction

Attribution Theory
Stability
temporary or frequent?

F
is it my fault or their fault?

Controllability
could it be prevented?

Equity Theory
Fairness of exchange
perceived relationship of cost of production to price charged relative bargaining power of the two sides opportunism

How Customers Express Dissatisfaction

Exit Voice Loyalty Neglect

Components of Exit, Voice and Loyalty Framework

Exit: the withdrawal from a relationship with a person or organization
Reaction to decline in quality differentials between competing services
The quality of service of the firm may decline Qualities of competing firms services may increase All service providers in the market may decline in quality

Components of Exit, Voice and Loyalty Framework

Voice: consumers prefer to communicate their dissatisfaction stemmed of quality decline, rather than Exit
Heavily dependent to uncertainty of results of communicating dissatisfaction Openness of communication channels push citizens to Voice, than Exit

Components of Exit, Voice and Loyalty Framework

Loyalty: Consumer prefers to being loyal to his/her previous choice, despite the quality decline, without communicating his/her satisfaction
Brand Loyalty: Psychological resistance to change
Dependent to the Cost of Exit

Group Loyalty: Identification with the group

Dependent to the previous investment made to the group, in other words, the previous voice

Exit-Voice-Loyalty Framework

Source: Journal of Applied Social Psychology 15 no. 1, p. 83. V

Outline of the Exit, Voice and Loyalty Framework

QUALITY PROBLEM
Cost of Exit: Low Cost of Exit: High

Information Channels

Information Channels

Closed

Open

Open

Closed

Loyalty Problem

Voice

Loyalty Problem

Loyalty: High

Loyalty: Low

Loyalty: High

Loyalty: Low

Loyalty

Exit

Loyalty

Exit

When the Cost of Exit is Smaller?

When Competing Service Providers are similar:
Similarity in reputations Similarity in promises Irrelevant Promises

Voice Options
Voice Responses (seeking satisfaction directly from the seller)

Private Responses (bad-mouthing to friends)

Third-party Responses (taking legal action, filing complaints with consumer affairs agencies)

When Customers Complain?

Factors affecting complaining behaviour

Reluctance to complain
Word of mouth is often enough

Low relation between the degree of dissatisfaction and the likelihood to complain Theory of Planned Behaviour
Expected outcomes Normative influence Control factors

Expected outcomes
Expected returns vs opportunity costs
Replacement, apology, better goods/service in the future Wasted time, embarrassment, lost opportunities

Importance of the product

Normative influence
What other think I should do?
Not necessary that someone else should be actually aware of decision

Control factors
Knowledge
Ease of access to key personnel Understanding of causes

Skills
Ability to express complaint

Time

Commitment
Three Types of Commitment
Affective commitment
An individuals relationship with the service provider.

Normative commitment
The obligation an individual feels to staying with the service provider.

Continuance commitment
An individuals calculation that it is in his or her best interest to stay with the organization based on the perceived costs of leaving it.

Servicescape

Elements of Physical Evidence

Servicescape Facility exterior
Exterior Design Signage Parking Landscape

Facility Interior
Interior design Equipment Signage Layout Air quality/Temperature

Other Tangibles Business card Stationary Billing statement Report Employee dress Uniform Brochure Webpage

Typology of Servicescapes
Who Performs in Servicescape Self-service (customer only) Interpersonal (both) Remote service (employee only) Physical Complexity of the Servicescape Elaborate Lean Amusement Park Luxury hotel Airline terminal Research lab Bank ATM Budget hotel Bus station Telemarketing

What is the Purpose of Service Environments?

Purpose of Service Environments

Shape customers experience and their behaviors Support image, positioning, and differentiation Part of the value proposition Facilitate service encounter and enhance productivity

Shape customers experience and their behaviors

Message-creating medium
symbolic cues to communicate the distinctive nature and quality of the service experience

Attention-creating medium
make servicescape stand out from competition and attract customers from target segments

Effect-creating medium
use colors, textures, sounds, scents, and spatial design to enhance desired service experience

Roles of Servicescape
Differentiator
Who are you targeting?
Eg. King Class

Package
Convey external image of what is inside
Eg. Disneyland

Facilitator
Aid in performance
Eg. Bank

Socializer
Conveys expected behaviors, roles, relationships
Eg. Barista, Caf Coffee Day

Servicescape as Part of Value Proposition

Physical surroundings help shape appropriate feelings and reactions in customers and employees

Servicescapes form a core part of the value proposition

Las Vegas: fun resort, visually striking entertainment center

Facilitate service encounter and enhance productivity

Process Layout
How will layout affect attitude of customers? (Distance walked, proximity to rest rooms, view from window) How will layout affect quality of service? (attitude of employees, communication with other depts, compatibility with organizational hierarchy) Costs associated with layout (fixed & variable costs, cost to customer) n! Possible layouts (n=10; 3 128 800)
10

Principles of waiting
1. Unoccupied time feels longer than occupied time. 2. Pre-service waiting feels longer than in-service waiting. 3. Anxiety makes waiting seem longer. 4. Uncertain waiting is longer than known, finite waiting. 5. Unexplained waiting is longer than explained waiting. 6. Unfair waiting is longer than fair waiting. 7. Solo waiting is longer than group waiting. 8. The more valuable the service, the longer

it is worth waiting for. 9. Physically uncomfortable waits feel longer than comfortable waits. 10.Unfamiliar waits seem longer than familiar ones.

Physical design of queues

Singlephase Types of queues Singlechannel Multiphase Singlephase Structure Multichannel Multiphase Single to Multi Mixed Queuing discipline Alternate paths

Servicescape for efficiency

Automobile Drivers License Office
Review Payment 2 240 15 120 30 Violations 3 60 60 40 Eye Test 4 90 20 Photograph 5 180 30 6 120 Issue

In

Out

Activity Number(s) Capacity per hour Cycle Time in seconds

Improved Layout
In
1,4 65 55 60 2 120 30 20 5 180 30 6 120 3 60

Out

In

1,4 65 55

3 60 60

Environmental Orientation Considerations

Need for spatial cues to orient visitors Formula facilities draw on previous experience Entrance atrium allows visitors to gain a quick orientation and observe others for behavioral cues Orientation aids and signage such as You Are Here maps reduce anxiety

Service Recovery

Customer Complaining Behavior

Service Recovery
Customers do not expect you to be perfect. They do expect you to fix things when they go wrong.
Donald Porter
Senior VP, British Airways

Customer Response Categories to Service Failures

Types of Complainers
1. Passives 2. Voicers 3. Irates 4. Activists

Passives
- Keep quiet - Do not complain - Do not spread negative word of mouth - Feel if they complaint nothing will happen.

Voicers
- Vociferous - Actively complain - Less likely to spread negative word of - Give company a second chance - By complaining companies improve mouth

Irates
- More vociferous - High negative word of mouth - Speak to friends and relatives - Do not give provider a second chance - Switch to competition.

Activists
Complain everywhere - Friends - Relatives - Third parties Consumers can become terrorists Feel consequences are positive.

Understanding Customer Responses to Service Failure

Where do customers complain?

What proportion of unhappy customers complain?

Understanding Customer Responses to Service Failure

Why do customers complain?
Obtain compensation Vent their anger Help to improve the service Altruistic reasons

Why dont unhappy customers complain?

