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This article was downloaded by: [The University of Manchester Library]On: 26 November 2014, At: 23:19Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH,UK
Journal of RelationshipMarketingPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/wjrm20
Improving Customer Serviceand Profitability ThroughCustomer Intervention inService RelationshipsArun Sharma aa School of Business , University of MiamiPublished online: 12 Dec 2008.
To cite this article: Arun Sharma (2008) Improving Customer Service and ProfitabilityThrough Customer Intervention in Service Relationships, Journal of RelationshipMarketing, 7:4, 327-340, DOI: 10.1080/15332660802508505
To link to this article: http://dx.doi.org/10.1080/15332660802508505
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Improving Customer Service andProfitability Through Customer Intervention
in Service Relationships
Arun SharmaUniversity of Miami
ABSTRACT. Relationship marketing has traditionally emphasized indi-vidual relationships with customers. However, some researchers have ques-tioned if relationship marketing is the best strategy from the customer’sperspective. At the same time, some research has questioned whether re-lationship marketing is the best strategy from the firm’s perspective. Inaddition, some researchers have highlighted characteristics of consciouscustomer misbehavior that have serious consequences for firms. The focusof this paper is what the firm response should be regarding customers whodo not contribute to relationships through their conscious and unconsciousbehaviors. Catering to customers who do not contribute to relationships in-creases a firm’s financial, customer service, and employee costs. The papersuggests that firms should undertake customer intervention for customerswho do not contribute to relationships and look at separating customersegments, increasing prices for certain customer activities, outsourcing cus-tomers, or even firing customers. The paper also suggests that customerintervention will lead to enhanced customer service and profitability.
KEYWORDS. Customer service, service intervention, fire customers,customer selection.
Arun Sharma is Professor of Marketing at the School of Business, Universityof Miami.
Address correspondence to: Arun Sharma, School of Business, University ofMiami, 521 Jenkins Building, 5250 University Drive, Coral Gables, FL 33146(E-mail: [email protected]).
Journal of Relationship Marketing, Vol. 7(4), 2008C© 2008 by The Haworth Press. All rights reserved.
doi: 10.1080/15332660802508505 327
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In relationship marketing, the emphasis of the literature has been onthe firm creating relationships with customers. The traditional strategicimperative of relationship marketing has been on developing and imple-menting strategies that will help firms develop relationships with individualcustomers. The primary assumption of relationship marketing is that rela-tionships enhance stable and profitable interactions with customers. Threeissues that are important in this regard are increasingly being addressedby research. First, is relationship marketing the best strategy from thecustomer perspective (Fournier, Dobscha, & Mick, 1998)? This concernhighlights the issue that firms attempt to form relationships with customersirrespective of whether customers are interested in relationships. Examplesare frequently calling or e-mailing customers when customers do not de-sire to receive communications. Second, is relationship marketing the beststrategy for all customers? Recent research has suggested that the returnsmay not justify relationship marketing for some customers (Reinartz &Kumar, 2000, 2002, 2003; Sharma, 2003, 2007). This concern highlightsthe fact that not all relationships are profitable. Third, some customer be-haviors (or misbehaviors) may not be conducive to relationship marketingstrategies and the implicit trust that is expected in relationships (cf. Fuller-ton & Punj, 2004; Harris & Reynolds, 2003, 2004; Reynolds & Harris,2005). Examples of customer misbehavior are cutting lines, engaging invandalism, being rude and using obscenities with fellow customers andemployees, and resorting to physical violence. In these cases, relationshipswith customers who misbehave have high financial costs (possible loss andcompensation), customer service costs (level of service provided and per-ceptions of fellow customers), and employee costs (motivation, selection,and retention).
