1 OPSM 405 Service Management Class 8: CRM and service operations Koç University Zeynep Aksin

2 Benefits obtained from quality programs (McCabe, Knights, Wilkinson, 1994)  Where did you see the benefits of quality programs? –Quality mentality 82% –Customer satisfaction 63% –Team work 59% –Better communication 57% –Profits 35% –Sales 18%

3 Is the problem in quality programs or in measurement? (Operations Council, 1995)

4  Difficulty in tying process and internal quality measures to financial performance  Measurement systems remain internal –Disregarding competitors actions –Focus on internal measures that have little impact on results

5 Relationship between Customer Satisfaction and Profitability Kaynak:National Quality Research Center, University of Michigan Business School; Annual Reports; Hotel & Motel Management (vol. 210, ; vol. 212, ; vol. 212, ; vol. 214, ); The American Hotel & Lodging Association (1999 AH&LA Lodging Industry Profile and 2000 AH&LA Lodging Industry Profile). Federated Department Stores The Allstate Corporation Wal-Mart Colgate-Palmolive Satisfaction Profits Southwest Airlines Hotel Industry

6 Zero Defections: Quality Comes to Services Reichheld and Sasser (1990) “Customer defections have a surprisingly powerful impact on the bottom line. As a customer’s relationship with a company lengthens, profits rise.”

Why are customers profitable over time? (Reichheld and Teal, 1996) 0 Acquisition costs Base profit Increased purchase Reduced costs Referrals Price premium TIME COMPANY PROFITS

8 The economics of service quality  want to satisfy customers to stay competitive  yet customer service and quality comes at a cost  easy to count the costs…  …hard to quantify benefits  one view: delight!  another view: fire your customers!  something in between: CRM differentiated service based on profitability nurture profitable relationships Manage less profitable relationships

9 ROQ: Quality as an investment Improvement effort Service quality improvement Perceived Serv. Qual. & Satis. Customer retention Revenues & Market share Profitability Cost reductionWord of mouth New cust. attraction

10 Contractual versus non-contractual settings (Reinartz and Kumar 2000)  Long-life customers don’t always generate more profits for the firm  Short-life customers can be very profitable

11 What should companies focus on: defections or downward migration?  Many more customers change spending behavior than defect  Satisfaction alone is not enough to explain customer defections and downward migrations  Why do customers change spending patterns? A change in basic needs Comparisons to others Dissatisfaction

12 Revenue-Profit Relationship REVENUE Profits Least profitable Most profitable Source: Keiningham, Perkins-Munn, Aksoy ve Estrin (2005) “Does customer satisfaction lead to Profitability?” Managing Service Quality, 15(2)

13 Making loyal customers profitable (Reinartz ve Kumar 2002)  Transaction satisfaction more important than loyalty  Maximize benefits from customer as long as they stay  Stop investing towards the end  Consistent and regular communication  Move loyalty to emotional dimension  Delight customer to retain and develop further  Do not invest in relationship  Try to make each transaction profitable  Measure size and share of wallet  If share is low try cross-sell  If size is small perform disciplined cost control Profitability Loyalty L H L H

14 How to Measure Customer Value?  Revenues –Is easiest to measure –Reflects past behavior –Doesn’t consider costs  Profitability –Considers both revenues and costs –Reflects past behavior –Can be difficult to measure (need detailed cost information)  Lifetime Value –Considers full lifecycle of customer (past and future) –Most difficult to measure Need detailed cost information Need to forecast/predict/project future behavior

15 Customer Lifetime Value  Margins: annual revenue that a customer generates minus operating expenses a company incurs in serving them  Retention rate  Discount rate

16 Basic Model of Lifetime Value (source: L.Aksoy) Lifetime Value (LTV) Volume of purchases per period (Q) Margin per unit (  Probability of Purchase in period t (P) Discount rate Acquisition, Development and Retention costs (ADR)

17 Strategy based on LTV (Keiningham, Vavra, Aksoy, Wallard, Kumar, 2005) Grouped by profitability Low wallet shareHigh wallet share

18 Potential strategies (Kumar 2006)  Make loyal customers profitable  Offer right product to right customer at right time  Tie acquisition and retention investments to profitability  Prevent customer defections  Try to direct low profitability customers to cheaper delivery channels

19 Radikal gazetesi 28 Mayıs 2005