Strategies to Reduce Customer Complaint Barriers

Principles of Effective Service Recovery Systems

Eight Most Common Remedies Customers Seek with Serious Problems

Have the product repaired or service fixed Be reimbursed for the hassle of having experienced a problem Receive a free product or service in the future Explanation by the firm as to what happened Assurance that the problem will not be repeated A thank you for the customers business An apology from the firm An opportunity for the customer to vent his or her frustrations to the firm

Three Dimensions of Perceived Fairness in Service Recovery

Distributive Justice or Outcome Fairness

- Outcome or compensation - Match their dissatisfaction - What can it be - Monetary compensation - Apology - Future free service - Reduced charges - Replacements - Equality

Company pay for mistakes

17

Procedural Justice
Procedural Fairness Customer expect fairness in terms of - Policies - Rules - Timeliness of the complaint process - Easy access to complaint process - Quick handling Eg. Hallo Tunes
18

Interaction Justice
- Customers expect to be treated politely, with care and honesty - Company employees treat customers with fairness

19

Components of an Effective Service Recovery System

Do the job right the + first time Handling Effective Complaint = Increased Satisfaction and Loyalty Conduct research Identify Service Complaints Monitor complaints Develop Complaints as Opportunity culture Resolve Complaints Effectively Develop effective system and training in complaint handling Learn from the Recovery Experience Close the loop via feedback

Conduct root cause analysis

How to Enable Effective Service Recovery

Methods:
Be proactiveon the spot, before customers complain Plan recovery procedures Teach recovery skills to relevant personnel Empower personnel to use judgment and skills to develop recovery solutions

Rules of Thumb for Adequate Compensation:

What is positioning of our firm? How severe was the service failure? Who is the affected customer?

Customer Responses to Effective Service Recovery

Service Recovery
Plays a crucial role in achieving customer satisfaction by testing a firms commitment to satisfaction and service quality Impacts customer loyalty and future profitability Severity and recoverability of failure (e.g., spoiled wedding photos) may limit firms ability to delight customer with recovery efforts

Unhappy Customers Repurchase Intentions

Service Recovery Paradox

A good recovery can turn angry, frustrated customers into loyal ones. ..can, in fact, create more goodwill than if things had gone smoothly in the first place. (Hart et al.) HOWEVER:
only a small percent of customers complain service recovery must be SUPERLATIVE
only with responsiveness, redress, and empathy/courtesy only with tangible rewards

Service Recovery Paradox

The service recovery paradox is more likely to occur when:
the failure is not considered by the customer to be severe the customer has not experienced prior failures with the firm the cause of the failure is viewed as unstable by the customer the customer perceives that the company had little control over the cause of the failure

Conditions must be just right in order for the recovery paradox to be present!

Service Guarantees

How to Design Service Guarantees

Unconditional Easy to understand and communicate Meaningful to the customer Easy to invoke Easy to collect on Credible

Types of Service Guarantees

Single attributespecific guarantee

Multi-attributespecific guarantee Explicit minimum performance standard on a few important attributes is guaranteed

Full-satisfaction guarantee All service aspects are guaranteed to be delivered to the full satisfaction of the customer with no exceptions or conditions attached

Combined guarantee
All service aspects are guaranteed (as for fullsatisfaction guarantee) Explicit minimum performance standards on important attributes are guaranteed (as for multiattribute-specific guarantee)

Explicit minimum performance standard on one important attribute is guaranteed (e.g., delivery by noon the next day)

How to Design Service Guarantees

SATISFACTION GUARANTEED We commit to keeping scheduled appointments We commit to restoring power outages as soon as we can vs.
We will activate a customers service by the date promised. If we fail, well automatically credit that customers account $50. This commitment does not apply during severe storm conditions or emergency events, if access to that premises is not available or is deemed unsafe. We want you to be happy with your new glasses. Thats why well repair or exchange them for up to 30 days at no charge to you. This guarantee does not cover accidental damage, scratches or breakage.

Discouraging Abusive and Opportunistic Customer Behavior

Addressing the Challenge of Jaycustomers

Jaycustomer: A customer who behaves in a thoughtless or abusive fashion, causing problems for the firm, its employees, and other customers More potential for mischief in service businesses, especially when many customers are present No organization wants an ongoing relationship with an abusive customer

Seven Types of Jaycustomers

The Cheat:
Thinks of various ways to cheat the firm

The Thief
No intention of paying sets out to steal or pay less
Services lend themselves to clever schemes to avoid payment

e.g., bypassing electricity meters, circumventing TV cables, riding free on public transportation
Firms must take preventive actions against thieves, but make allowances for honest but absent-minded customers

Seven Types of Jaycustomers

The Rulebreaker Rules guide customers safely through the service encounter
Government agencies may impose rules for health and safety reasons Some rules protect other customers from dangerous behavior
e.g., ski patrollers issue warnings to reckless skiers by attaching orange stickers on their lift tickets

Ensure company rules are necessary, should not be too much or inflexible

Seven Types of Jaycustomers

The Belligerent Shouts loudly, maybe mouthing insults, threats, and curses
Service personnel are often abused even when they are not to be blamed Confrontations between customers and service employees can easily escalate

Firms should ensure employees have skills to deal with difficult situations

Seven Types Of Jaycustomers

Family Feuders People who get into arguments with other customers often members of their own family The Vandal Service vandalism includes pouring soft drinks into bank cash machines, slashing bus seats, breaking hotel furniture
Sources: bored and drunk young people, and unhappy customers who feel mistreated by service providers take revenge Prevention is the best cure

Seven Types Of Jaycustomers

The Deadbeat Customers who fail to pay (as distinct from thieves who never intended to pay in the first place)
Preventive action is better than cure e.g., insisting on prepayment; asking for credit card number when order is taken Customers may have good reasons for not paying
If the client's problems are only temporary ones, consider longterm value of maintaining the relationship

Consequences of Dysfunctional Customer Behavior

Employees:
Mood or temper negatively affected Long-term psychological damage Staff morale will fall, affecting productivity

Other Customers:
Positive rally to support an employee who is perceived to be abused Negative Contagious bad behavior might escalate the situation

Dealing with Customer Fraud

Treating all customers with suspicion is likely to alienate them
Only 1-2% of customer base engages in premeditated fraud so why treat remaining 98% of honest customers as potential crooks? But, records need to be kept to investigate repeat claimers

Insights from research on guarantee cheating:

Amount of a guarantee payout had no effect on customer cheating Repeat-purchase intention reduced cheating intent Customers are reluctant to cheat if service quality is high

Service Quality

Possible Levels of Customer Expectations

The Zone of Tolerance

Desired Service

Delights

Zone of Tolerance

Desirables

Adequate Service

Musts

Factors That Influence Desired Service

Factors That Influence Adequate Service

Factors That Influence Desired and Predicted Service

Six Service Quality Gaps

Closing the Six Service Quality Gaps

Six Service Quality Gaps

Closing the Six Service Quality Gaps

Six Service Quality Gaps

Closing the Six Service Quality Gaps

Six Service Quality Gaps

Closing the Six Service Quality Gaps

Dimensions of Service Quality

Tangibles Reliability Responsiveness Assurance Empathy
Appearance of physical elements Dependable and accurate performance Promptness; helpfulness Competence, courtesy, credibility, security Easy access, good communication, understanding of customer

Measuring and Improving Service Quality

Measures of Service Quality

Soft Measures
Not easily observed, must be collected by talking to customers, employees or others Provide direction, guidance and feedback to employees on ways to achieve customer satisfaction Can be quantified by measuring customer perceptions and beliefs e.g., SERVQUAL, surveys, and customer advisory panel

Hard Measures
Can be counted, timed, or measured through audits Typically operational processes or outcomes Standards often set with reference to percentage of occasions on which a particular measure is achieved

SERVQUAL
Survey research instrument based on premise that customers evaluate firms service quality by comparing:
their perceptions of service quality actually received with their prior expectations of companies in a particular industry Poor Quality: Perceived performance ratings < expectations Good Quality: Perceived performance ratings > expectations

Developed primarily in context of face-to-face service encounters Scale contains 22 items reflecting five dimensions of service quality Scale may have to be customized to the research context

SERVQUAL Attributes
RELIABILITY
Providing service as promised Dependability in handling customers service problems Performing services right the first time Providing services at the promised time Maintaining error-free records

EMPATHY
Giving customers individual attention Employees who deal with customers in a caring fashion Having the customers best interest at heart Employees who understand the needs of their customers Convenient business hours

RESPONSIVENESS
Keeping customers informed as to when services will be performed Prompt service to customers Willingness to help customers Readiness to respond to customers requests