The strategies that firms should follow when they have identified nonre-lationship customers has been very infrequently addressed by research andis the focus of this paper. Although research has inadequately addressedthis issue (e.g., Heskett & Schlesinger, 1997a, 1997b), one sees many ex-amples of customer intervention in practice. As an example, Sprint “fired”1,000 subscribers whose calls to customer service were deemed exces-sive (“Sprint Fires Its Customers,” 2007). Similarly, Netflix states that “indetermining priority for shipping and inventory allocation, we give prior-ity to those members who receive the fewest DVDs through our service”(www.informationweek.com) to curtail service to the most frequent cus-tomers to the benefit of infrequent customers. In fact, mainstream presssuch as the Wall Street Journal (Daspin, 2000) and BusinessWeek (“When,why, and how to fire that customer,” 2007) have started examining theissue of customer intervention strategies.
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Customer relationships can be unprofitable for multiple reasons. Thefirst reason is that the characteristics of the firm’s offering do not matchthe needs of the customers. Examples are customers who do not have therequisite knowledge to take advantage of the firm’s service offerings andneed extra resources from the firm, leading to unprofitability for the firm.The second reason is that a customer’s misbehaviors (e.g., vandalism, theft)lead to higher costs to serve the customer, leading to unprofitability. Otherreasons are idiosyncratic (e.g., customers’ needs change, customers moveaway but maintain the relationship) and occur in spite of improved processand service design. These reasons, due to their idiosyncratic nature, are notthe focus of this paper.
In this regard, this paper develops a model for customer interven-tion. Intervention comes from the word intervene, and the definitionof the word is used as described in the Merriam-Webster dictionary:“to interfere with the outcome or course especially of a condition orprocess (as to prevent harm or improve functioning)” (www.merriam-webster.com/dictionary/intervention). The paper suggests that servicefirms need to interfere in the course of customer relationships to reducethe cost of relationships with customers who do not match the service de-sign. The proposed model begins with a discussion of customer behaviors(financial, customer service, and employee aspects) that lead to financial,customer service, employee, and monitoring costs for firms. The modelsuggests that if individual customers increase costs to a firm without addi-tional benefits for the firm, the firm needs to separate customer segments,increase prices, outsource the customers, or fire the customers.
The first section introduces the customer intervention model; subsequentsections discuss the customer characteristics of the model, firm-level addi-tional costs, and firm-level customer strategies. The final section discussesthe application of intervention strategies.
THE MODEL
This paper develops a conceptual model for customer-level interventionby a service firm (see Figure 1). The model has three major building blocks.The first block examines customer characteristics and encompasses the typeof customer and customer behaviors that lead to additional costs. Thesebehaviors are classified into financial aspects, customer service aspects,and employee aspects. The second block addresses enhanced costs forfirms associated with the characteristics of customers whom they serve.Additional costs are classified into financial costs, customer service costs,
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FIGURE 1. Customer Intervention Model
Customer Characteristics
Employee Aspects
Employee Abuse
Type of Customer
Financial Aspects
Financial Abuse
Type of Customer
Customer Service Aspects
Customer Abuse
Type of Customer
Financial Costs
Employee Motivation
Costs
Monitoring Costs
Customer Service Costs
Firm Level Additional Costs
Firm Level
Generic StrategiesProcess ImprovementSetting ExpectationsCustomer Selection
Customer Intervention Strategies
Fire Customers
Outsource Customers
Increase Prices
Separate Segments
employee motivation costs, and monitoring costs. The final block of themodel relates to firm-level customer intervention strategies that includeseparating customer segments, increasing prices, outsourcing customers,and finally firing customers.
Customer Characteristics in Customer Intervention
Customer characteristics that lead to additional costs for the firm hasbeen an area of increasing research. Some of the research has discussed cus-tomer behaviors, and some research has examined the nature of customersand their profitability (Reinartz & Kumar, 2000, 2002, 2003; Sharma, 2003,2007). I discuss the specifics next.
