University of Washington EMBA ProgramRegional 20

“The Case of the Complaining Customer”

TA: Rory McLeod

The Case of the Complaining Customer• Background

– Decision Maker: Presto Cleaner President J.W. Sewickley• Recently received information on a “service failure”

– Customer: George Shelton• Angry!!!

– Not very fond of new order system’s performance from the start ($3 for each bag, longer wait, service provider unfamiliarity with the new system)

– Presto lost (and later found) shirts he submitted for cleaning– Feels like he got “the run around”/no empathy from Paul Hoffner

& Presto Management or the current complaint resolution system– After 9 day wait he bought 4 new shirts– Eventually another customer—having inadvertently picked up

the wrong order—returned his 4 shirts– Still has not heard from Presto as of October 8 (originally tried to

pick up his 4 shirts on August 10)

The Case of the Complaining Customer

• Background (cont.)– Presto Manager: Paul Hoffner

• Feels like he made a good faith effort

• Considers circumstances to be highly mitigating factors

• Customer has outright lied about some key facts

• Willing to play the fall guy

The Case of the Complaining Customer

• Mr. Sewickley has 2 decisions to make:– Fix the problem?

• Customer

– Assess and fix the system?• Employee

• Operations System

• Corporate Culture

Case of the Complaining Customer

• Fixing the Problem: To Keep or Not To Keep Customer?– Costs vs. benefits to Presto

• Value of Customer

• Compensation needed/given to keep customer (if any)

Average Expenditure $25.00Purchase Cycle (weeks) 1

Gross Margin % 50%Annual Contribution from Exchanges $650

Forecast Customer Life (years) 4NPV of Lifetime Value of Direct Exchanges $2,060

Case of the Complaining CustomerSample Calculation of Lifetime Value

Customer Segment: The Sheltons (2001-2002)

*Assumes discount rate of 10%.

Average Expenditure $25.00Purchase Cycle (weeks) 1

Gross Margin % 50%Annual Contribution from Exchanges $650

Undiscounted Lifetime Profit $2,600NPV of Lifetime Value of Direct Exchanges $2,060

Associated Lifetime Value (NPV)# of Persons Referred 10

Word-of-Mouth Conversion Rate 50.00%Annual Contribution from Exchanges with Referrals $1,625.00

NPV of Associated Lifetime Value $5,151

TOTAL NPV $7,751

Case of the Complaining CustomerSample Calculation of Lifetime Value

Customer Segment: The Sheltons (2001-2002)

BenefitsCustomer's Augemented (Basic + Associated) NPV $7,751

Costs Apology $0 (approximate value only) Refunding the order $35 Replacing the 4 Shirts $300 (liberal estimate) "Extras" ???

Value of this Alternative to Presto $7,416

Decision Alternative: Giving the Customer What He Wants

Case of the Complaining Customer

Benefits A more confident Mr. Hoffner $0 ???

Costs Missed opportunity to earn augmented NPV $0 Negative word-of-mouth $5,813 Number of current customers who hear the horror story 15 Likelihood that someone switches upon hearing story 10% Value of lost customer $3,876 Lost Opportunity to Obtain New Customers (Negative word-of-mouth) ???

Value of this Alternative to Presto ($5,813)

Case of the Complaining Customer

Decision Alternative: Forget the Customer

SERVICE ENCOUNTER

Satisfied Dissatisfied

Do notComplain

Complain to Management

Complain toEmployee

Unhappy,Leave

Stay, butUnhappy

Resolved, Stay

Unresolved,Leave

Unresolved,Leave

Resolved, Stay

P1

P3 P4

% Customers Lost =(P1)(a)(P2) + (P1)(b)(P3) +( P1)(c)(P4) + negative word of mouth

a

P2

b c

Case of the Complaining CustomerBuilding a Defection Tree

Case of the Complaining CustomerBuilding a Defection Tree

SERVICE ENCOUNTER

Satisfied Dissatisfied

Do notComplain

Complain to Management

Complain toEmployee

Unhappy,Leave

Stay, butUnhappy

Resolved, Stay

Unresolved,Leave

Unresolved,Leave

Resolved, Stay

P1=.10

P3=.50 P4=.30

.90

.60

.35.05

P2=.50

. 50 .50 .70

% Customers Lost = .03 + .0175 + .0015 = 4.9%, excluding negative word of mouth% Lost observed by Management = 0.15% = 3% of Total Lost For every customer Management loses, there are 33 more out there (x 1.5 negative w.o.m)!!!

Key Learnings

– A substantial portion of the customer’s “true” value to the organization can stem from referrals, network effects, and reduced service costs that are not part of “basic” LTV calculations

– Informed decision makers tradeoff the costs and benefits of service recovery, and they learn from mistakes

• Customers who complain are typically desperate to do business with your organization

– Customers will typically hold your organization responsible for their entire experience (whether you think you’re responsible or not)

• Coordinate points of contact to send a consistent message

Key Learnings

– Its usually best to keep customers informed, even when the news is bad

• Emotion plays a huge role in customer assessments of service quality. Keeping customers in the dark risks making things worse.

– In addition to assessing whether or not to fix the problem, good marketing managers will check to see whether or not the system needs fixing as well

Thank You!