TANGIBLES
Modern equipment Visually appealing facilities Employees who have a neat, professional appearance Visually appealing materials associated with the service

ASSURANCE
Employees who instill confidence in customers Making customers feel safe in their transactions Employees who are consistently courteous Employees who have the knowledge to answer customer questions

Tools to Analyze and Address Service Quality Problems

Control Chart for Departure Delays Control Chart for Departure Delays

Tools to Analyze and Address Service Quality Problems

Fishbone diagram
Cause-and-effect diagram to identify potential causes of problems

Pareto Chart
Separating the trivial from the important. Often, a majority of problems are caused by a minority of causes (i.e., the 80/20 rule)

Blueprinting
Visualization of service delivery, identifying points where failures are most likely to occur

Cause-and-Effect Chart for Flight Departure Delays

Return On Quality (ROQ)

Assess costs and benefits of quality initiatives
ROQ approach is based on four assumptions:

quality is an investment - quality efforts must be financially accountable - its possible to spend too much on quality - not all quality expenditures are equally valid

Implication: Quality improvement efforts may benefit from being related to productivity improvement programs To determine feasibility of new quality improvement efforts, determine costs and then relate to anticipated customer response

Determine optimal level of reliability

Diminishing returns set in as improvements require higher investments Know when improving service reliability becomes uneconomical

When Does Improving Service Reliability Become Uneconomical?

100%

Satisfy Target Customers Through Service Recovery

Service Reliability

Optimal Point of Reliability: Cost of Failure = Service Recovery

D Investment

Satisfy Target Customers Through Service Delivery as Planned

Small Cost, Large Improvement

Large Cost, Small Improvement

Assumption: Customers are equally (or even more) satisfied with the service recovery than with a service that is delivered as planned.

Effective Pricing is Central to Financial Success

What Makes Service Pricing Strategy Different and Difficult?

Harder to calculate financial costs of creating a service process or performance than a manufactured good Variability of inputs and outputs:
How can firms define a unit of service and establish basis for pricing?

Importance of time factor same service may have more value to customers when delivered faster Customers find service pricing difficult to understand, risky, and sometimes even unethical

Objectives for Pricing of Services

Revenue and Profit Objectives
Seek profit Cover costs

Patronage and User-Based Objectives

Build demand
- Demand maximization - Full capacity utilization

Build a user base

- Stimulate trial and adoption of new service - Build market share/large user base

Pricing Strategy As Represented by the Pricing Tripod

The Pricing Tripod

Floor and Ceiling of Price

Value to customer

Competition

Costs

Three Main Approaches to Pricing

Cost-Based Pricing
Set prices relative to financial costs Activity-Based Costing Pricing implications of cost analysis

Value-Based Pricing
Relate price to value perceived by customer

CompetitionBased Pricing
Monitor competitors pricing strategy Dependent on the price leader

Cost-Based Pricing: Traditional vs. Activity-Based Costing

Traditional costing approach
Emphasizes expense categories (arbitrary overheads allocation) May result in reducing value generated for customers

ABC management systems

Link resource expenses to variety and complexity of goods/services produced Yields accurate cost information

BUT, customers care about value to themselves, not what service production costs the firm

Value-Based Pricing: Understanding Net Value

Net Value = Perceived Benefits to Customer (Gross Value) minus All Perceived Outlays (Money, Time, Mental/Physical Effort) Consumer surplus: difference between price paid and amount customer would have been willing to pay in absence of other options Competing services are then evaluated via comparison of net value

Defining Total User Cost

Money Search Costs* Time Physical Effort Purchase and Service Encounter Costs Operating Costs Incidental Expenses Purchase

Psychological Burdens Sensory Burdens

Necessary Post Purchase Costs* Follow-up Problem Solving * Includes all five cost categories

Value-Based Pricing: Strategies for Enhancing Net Value

Enhance gross value benefits delivered
Add benefits to core product Enhance supplementary service Manage perceptions of benefits delivered

Reduce costs incurred by

Reducing monetary costs of acquisition and usage Cutting amount of time required to evaluate, buy, use service Lowering effort associated with purchase and use

Four Definitions of Value

Value is low price
Discounting

Value is everything I want in service

Skimming pricing

Value is the quality I get for the price I pay

Market Segmentation pricing

Value is all that I get for all that I give

Price bundling Result based pricing

Competition-Based Pricing
Price competition increases due to:
Increasing competition Increase in substituting offers Wider distribution of competitor Increasing surplus capacity in the industry

However under these circumstances, price competition can decrease:

High non-price-related costs of using alternatives Personal relationships matter Switching costs are high Time and location specificity reduces choice Managers should examine all related financial and non-monetary costs

Yield Management

Maximizing Revenue from Available Capacity at a Given Time

Most effective in the following conditions:
High fixed cost structure Relatively fixed capacity Perishable inventory Variable and uncertain demand Varying customer price sensitivity

Revenue management (RM) is price customization

Charge different value segments different prices for same product based on price sensitivity

History
Theory propounded by Taylor (1962) Early adopters of yield management: American Airlines and Delta Airlines in the late 80s

Conceptual Foundation

Conceptual Foundation

Basic Economics

Segmented Market

Market Segmentation Methods

Clustering Customers

Time Segmentation

Changing Demand Over Time

Changing Demand Over Time

Demand Estimation

Leakage

Fences

Pricing

Same Price, Two Segments

Two Prices, Two Segments

Accept / Reject Decision Making

Discount Allocation

Littlewood Rule

Expected Marginal Revenue Curve

Key Categories of Rate Fences: Physical (Product-Related) Fences

Product-Related Fences
Rate Fences Basic Product Examples
Class of travel (Business/Economy class) Size and furnishing of a hotel room Seat location in a theater

Amenities Service Level

Free breakfast at a hotel, airport pick up, etc. Free golf cart at a golf course Priority wait listing Increase in baggage allowances Dedicated service hotlines Dedicated account management team

Key Categories of Rate Fences: Non Physical Fences

Transaction Characteristics
Rate Fences Time of booking or reservation Location of booking or reservation Flexibility of ticket usage Examples
Requirements for advance purchase Must pay full fare two weeks before departure Passengers booking air tickets for an identical route in different countries are charged different prices Fees/penalties for canceling or changing a reservation (up to loss of entire ticket price) Non-refundable reservation fees

Key Categories of Rate Fences: Non Physical Fences

Consumption Characteristics
Rate Fences Time or duration of use Example
Early bird special in restaurant before 6pm Must stay over on Sat for airline, hotel Must stay at least five days

Location of consumption

Price depends on departure location, especially in international travel Prices vary by location (between cities, city centre vs. edges of city)

Key Categories of Rate Fences: Non Physical Fences

Buyer Characteristics
Rate Fences Frequency or volume of consumption Group membership Size of customer group Examples
Member of certain loyalty tier with the firm get priority pricing, discounts or loyalty benefits Child, student, senior citizen discounts Affiliation with certain groups (e.g., Alumni) Group discounts based on size of group

Relating Price Buckets and Fences to Demand Curve

Planned Upgrade

Overbooking

Managing Overbooked Customers

Overbooking: Basic Model

Optimal Level of Overbooking

Minimizing No-show Rate

Managing Demand and Capacity

Defining Productive Capacity

Productive capacity can take several forms in services
Physical facilities designed to contain customers Physical facilities designed for storing or processing goods Physical equipment used to process people, possessions, or information Labor Infrastructure

Financial success in capacity-constrained business is a function of managements ability to use productive capacity as efficiently and profitably as possible.

Capacity
Design capacity

maximum output rate or service capacity an operation, process, or facility is designed for Design capacity minus allowances such as personal time, maintenance, and scrap rate of output actually achievedshould not exceed effective capacity.