The issue of customer misbehaviors was identified by Lovelock (1994),and the research on customer misbehavior is very extensive (Fullerton &
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Punj, 2004; Harris & Reynolds, 2004). The specifics of misbehaviors isnot the focus of this paper, but Fullerton and Punj, Harris and Reynolds(2003, 2004), and Reynolds and Harris (2005) provided excellent sum-maries. Fullerton and Punj examined the issue of customer misbehaviorsby creating a typology for customer misbehaviors. They suggested thatthere are five major categories of consumer misbehaviors. They made adistinction between people and assets, and two of the five categories ofmisbehaviors are against people—firm employees and other customers.Three categories of misbehaviors are against firm assets—merchandiseand services, financial assets, and physical or electronic premises(Fullerton & Punj, 2004). They also developed three conceptual dimensionsfor each type of misbehavior to help identify the underlying commonalitiesfor the five categories of consumer misbehavior (Fullerton & Punj, 2004).The first of three dimensions is the nature of the act, which includes thedegree of sophistication, advance planning involved, apparent intent, andbenefit to the customer. The second dimension is the type and degree ofdisruption and ranges from highly visibly destructive and psychologicallyintimidating behaviors to stealth behaviors. The third dimension is the re-actions of firms and other customers, which may range from being tolerantto taking legal action.
Research by Harris and Reynolds (2003, 2004) and Reynolds and Har-ris (2005) examined the issue of customer misbehavior from the employeeand customer perspectives. It is interesting that, in the researchers’ inter-views with a variety of customer and employees, all respondents statedthat they had witnessed customer misbehaviors, suggesting that customermisbehaviors may be very prevalent.
The model is discussed within this context. In a broad manner, I dividecustomer characteristics into type of customer and customer behaviors.Type of customer refers to the nature of the customer that may lead tohigher costs for the organization. Examples for an information technologyconsultant are small customers who may not have expertise and who aretoo expensive to serve, and large customers who get big discounts. In thesecases, the customer does not have an overt intention to increase the cost ofthe firm. Customer misbehaviors are overt and/or planned behaviors thatlead to an increased cost for the firm. Lovelock and Wirtz (2006) describedcustomers who misbehave as “jaycustomers” and classified them as thethief, the rule breaker, the belligerent, the family fueders, the vandal, andthe deadbeat. Within this context of customer characteristics, customers’effect on financial aspects, customer service aspects, and employee aspectsof the firm is discussed.
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Financial Aspects
Characteristics of customers affect the financial returns of a firm. Iexamine type of customer and financial abuse in this section.
Type of Customer. Customer characteristics are important determinantsof profitability in several service industries. Some of the research byReinartz and Kumar (2000, 2002, 2003) would suggest that relational cus-tomers may not necessarily be more profitable than one-time customers.Sharma (2003) demonstrated that in a business-to-business environment,smaller customers were more profitable than large customers. Similarly,Sharma (2007) showed that in both services and consulting firms, “transac-tional” customers were more profitable than “deep relationship” customers.
In addition to client size and type of relationship, some customers maycost more because they do not have the ability to absorb the firm’s services.An example may be a bank that sells financial services to a small business.Because the small business does not have internal capabilities, the customerfirm may be using the bank’s resources, leading to lower profitability.
In these examples, the customer does not consciously attempt to reducethe firm’s profitability. The reduced profitability arises from customer se-lection processes (i.e., the incorrect customer is being chosen by the firm).In addition, pricing strategies may be incorrect, as cost projections maynot match actual costs.
Financial Abuse by Customers. There are customers who consciouslyengage in activities that increase customer costs and reduce customerprofits. These include shoplifting, making fraudulent returns, altering pricetags, and engaging in fraud (Fullerton & Punj, 2004). Firms regard theseas the cost of doing business, but firms need to take a closer look at thebehavior of customers (Fullerton & Punj, 2004) and develop interventionstrategies.
Customer Service Aspects
Characteristics of customers and the service environment can affect boththe quality of service and customers’ consumption of the service. As anexample, jumping a queue affects other customers’ consumption of service.Similarly, rude and abusive customers affect the quality of service that isprovided. Again, in this context, I examine type of customer and customerabuse.
