1

OPSM 405 Service Management

Class 8:

CRM and service operations

Koç University

Zeynep Aksinzaksin@ku.edu.tr

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)

61 63

26 1929

198

0

50

100

150

200

250

IT Transactions Credit ops. Call Center Accounting Total

nu

mb

er o

f q

ual

ity

mea

sure

s

4

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

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

65

66

67

68

69

70

1997 1998 1999 2000 2001

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

($300)

($100)

$100

$300

$500

$700

$900

Ne

t In

co

me

($

Mill

ion

)

Kaynak: National Quality Research Center, University of Michigan Business School; Annual Reports; Hotel & Motel Management (vol. 210, 02-20-1995; vol. 212, 01-13-1997; vol. 212, 12-15-1997; vol. 214, 01-11-1999); The American Hotel & Lodging Association (1999 AH&LA Lodging Industry Profile and 2000 AH&LA Lodging Industry Profile).

70

71

72

73

74

75

76

77

1997 1998 1999 2000 2001

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

$1,000

$1,500

$2,000

$2,500

$3,000

Ne

t In

co

me

($

Mill

ion

)

71

73

75

77

79

81

83

1994 1995 1996 1997 1998 1999 2000 2001

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

Ne

t In

co

me

($

Bill

ion

)

78

79

80

81

82

83

84

85

86

87

1994 1995 1996 1997 1998 1999 2000

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

Ne

t In

co

me

($

Mill

ion

)

Federated Department Stores

The Allstate Corporation

Wal-Mart

Colgate-Palmolive

Satisfaction Profits

69

70

71

72

73

74

75

76

77

78

79

1994 1995 1996 1997 1998 1999 2000

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

$100

$200

$300

$400

$500

$600

$700

Ne

t In

co

me

($

Mill

ion

)

Southwest Airlines

70

71

72

73

74

75

76

1994 1995 1996 1997 1998 1999 2000

Ind

us

try

Sa

tis

fac

tio

n L

ev

el (

0-1

00

Sc

ale

)

$2

$7

$12

$17

$22

$27

Ind

us

try

Pro

fita

bili

ty (

$ B

illio

n)

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

CO

MPA

NY

PR

OF

ITS

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

0%

5%

10%

15%C

ust

om

er p

erce

nta

ge

Bottom %25 %50-75

%25-50 Top %25

Revenue-Profit Relationship

REVENUE

ProfitsLeast 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 loyaltyMaximize benefits from customer as long as they stayStop investing towards the end

Consistent and regular communicationMove loyalty to emotional dimensionDelight customer to retain and develop further

Do not invest in relationshipTry to make each transaction profitable

Measure size and share of walletIf share is low try cross-sellIf size is small perform disciplined cost control

Pro

fita

bil

ity

LoyaltyL 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

A

d1

RD

d1

)π(QPLTV

n

1tttt

n

1ttttt

Acquisition,Development

andRetention costs

(ADR)

17

Strategy based on LTV(Keiningham, Vavra, Aksoy, Wallard, Kumar, 2005)

Gro

up

ed b

y p

rofi

tab

ilit

y

Low wallet share High 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