Effective capacity

Actual output

Efficiency and Utilization

Actual output Efficiency = Effective capacity Actual output Utilization = Design capacity
Both measures expressed as percentages

Efficiency/Utilization Example
Design capacity = 50 calls/day Effective capacity = 40 calls/day Actual output = 36 calls/day

Actual output

36 units/day = 90% 40 units/ day = 36 units/day 50 units/day = 72%

Efficiency =
Effective capacity

Utilization =

Actual output Design capacity

Relationship between Utilization and Service Quality

Higher utilization leads to lower service quality!! For example:
in medical services, increasing the number of doctors can decrease waiting times and allow each doctor to spend more time with each patient. in a retail store, increasing the number of trained floor employees helps customers find assistance more quickly.

From Excess Demand to Excess Capacity

Excess demand
Demand exceeds optimum capacity Too much demand relative to maximum capacity

Service quality is perceived to have deteriorated

Optimum capacity

Staff is not overworked and customers receive good service

Excess capacity

Too much capacity relative to demand

Addressing Problem of Fluctuating Demand

Two basic approaches of which most firms use a mix of: Adjust level of capacity to meet demand
Need to understand productive capacity and how it varies on an incremental basis

Manage level of demand

Use marketing strategies to smooth out peaks, fill in valleys Inventorying demand until capacity becomes available

Example: Capacity Planning for Cookies and Cream-Naive Approach

An enterprising student is considering opening a Cookies and Ice Cream shop in space that has become available in a food court. Observations of traffic during lunch hour suggest a potential peak demand of 50 customers, each ordering an average six baked-to-order cookies, and spending 20 minutes at a table. Cookie sheet can accommodate a dozen cookies and baking time 10 minutes. One server requires on average 6 minutes to take an order, mix a batch of cookies, make change, prepare and assemble the order. Capacity requirements are determined by calculating the units of facility, equipment, and labor needed to accommodate the anticipated peak demand

Little Law
Littel Law states that the average number of customers in a system (L) is equal to the arrival rate () times the average waiting time (W); L= W.

 Facility requirements: With 50 customers arriving

during the peak and each staying approximately 20 minutes, we need (50)(20)/(60)=16.7 ~ 17 chairs. Equipment Requirements: Assume that orders can be combined to fill a sheet.
(50 cust/hr)(6 cookies/order) = 4.17 (12 cookies/sheet)(6 cycles/hour)

Sheets needed=

Labor Requirement is focused on calculating the number

of servers required.
(50 cust/hr)(6 min each) Servers needed= 60 min./hr = 5.0

 Caution needs to be exercised in implementing such an approach. Excess capacity is required in a service system. Capacity to serve must exceed the arrival rate to avoid out-of-control waiting lines.

Service Capacity Planning

Service capacity planning can present a number of challenges related to:

The need to be near customers

Convenience Cannot store services for consumption later Volume and timing of demand Time required to service individual customers

The inability to store services

The degree of demand volatility

Capacity Strategies

Leading

Build capacity in anticipation of future demand increases

Following

Build capacity when demand exceeds current capacity

Tracking

Similar to the following strategy, but adds capacity in relatively small increments to keep pace with increasing demand

Strategy Formulation

Strategies are typically based on assumptions and predictions about:

Long-term demand patterns Competitor behavior

Capacity Cushion

Capacity Cushion
Extra capacity used to offset demand uncertainty Capacity cushion = 100% - Utilization Capacity cushion strategy

Organizations that have greater demand uncertainty typically have greater capacity cushion Organizations that have standard products and services generally have smaller capacity cushion

Managing Capacity
Enables more people to be served at same level of capacity Stretch and shrink:
Offer inferior extra capacity at peaks (e.g., bus/train standees) Use facilities for longer/shorter periods Reduce amount of time spent in process by minimizing slack time

Two Capacity Strategies

Planned unused capacity Forecast of capacity needed
Capacity

Forecast of Planned use of short-term options capacity needed

Capacity

Time between increments

Expansionist Strategy

Wait-and-See Strategy

Economic Trade-off in Capacity Planning

Adjusting Capacity to Match Demand

Rest during low demand: Employee vacation, Employee lunch hour etc. Cross-train employees: In supermarkets stockers are asked to do billing using
hand-held billing machines in peak hours

Use part-time employees: Resorts in vacation season, CA firms in May & June Customers perform self-service: Buffet for Lunch / Full Service Restaurant for
Dinner _ Indijoe , Old Madras Road, Bangalore

Ask customers to share Rent/share facilities and equipment

Create flexible capacity:

Boeing 777 cabin features "Flexibility Zones", which

entails deliberate placement of water, electrical, pneumatic, and other connection points throughout the interior space, allowing airlines to move seats, galleys, and lavatories quickly (in 2 days instead of normal 3 weeks) when adjusting cabin arrangements. http://www.boeing.com/farnborough2012/pdf/Bkgd_777.pdf

Analyze Patterns of Demand

Demand Varies by Market Segment

Understand why customers from specific market segments select this service Keep good records of transactions to analyze demand patterns
Sophisticated software can help to track customer consumption patterns

Record weather conditions and other special factors that might influence demand

Managing Demand
Take no action
Let demand find its own levels

Interventionist approach
Reduce demand in peak periods Increase demand when there is excess capacity

Inventorying demand until capacity becomes available

Formal wait and queuing system Reservation system

Marketing Mix Elements to Shape Demand Patterns

Use price and other nonmonetary costs to manage demand Change product elements Modify place and time of delivery
No change Vary times when service is available Offer service to customers at a new location

Promotion and Education

Hotel Room Demand Curves by Segment and Season

Price per room night Bl Bh Bh = business travelers in high season Bl = business travelers in low season Th = tourist in high season Tl = tourist in low season

Th
Tl

Bl

Bh

Th Tl

Quantity of rooms demanded at each price by travelers in each segment in each season

Benefits of Reservations
Saves customers from having to wait in line Helps to control and manage the demand (e.g., leave time for emergency jobs) Pre-sells the service and can be used to prepare and educate the customer for the service encounter Data captured helps organizations to understand their demand patterns and to plan their operations and staffing levels

Characteristics of Well-Designed Reservations System

Fast and user-friendly for customers and staff Responsive to customer queries and needs Offers options for self service (e.g., through an online reservations system) Accommodates preferences (e.g., room with a view) Deflects demand from unavailable first choices to alternative times and locations

Reservations Strategies Should Focus on Yield

Yield analysis helps managers recognize opportunity cost of allocating capacity to one customer/segment when another segment might yield a higher rate later Decisions need to be based on good information
Detailed records of past usage Current market intelligence and good marketing sense Realistic estimate of the chances of obtaining higher rated business

When firms overbook to increase yield,

Victims of overbooking should be compensated to preserve the relationship

Setting Hotel Room Sales Targets by Segment and Time Period

Capacity (% rooms)
100%

Week 7
(Low Season) Out of commission for renovation Loyalty Program Members Transient guests Weekend package

Week 36
(High Season) Loyalty Program Members

50% Transient guests Groups and conventions

W/E package

Groups (no conventions) Airline contracts Airline contracts F S Su M Tu W Th F S Su

Time

Nights: M

Tu

Th

Creating Alternative Use For Otherwise Wasted Capacity

Use capacity for service differentiation Reward your best customers and build loyalty Customer and channel development Reward employees Barter free capacity

A great service marketing company spends money here

Advocate Client

Customer Prospect

Suspect Traditional Advertising

Value ( $ )

Duration of Customer Relationship

Targeting

Acquisition

Retention

Expansion

Who Do we target What segments are most profitable What segments match our Value Proposition What is the best segmentation strategy for us / our industry

What is the best channel for each segment What is the acquisition cost for a channel / segment Do certain channels deliver certain types of customers Cost effective acquisition

How can we improve retention What is our average customer relationship length How can we hold customer for as long as possible What is the most cost effective method of retention

How many products does our average customer buy How can we induce our current base to buy more products Who are the prime targets for expansion What is the cost of expansion

Customer Relationship Management can be simply defined as everything involved with managing the customer relationship.

Why Customer Loyalty?