Type of Customer. The type of customer in certain service industries canaffect customer service without the customer making a conscious effort to
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do so. An example is an overweight customer in an airline environment.Accommodating an overweight customer puts a large amount of stresson the customer’s seat companions. Similarly, a customer who has lit-tle knowledge requires additional time and effort from customer servicepersonnel, which increases the wait time for customers who are expertsand do not need hand-holding. An example is a bank, where teller linessometimes get clogged because of inexperienced customers, leading tomerchant bankers standing longer in line. As stated earlier, in these exam-ples the customer does not consciously behave in a manner that reducesthe quality of customer service. The reduced customer service arises fromcustomer selection processes (i.e., the incorrect customer is being chosenfor the firm’s current level of service).
Abuse by Customers. There are customers who consciously engage inactivities that reduce the level of customer service that a firm provides.These activities include jumping of queues, illegitimate use of expresslines, hostile acts, loud or boorish behavior, and even vandalism (Fullerton& Punj, 2004). For example, in a restaurant, bar patrons are sometimesloud and use foul language, which leads to a decline in enjoyment by othercustomers. In these cases, the customer service quality declines for fellowcustomers.
Employee Aspects
Characteristics of the customer and service environment affect employeemotivation and behaviors. Research by Harris and Reynolds (2003, 2004)and Reynolds and Harris (2005) has extensively examined this issue. Likein the previous discussions, type of customer and customer abuse arereflected in this aspect.
Type of Customer. The type of customer in certain service industries canaffect employee behavior and motivation without the customer making aconscious effort to do so. Examples are dying and seriously ill patients whoneed hospice service. Employee motivation takes a toll in these circum-stances. Similarly, a customer who has little knowledge requires additionaltime and effort from customer service personnel. In these cases, the em-ployee can see that the customers standing behind the current customer areagitated, but he or she can do little to hasten the process. The employeefeels an enhanced sense of anxiety and is uncertain about how waitingcustomers will treat him or her. As stated earlier, in these examples thecustomer does not consciously behave in a manner that changes employeebehavior and motivation. The reduced employee motivation arises from
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customer selection processes (i.e., the incorrect customer is being chosenfor the firm’s current level of service) or employee selection processes (i.e.,the wrong type of employee is selected for the job).
Abuse by Customers. Customer abuse of employees is becoming moreprevalent, as highlighted in research and in the literature (Harris &Reynolds, 2003, 2004; Reynolds & Harris, 2005). Examples of such behav-iors range from rude words to actual physical violence (Fullerton & Punj,2004). It would seem that in a more stressed environment, these kinds ofbehaviors are increasing. Reynolds and Harris (2006) suggested that theseissues are so pervasive that employees consciously devise tactics to copewith customer misbehaviors.
ADDITIONAL COSTS BORNE BY THE FIRM
There are four types of additional costs borne by a firm when the firm at-tempts to develop relationships with customers whose needs do not matchthe service design. The first three match our discussion on customer char-acteristics (i.e., financial, customer service, and employee motivation), andthe fourth type of cost is monitoring costs.
Financial costs are loss in profitability based on the behavior of cus-tomers. These costs may be high costs to serve certain customers, improperpricing for these customers, or financial abuse by customers. Customer ser-vice costs are associated with higher than optimal service provided by thefirm in face of actual disruption by customers or in anticipation of servicedisruption by customers. In the former case, firms need to plan to take careof customers who have been victims of service disruption that have associ-ated costs (e.g., free service or compensation for delays). In the latter case,firms provide service levels that are higher than optimal to ensure that anadequate level of service can be provided in case of service interruption.Employee costs are associated with selection, training, motivation, andretention of employees. Customer misbehaviors affect all of these aspectsof employee costs. Employees do not like to work or are not motivated towork in areas where there is a high incidence of customer misbehaviors(e.g., convenience stores).
Monitoring costs have not been examined in the context of customerintervention. When customers misbehave and are allowed to come backto the firm, the firm increases its own monitoring costs to ensure propercustomer behaviors. Some monitoring costs include security guards,software for monitoring fraudulent returns, training for handling customer
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misbehaviors, and so on. In addition to costs, these processes sometimessnag innocent customers, leading to a deterioration of customer service.