Acquisition Emphasis Gain 6 new customers ($500 each) $3,000 Retention Emphasis Gain 3 new customers ($500 each) Retain 20 current customers ($100 each) Total cost Total number of customers $1,500

Retain 5 current customers $ 500 ($100 each) Total cost Total number of customers $3,500 11

$2,000

$3,500 23

Maximizing Number of Customers Source: Adapted from Peppers and Rogers (1996)

Economics of customer retention

Winning back a lost customer can cost up to 50-100 times as much as keeping a current one satisfied. Rob Yanker, Partner, McKinsey & Company

Understanding your customer is key to retention..

Length of customer tenure and profitability

High

Lifetime Profit

Low Short Lifetime Long

Accountants
They make no distinction between the sales revenue from brand new customers and sales revenue from long term, loyal customers, because they dont know or care that it costs much more to serve new customers than an old one. Worse accountant treat investment in customer acquisition as one more current expense instead of assigning it to specific customer accounts and amortizing it over the life of the customer relationship.

Understanding the Lifetime Part of CLV

Comparing ROI to CLV Return on Investment (ROI) represents a way to measure the immediate result of any sales effort CLV uses relationship capital to assess the long-term value of the customer

Why Lifetime Value Analysis?

We need to know the value of our customers, so as to properly target our sales and retention efforts. We need to discriminate among our customers to acquire and retain the best.

Customer Groups
Butterflies
High Good fit between companys offerings and customers needs; high profit potential

True Friends
Good fit between companys offerings and customers needs; highest profit potential

Profitability

Strangers
Low Little fit between companys offerings and customers needs; lowest profit potential

Barnacles
Limited fit between companys offerings and customers needs; low profit potential Long-term customers

Short-term customers

Projected loyalty

LTV Analysis Goal:

Determine:
Where to put your retention dollars The value of each retention strategy Where to put your acquisition dollars How much to spend on acquisition

Customer Lifetime Value

Churn rate, the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. Discount rate, the cost of capital used to discount future revenue from a customer. Discounting is frequently ignored in customer lifetime value calculations. Contribution margin. Retention cost, the amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc. Period, the unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 37 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.

Model

where is GC yearly gross contribution per customer, M is the (relevant) retention costs per customer per year (this formula
assumes the retention activities are paid for each mid year and they only affect those who were retained in the previous year), n is the horizon

(in years), r is the yearly retention rate, d is the yearly discount rate.

Variable Costs
Include any variable cost. Do not include fixed costs like rent, long term debt overhead etc. These costs do not vary with number of customers. The costs of servicing a customer tend to decrease with the number of years that the customer has been buying from you.

The Discount Rate

The profits you receive from your customers come in over several years. Money received in future years is not worth as much as money received today. We must discount it by a certain percentage so we can equate it to the present money. Use the market rate of interest to discount the future revenue
And include the risk factor

Service Profit Chain

Service Profit Chain

Source: Heskett et.al, Harvard Business Review, 2008

Links in the Service-Profit Chain

1. Customer loyalty drives profitability and growth 2. Customer satisfaction drives customer loyalty 3. Value drives customer satisfaction 4. Employee productivity and retention drive value 5. Employee loyalty drives productivity 6. Employee satisfaction drives loyalty and productivity 7. Internal quality drives employee satisfaction 8. Top management leadership underlies chains success

Understanding Consumer Reponses to Service Environments

The Mehrabian-Russell Stimulus-Response Model

Feelings Are a Key Driver of Customer Responses to Service Environments

Environmental Stimuli and Cognitive Processes

Dimensions of Affect: Pleasure and Arousal

Response/Behaviors: Approach Avoidance & Cognitive Processes

Insights from Mehrabian-Russell Stimulus-Response Model

It is a simple yet fundamental model of how people respond to environments that illustrates:
The environment, its conscious and unconscious perceptions, and interpretation influence how people feel in that environment Feelings, rather than perceptions/thoughts drive behavior Typical outcome variable is approach or avoidance of an environment,

The Russell Model of Affect

Insights from Russells Model of Affect

Emotional responses to environments can be described along two main dimensions:
Pleasure: subjective, depending on how much individual likes or dislikes environment Arousal: how stimulated individual feels, depends largely on information rate or load of an environment

Advantage: simple, direct approach to customers feelings

Firms can set targets for affective states

Drivers of Affect
Caused by perceptions and cognitive processes of any degree of complexity Determines how people feel in a service setting If higher levels of cognitive processes are triggered, the interpretation of this process determines peoples feelings The more complex a cognitive process becomes, the more powerful its potential impact on affect

Behavioral Consequence of Affect

Pleasant environments result in approach, whereas unpleasant ones result in avoidance Arousal amplifies the basic effect of pleasure on behavior
If environment is pleasant, increasing arousal can generate excitement, leading to a stronger positive consumer response If environment is unpleasant, increasing arousal level will move customers into the distressed region

Feelings during service encounters are an important driver of customer loyalty

How Exciting Should a Store Be?

Depends on the Customers Shopping Goals Task-completion: a simple atmosphere with slow music, dimmer lighting, and blue/green colors Fun: an exciting atmosphere with fast music, bright lighting, and red/yellow colors
18-8

The Servicescape Model

Designing Services

Service Products
A service product comprises of all elements of service performance, both tangible and intangible, that create value for customers. Service products consist of: Core Service central component that supplies the principal, problem-solving benefits customers seek Supplementary Services augments the core product, facilitating its use and enhancing its value and appeal Delivery Processes used to deliver both the core product and each of the supplementary services

Core Services and Supplementary Services

In mature industries, core services often become commodities Supplementary services help to differentiate core products and create competitive advantage by: Facilitating use of core product (a service or a good) Enhancing the value and appeal of the core product

People-processing and high contact services have more supplementary services Market positioning strategy helps to determine which supplementary services should be included Different levels of service can add extra supplementary services for each upgrade in service level Low-cost, no-frills basis firms needs fewer supplementary elements

The Flower of Service

Information Payment Billing Exceptions
KEY:

Consultation
Core

Order-Taking Hospitality

Safekeeping

Enhancing elements Facilitating elements

Designing a Service Concept

Service concept design must address the following issues:
How the different service components are delivered to the customer The nature of the customers role in those processes How long delivery lasts and the intermediate waiting time The recommended level and style of service to be offered

Characteristics of Well Designed Service Systems

1. Consistent with the organizations operating focus 2. User friendly 3. Robust 4. Easy to sustain (consistent performance by its 5. 6. 7. 8. 9.

people and systems is easily maintained) Cost effective Value to customers Effective linkages between back operations Single unifying theme Ensure reliability and high quality
4-16

Documenting Delivery Sequence Over Time

Must address sequence in which customers will use each core and supplementary service Determine approximate length of time required for each step Information should reflect good understanding of customers, especially their:
needs habits expectations

The Service Design Process

Desired service experience Service Concept Targeted customer Service Package Physical items Sensual benefits Psychological benefits

Performance Specifications Customer requirements Customer Activities Customer expectations Service Provider Cost and time estimates

Design Specifications Facility Provider skills

Delivery Specifications Schedule Deliverables Service Location

Flowcharting Customer Service Processes

Flowcharting Service Delivery Helps to Clarify Product Elements

Technique for displaying the nature and sequence of the different steps in delivery service to customers Offers way to understand total customer service experience Shows how nature of customer involvement with service organizations varies by type of service:
People processing Possession processing Mental Stimulus processing Information processing

Degree of Complexity
Measured by the number of steps in the service blueprint. For example, a medical clinic is less complex than a general hospital.

Degree of Divergence
Amount of discretion permitted the server to customize the service. For example, a high-end vs. low-end hotel has more personalized services.

Structural Positioning of Healthcare Services

HIGH COMPLEXITY * Hospitals Services * General Practitioner: Diagnosis & Treatment * Diagnostic services only Specialist: * Treatment only HIGH DIVERGENCE Outpatient Clinic: Limited * Treatment: e.g. Broken Bones/Minor Burns only * Retailer of Orthopedic Supplies * X-Ray Lab LOW COMPLEXITY * Medical Counseling

* Forensic-Testing Lab

LOW DIVERGENCE

Complexity
Specialization positioning strategy
reduces complexity
by reducing the number of steps in the process it unbundles the service offering

Penetration strategy
increases complexity
by increasing the number of steps attempts to appeal to a broader market

Eg. Narayana Hrudayalaya, Escorts Hospital

Divergence--degrees of freedom given to personnel in providing a service

Volume-oriented positioning strategy (production-line)
decreases divergence produces standardized output and reduces costs but does so at the expense of increasing conformity and inflexibility
Eg. Shouldice

Divergence--degrees of freedom in decision making

Niche positioning strategy
increases divergence produces a heterogeneous output creates flexibility in tailor-made solutions but it does so at increased expense
Eg. Off-the-shelf vs. Custom-made Software

Structural Alternatives for a Restaurant

LOWER COMPLEXITY/DIVERGENCE No Reservations Self-seating. Menu on Blackboard Eliminate Customer Fills Out Form CURRENT PROCESS TAKE RESERVATION SEAT GUESTS, GIVE MENUS SERVE WATER AND BREAD TAKE ORDERS PREPARE ORDERS Salad (4 choices) Entree (15 choices) Dessert (6 choices) Beverage (6 choices) SERVE ORDERS HIGHER COMPLEXITY/DIVERGENCE Specific Table Selection Recite Menu: Describe Entrees & Specials Assortment of Hot Breads and Hors Doeuvres At table. Taken Personally by Maltre d

Pre-prepared: No Choice Limit to Four Choices Sundae Bar: Self-service Coffee, Tea, Milk only Serve Salad & Entree Together: Bill and Beverage Together Cash only: Pay when Leaving

Individually Prepared at table Expand to 20 Choices: Add Flaming Dishes; Bone Fish at Table; Prepare Sauces at Table Expand to 12 Choices Add Exotic Coffees; Sherbet between Courses; Hand Grind Pepper

COLLECT PAYMENT

Choice of Payment. Including House Accounts: Serve Mints

Taxonomy of Service Processes

No Customer Contact Low divergence High divergence (standardized service) (customized service) Processing Processing Processing Processing Processing of goods Information of people of goods Information Dry Check Auto repair Computer Cleaning processing Tailoring a programming Restocking Billing for a suit Designing a a vending credit card building machine Ordering Supervision groceries of a landing from a home by an air computer controller Withdrawing cash from an ATM Processing of people

Indirect customer contact

No Operating customera vending service machine worker Assembling interaction premade (selffurniture Direct service) Customer Customer Food Contact service service in a worker restaurant interaction Hand car washing

Operating Sampling Documenting Driving a an elevator food at a medical rental car Riding an buffet dinner history Using a escalator Bagging of health club groceries Searching for facility information in a library Giving a Providing Home Portrait Haircutting lecture public carpet painting Performing Handling transportcleaning Counseling a surgical routine bank a tion Landscaping operation transactions Providing service mass vaccination

Constructing the Service Blueprint

Elicit scripts from employees and customers
order events in sequence of occurrence

Identify potential fail points in the system Specify the time frame for service execution Given the costs of inputs needed for the system to operate, analyze the profitability of the system

Major Steps in Service Blueprinting

1.

Establish boundaries: Distinguish between frontstage and backstage

2. Identify sequence of customer interactions

Prepare a flowchart

3.

Develop time estimates

4. Identify potential failure points 5. Pinpoint stages where customers commonly have to wait

Time and Motion Study: Defined

A method created to determine the correct time it takes to complete a certain task A method to establish the one best way to perform a task

30

Time and Motion Study

T&M Studies can be used for planning purposes in order to predict the level of output that may be achieved T&M Studies can be used to uncover problems and create solutions T&M Studies can be used for time cost analysis T&M Studies can be effective for performance evaluations
31

Time and Motion Study: Objective

The objective of the Time and Motion Study is to determine a normal or average time for a job, by using observers to record exactly how much time is being devoted to each task.
32

How it Works Step-by-Step

1. Establish the standard job method. 2. Break down the job into elements 3. Study the job. 4. Rate the workers performance
33

How it Works Step-by-Step contd

5. Compute the average time 6. Compute the normal time
Nt=(t)(RF) or Normal Time=(elemental average time) (rating factor)

7. Compute the standard time

ST=(Nt)(1+AF) or Standard Time=(Normal cycle time)(1+Allowance factor)
34

Time and Motion Study: Problems

1.

Observers are not always competent

2. Those conducting the

study are not always proficient in the job being observed

3. The actions observed are

not always reflective of the group as a whole

Time and Motion Study: Problems

Workers may not cooperate with a time and motion study: 1. They may resent the study if it is being used to determine the pay scale 2. Workers may change the rate at which they work 3. Pressure may increase mistakes made 4. Workers may alter normal work methods to disrupt the study

Key Components of a Service Blueprint

Define standards for front-stage activities Specify physical evidence Identify principal customer actions

Objectives:
Identify fail points & risks of excessive waits Set service standards Fail-proof process

Line of visibility

Front-stage actions by frontline personnel

Line of interaction

Backstage actions by customer contact personnel

Support processes involving other personnel

Support processes involving IT

Standard execution time 2 minutes

Verbalize Order 30 seconds

Enter Order

Prepare Food 60 seconds

Collect payment 15 seconds

15 seconds Fail point Correct Order 20 seconds

Front Office

Materials (e.g., food, paper)

Line of visibility

Not seen by customer but necessary to performance

Select and purchase supplies

Back Office

Blueprint for an Installment Lending Operation

Loan application
30 min. 1 hr.

Branch

Officer Pay book

W
Line of visibility

W
Receive payment Final payment

Decline Deny

Notify customer

Issue check

Confirm

F
Close account

F
Verify income data Initial screening 1 day Credit check 2 days Accept 3 days Print payment book Delinquent

F
Verify payor Branch records

F
Employer

Credit bureau

Bank accounts Data base records

Confirm

Accounting

Fail point

Customer wait

Employee decision

System Availability
System Availability, SA =
PROVIDER A B C MTBF (HR) 60 36 24

MTBF MTBF + MTTR

MTTR (HR) 4.0 2.0 1.0

SAA = 60 / (60 + 4) = .9375 or 93.75% SAB = 36 / (36 + 2) = .9726 or 97.26% SAC = 24 / (24 + 1) = .9473 or 94.73%

Design for High-Contact Services

DESIGN DECISION HIGH-CONTACT SERVICE
Facility location Facility layout Convenient to customer Must look presentable, accommodate customer needs, and facilitate interaction with customer More variable since customer is involved in process; customer expectations and perceptions of quality may differ; customer present when defects occur Excess capacity required to handle peaks in demand

LOW-CONTACT SERVICE
Near labor or transportation Designed for efficiency

Quality control

Measured against established standards; testing and rework possible to correct defects

Capacity

Planned for average demand

Design for High-Contact Services

DESIGN DECISION HIGH-CONTACT SERVICE
Worker skills Must be able to interact well with customers and use judgment in decision making Must accommodate customer schedule Mostly front-room activities; service may change during delivery in response to customer Varies with customer; includes environment as well as actual service

LOW-CONTACT SERVICE
Technical skills

Scheduling

Customer concerned only with completion date Mostly back-room activities; planned and executed with minimal interference Fixed, less extensive

Service process

Service package

1-10-100 Rule
The 1-10-100 rule states that as a product or service moves through the production system, the cost of correcting an error multiplies by 10. Activity Order entered correctly Error detected in billing Error detected by customer $ 100 $1 $ 10 Cost

Dissatisfied customer shares the experience with others the costs is

$1000
43

Improving Reliability of Processes Through Fail-Proofing

Identify fail points Analysis of reasons for failure reveals opportunities for failure-proofing to reduce/eliminate future errors Need fail-safe methods for both employees and customers

Design Review
Failure Mode and Effects Analysis (FMEA)
A systematic approach for analyzing causes & effects of failures Prioritizes failures Attempts to eliminate causes

Fault Tree Analysis (FTA)

Study interrelationship between failures

FMEA for Potato Chips

FAILURE MODE CAUSE OF FAILURE EFFECT OF FAILURE CORRECTIVE ACTION

Stale

Low moisture content, expired shelf life, poor packaging Too thin, too brittle, rough handling, rough use, poor packaging

Tastes bad, wont crunch, thrown out, lost sales Cant dip, poor display, injures mouth, chocking, perceived as old, lost sales Eat less, drink more, health hazard, lost sales

Add m cure longer, better package seal, shorter shelf life Change recipe, change process, change packaging

Broken

Too Salty

Outdated receipt, process not in control, uneven distribution of salt

Experiment with recipe, experiment with process, introduce low salt version

Fault Tree for Potato Chips

Setting Service Standards and Targets

Service providers set standards for each step sufficiently high to satisfy and even delight customers
Include time parameters, script and prescriptions for appropriate style and demeanor Must be expressed in ways that permit objective measurement

Performance targets specific process and team performance targets for which staff are responsible for Evaluated based on distinction between standards and targets

Hard vs. Soft Service Standards

HARD STANDARDS AND MEASURES
Things that can be counted, timed, or observed through audits (time, numbers of events)

SOFT STANDARDS AND MEASURES

Opinion-based measures that cannot be observed and must be collected by talking to customers (perceptions, beliefs)

HARD Customer Defined Standards

Counted, timed or observed through audits
Customer Priorities Customer Defined Standard

Eg. FedEx

On Time delivery
Eg. Dell

1. No. of packages right, day late

2. No. of packages wrong, day late 3. No. of missed pick-ups

Computer works properly

1. Initial field incidence rate

SOFT Customer Defined Standards

Can be quantified by measuring customer perceptions & beliefs Provide direction, guidance and feedback

Eg. American Express

Customer Priorities Resolution of Problem Customer Defined Standard
Resolve problem at first contact Take all the time necessary

Treatment Courtesy of representative

Listen, do everything possible to help

Put card member at ease Address card member by first name

Seven Service Culture Standards

1. Smile 2. Eye 3. Recognition 4. Voice 5. Informed 6. Clean 7. Everyone

Setting Standards and Targets for Customer Service Processes

Service Attributes
Responsiveness Reliability Competence Accessibility Courtesy Communication Credibility Confidentiality Listening to the customer Creates a Base to Measure Customer Satisfaction Define Service Quality Goals for Staff Define/Process Departmental Service Goals Processing time to approve applications 24 hours 80% of all applications in 24 hours

Service Process Indicators

Service Process Standards

Performance Targets

Customer-Driven Standards and Measurements

Service Encounter Customer Requirements Measurements

Service Quality

AT&Ts Process Map for Measurements

Source: R. E. Kordupleski, R. T. Rust, and A. J. Zaharik, Why Improving Quality Doesnt Improve Quality (or Whatever Happened to Marketing?), California Management Review 35, no. 3 (Spring 1993).

What Customers Expect: Getting to Actionable Steps

Satisfaction Relationship Value Solution Provider Empathy Tangibles Price

Requirements: Diagnosticity: Abstract Low General concepts Dimension s Attributes

Dig deeper

Reliability Assurance Responsiveness

Dig deeper

Delivers on time Returns calls quickly Knows my industry

Dig deeper

Delivers by Wednesday Returns calls in two hours Knows strengths of my competitors

Behaviors and actions High

Concrete

Select Behaviors & Actions for Standards

The standards are based on behaviors & actions that are important to customers The standards cover performance that needs to be improved or changed The standards cover behaviors & actions employees can improve The standards are accepted by employees The standards are predictive rather than reactive The standards are challenging but realistic

Kano Model

Origins of the Kano Model

Noriaki Kano
Developed foundation for an approach on Attractive Quality Creation commonly referred to as the Kano Model Challenged traditional Customer Satisfaction Models that More is better, i.e. the more you perform on each service attribute the more satisfied the customers will be. Proposed new Customer Satisfaction model (Kano Model)
Performance on product and service attributes is not equal in the eyes of the customers Performance on certain categories attributes produces higher levels of satisfaction than others.

Key Elements
Identify the Voice of the Customer Translate Voice of the Customer into Critical to Quality Characteristics (CTQs) Rank the CTQs into three categories:
Dissatisfier - Must bes Cost of Entry Satisfier More is better Competitive Delighter Latent Need Differentiator

Evaluate Current Performance

Kano Model

Kano Model Process

Research Analyze & Brainstorm Plot & Diagram Strategize

Research available data sources Determine data collection strategy Design data collection instruments Collect and summarize data

Analyze results Develop Customer from data collection Requirement Matrix Brainstorm list of Record features and Questionnaire functionality results in Matrix Develop Functional and Summarize and Dysfunctional Plot results on Questionnaire Kano Model Distribute Questionnaire

Determine Project selection Product Development Service Development Identify Marketing Strategy

Research
Must Bes - Focus Groups, Lawsuits and Regulations, Buzz on Internet Satisfiers - Competitive Analysis, Interviews, Surveys, Search Logs, Usablity Testing, Customer Forums Delighters - Field Research, Marketing/Branding Vision, Industrial Design, Packaging, Call Center Data, Site Logs

Analyze & Brainstorm

Analyze data from available sources Brainstorm list of features and functionality Determine type of requirements:
Output Requirements Service Requirements

Kano Model Requirements Survey

User Survey
Functional form vs. Dysfunctional Form
How would you feel if the product had feature X? How would you feel if the product didnt have feature X?

Kano Questionnaire Answers:

I like it. I expect it. Im neutral. I can tolerate it. I dislike it.

Example: Requirements Survey

Example: Requirements Questionnaire

Functional vs. Dysfunctional Comparison

Evaluation Customer Requirements

C.R. 1 2 3 4 5
A: Attractive E: Expected

A 3 5 6

E 6 6 1 13

O 14 11 4 10 2

I 1

Total Grade 23 O 23 23 23 O I E A

11

11

23

Customer Requirement is: R: Reverse Q: Questionable Result O: One Dimensional I: Indifferent

Example Results

Summary of Kano Model

Analyze and rank the voice of the customer data Develop into Categories
Dissatisfier Must bes Cost of Entry Satisfier More is better Competitive Delighter Latent Need Differentiator

Identify and implement strategy

Customers Role in Service

 Service is co-creation!!

How Customers Widen the Service Performance Gap Lack of understanding of their roles Not being willing or able to perform their roles No rewards for good performance Interfering with other customers Incompatible market segments

Challenge in recovering from customer failures

If your reservation says you must check in before 6 p.m. and you show up at 6:30 p.m. and have not bothered informing the hotel you will be late: - there are no rooms available

Importance of Other (Fellow) Customers in Service Delivery Other customers can detract from satisfaction:
disruptive behaviors overly demanding behaviors excessive crowding incompatible needs

Other customers can enhance satisfaction:

mere presence socialization/friendships roles: assistants, teachers, supporters, mentors

Customers as Productive Resources

customers can be thought of as partial employees
contributing effort, time, or other resources to the production process

customer inputs can affect organizations productivity key issue:

should customers roles be expanded? reduced?

Customers as Contributors to Service Quality and Satisfaction Customers can contribute to:
their own satisfaction with the service
by performing their role effectively by working with the service provider

the quality of the service they receive

by asking questions by taking responsibility for their own satisfaction by complaining when there is a service failure

 Why customers fail?

Summary
Do root-cause analysis Understand customer behavior Improve the servicescape Ensure that the customer understands what is expected of him Use technology but like a human and not like a robot!! Redesign processes Penalize

Measures of Service Quality and Loyalty

Soft Measures
Not easily observed, must be collected by talking to customers, employees or others Provide direction, guidance and feedback to employees on ways to achieve customer satisfaction Can be quantified by measuring customer perceptions and beliefs e.g., SERVQUAL, surveys, and customer advisory panel

Hard Measures
Can be counted, timed, or measured through audits Typically operational processes or outcomes Standards often set with reference to percentage of occasions on which a particular measure is achieved

Cause-and-Effect Chart for Flight Departure Delays

Customer Value Metrics: Size of Wallet

J

Size of wallet =

S
j =1

Sj =

Sales to focal customer by firm j

Assumption: Firms prefer customers with large size of wallet in order to retain large revenues and profits

Customer Value Metrics: Individual Share of Wallet (SW)

A proportion expressed in terms of percentage, calculated among buyers Measured at individual level A measure of loyalty Can be used in future predictions Different from the market share, which also considers customers with no purchase Individual share of wallet % =

Sj
J

S
S j = Sales to focal customer by firm j
j =1

j
4

Customer Value Metrics

Share of wallet and size of wallet should be analyzed together because... Size of Wallet Customer 1 $500 Customer 2 $100 Share of Wallet 50% 50% Purchases $250 $50

RFM Method (Recency, Frequency, Monetary Value )

Recency When was the last customer interaction? Frequency How frequent was the customer in its interactions with the business? Monetary value of the interactions
6

RFM
The predictor of future behavior is past behavior RFM is pure behavior, it only works with customer files It requires knowledge of the customer purchase history. It works with any industry.

Loyalty Typology
(Dick and Basu)

SERVQUAL
Survey research instrument based on premise that customers evaluate firms service quality by comparing:
their perceptions of service quality actually received with their prior expectations of companies in a particular industry Poor Quality: Perceived performance ratings < expectations Good Quality: Perceived performance ratings > expectations

Developed primarily in context of face-to-face service encounters Scale contains 22 items reflecting five dimensions of service quality Scale may have to be customized to the research context

SERVQUAL Attributes
RELIABILITY
Providing service as promised Dependability in handling customers service problems Performing services right the first time Providing services at the promised time Maintaining error-free records

EMPATHY
Giving customers individual attention Employees who deal with customers in a caring fashion Having the customers best interest at heart Employees who understand the needs of their customers Convenient business hours

RESPONSIVENESS
Keeping customers informed as to when services will be performed Prompt service to customers Willingness to help customers Readiness to respond to customers requests

TANGIBLES
Modern equipment Visually appealing facilities Employees who have a neat, professional appearance Visually appealing materials associated with the service

ASSURANCE
Employees who instill confidence in customers Making customers feel safe in their transactions Employees who are consistently courteous Employees who have the knowledge to answer customer questions

Importance-Performance Analysis

Customer Loyalty

Why Customers Are More Profitable Over Time

Source: Reichheld and Sasser, Harvard Business Review

Why Satisfaction Is Not Enough

Are your customers satisfied? How do you know? Could your customers be more satisfied?
What are you doing about this? What about your competitors?

The Zone of Tolerance

Desired Service

Delights

Zone of Tolerance

Desirables

Adequate Service

Musts

Satisfaction isnt enough!

Source: Heskett et.al, Harvard Business Review, 2008

Loyalty-Satisfaction Lickage

Customer tells what is important; satisfaction vs. dissatisfaction if met

Customer hopes & asks but doesnt expect; if met then delighted. Unlikely to cause dissatisfaction. Build customer loyalty

Meeting basic needs; dissatisfaction if not met; indifference if met

Benefits above & beyond expectations; identify and suggest innovations with new products

The Wheel of Loyalty

Customer Loyalty Ladder

Suspect Prospect Customer Client Advocate

Advocate Client Customer Prospect Suspect

*One Stop Marketing by Jonathan Trivers

Traditional Investment

Traditionally least focused area of Marketing $pend

Advocate Client

Customer Prospect

Suspect Traditional focus of Marketing $pend

Nontraditional Advertising A great marketing company spends money here Advocate Client

Customer Prospect

Suspect Traditional Advertising

Building Service Culture

The Service Profit Chain

Service Employees Are Crucially Important

Service Personnel: Source of Customer Loyalty & Competitive Advantage

Customers perspective: encounter with service staff is most important aspect of a service Firms perspective: frontline is an important source of differentiation and competitive advantage Frontline is an important driver of customer loyalty
anticipating customer needs customizing service delivery building personalized relationships

Role Stress in Frontline Employees

Organization vs. Client: Dilemma whether to follow company rules or to satisfy customer demands
This conflict is especially acute in organizations that are not customer- oriented

Person vs. Role: Conflicts between what jobs require and employees own personality and beliefs
Organizations must instill professionalism in frontline staff

Emotional Labor
The act of expressing socially desired emotions during service transactions
Performing emotional labor in response to societys or managements display rules can be stressful Good HR practice emphasizes selective recruitment, training, counseling, strategies to alleviate stress

Service Sabotage
Openness of Service Sabotage Behaviors Covert Overt Routine
Customer-Private Service Sabotage Customer-Public Service Sabotage

e.g., Waiters serving smaller servings, bad beer, or sour

e.g., Talking to guests like young kids and putting them down
Sporadic-Public Service Sabotage

Normality of Service Sabotage Behaviors

wine
Sporadic-Private Service Sabotage

e.g., Chef occasionally purposefully slowing down orders

e.g., Waiters spilling soup onto laps, gravy onto sleeves, or hot plates into someones hands

Intermittent

Cycle of Failure
Costs of short-sighted policies are ignored:
Constant expense of recruiting, hiring, and training Lower productivity of inexperienced new workers Higher costs of winning new customers to replace those lostmore need for advertising and promotional discounts Loss of revenue stream from dissatisfied customers who turn to alternatives Loss of potential customers who are turned off by negative word-of-mouth

Cycle Of Mediocrity
Most commonly found in large, bureaucratic organizations that are frustrating to deal with Service delivery is oriented towards
Standardized service Operational efficiencies Promotions with long service Rule-based training Narrow and repetitive jobs Successful performance measured by absence of mistakes

Little incentive for customers to cooperate with organizations to achieve better service Complaints are often made to already unhappy employees Customers often stay because of lack of choice

Cycle of Mediocrity
Job responsibilities narrowly and unimaginatively defined Successful performance measured by absence of mistakes Ex. Call Centre Matrices Training focuses on learning rules and technical aspects of jobnot on improving interactions with customers and co-workers

Cycle of Success
Broadened job descriptions with empowerment practices enable frontline staff to control quality, facilitate service recovery Regular customers more likely to remain loyal because they:
Appreciate continuity in service relationships Have higher satisfaction due to higher quality

Is Empowerment Always Appropriate?

Empowerment is most appropriate when:
Firms business strategy is based on personalized, customized service, and competitive differentiation Emphasis on extended relationships rather than short-term transactions Use of complex and non-routine technologies Service failures are non-routine Managers are comfortable letting employees work independently for benefit of firm and customers Employees seek to deepen skills and have good interpersonal and group process skills

Human Resources Management How to Get it Right?

The Service Talent Cycle

Hire the Right People

The old saying People are your most important asset is wrong. The RIGHT people are your most important asset.

Jim Collins

Selecting Employees
Select the right people:
Different jobs are best filled by people with different skills, styles, or personalities Hire candidates that fit firms core values and culture Focus on recruiting naturally warm personalities for customer-contact jobs

Train Service Employees

Service employees need to learn: Organizational culture, purpose, and strategy
Promote core values, get emotional commitment to strategy Get managers to teach why, what, and how of job

Interpersonal and technical skills Product/service knowledge

Staffs product knowledge is a key aspect of service quality Staff must explain product features and position products correctly

Building High-Performance Service Delivery Teams Creating Successful Service Delivery Teams
Facilitate communication among team members and knowledge sharing Emphasis on cooperation, listening, coaching, and encouraging one another Understand how to air differences, tell hard truths, ask tough questions Management needs to set up a structure to steer teams toward success

The Inverted Organizational Pyramid

Internal Marketing
Necessary in large service businesses that operate in widely dispersed sites Effective internal marketing helps to:
Ensure efficient and satisfactory service delivery Achieve harmonious and productive working relationships Build employee trust, respect, and loyalty