FIRM-LEVEL CUSTOMER STRATEGIES
This paper suggests three broad-level strategies that can be followed ata firm level to reduce relationship costs. In addition to broad strategies tar-geted to all customers, firms need to design customer intervention strategiesfor individual customers. The three firm-level and broad strategies high-lighted in this section are service process design, setting and conveying ofcustomer expectations, and customer selection process.
Process Improvement
Firms need to undertake process improvement in multiple areas. Thefirst process improvement that firms need to undertake is capturing coststo serve customers. Firms need to use activity-based accounting so thatthey can better understand customer costs and profitability, as unprofitablerelationships are predominantly due to a lack of understanding of costsby firms (Sharma, 2003, 2007). Similarly, if a process accurately capturesthe cost of serving a specific customer, the firm can charge prices that areattached to these services.
The second area of process improvement is developing better processesat lower costs to serve. Recent research has also suggested that a strategyfor creating relationships with customers may be to develop consistentprocesses and outcomes (Iyer, Sharma, & Evanschitzky, 2006). In thesecases, if a firm can develop processes that reduce costs, this will leadto some of the formerly unprofitable customers becoming profitable. Forexample, firms currently design processes such as coding and routingcustomers to less expensive alternatives to reduce costs (Brady, 2000).
The third area of process improvement is a good service design thatreduces the ability of customers to misbehave. Examples are concertsthat do not allow customers to bring any external objects into the arena.Similarly, some sports stadiums sell drinks in plastic bottles with no capsto prevent bottles from being used as missiles.
Setting and Conveying Customer Expectations
The second major area of concern and suggested improvement is inthe setting of customer expectations. It always surprises parents when
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their teenagers do not pick up after themselves at home but are willing tocarry their trash at McDonald’s. McDonald’s provides a great example ofsetting customer expectations in that they clearly state what is expectedof customers and how they expect customers to behave. In contrast, mostfirms, primarily through advertising, promise a level of customer servicethat they fail to deliver. In addition, they do not set any expectations forcustomer behavior. With no expectations for behavior, customers tend tobehave as they please.
Customer Selection Process
The third major area is customer selection processes. Most firms havefew to no customer selection processes. Therefore, firms select some cus-tomers who are not suitable for the service that is being provided. Examplesare customers who do not have a knowledge floor and customers whose“cost to serve” is very high. Firms need to first define the customer who issuitable for their service. Once the type of customer has been identified,firms need to aggressively seek that type of customer while reducing theselection of other types of customers. In addition, when a large numberof customers do not have the requisite skills, education may help. Forexample, Fidelity helps customers learn how to use telephone and Inter-net systems to reduce costs, turning unprofitable customers into profitablecustomers (Brady, 2000).
CUSTOMER INTERVENTION STRATEGIES
This paper suggests that firms need to practice four major interventionstrategies at the individual customer level: separate customer segments,increase prices, outsource customers, and finally (and more dramatically)fire customers. These are discussed next.
Separate Customer Segments
Certain customers need a higher level of service than other customers.These customers may be high-volume customers or customers who havelower levels of knowledge. One of the easier methods of providing dif-ferential service levels is to separate customer segments. Recent researchhas suggested that this practice increases profitability and return on sales(Homburg, Droll, & Totzek, 2008). Some firms are good at practicingthis strategy. Examples are 10-items-or-less checkout lines, self-checkout
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lanes, voice response units, self-checking kiosks for airlines, and so on.The Internet has made some separation easier, as customers do not haveto queue to get services. In some cases, customer segments have differentservice levels. Larger banks have merchant teller lines, and some airlinessuch as Lufthansa have special access from lounges to gates. In these cases,customers who require more service are separated from customers who re-quire less service. This separation leads to an increase in satisfaction forboth groups.
Increase Prices
A strategy to ensure that customers remain profitable for a firm is toincrease the prices for customers who require higher levels of service.Unlike separation of customers, the firm charges for the extra service thatcustomers use. Banks have traditionally been very good at this strategy.Banks charge separate fees for checks cashed, cashier’s checks, and over-draft protection. Similarly, some airlines charge extra for passengers whorequire more than one seat and customers who have heavy bags. Also, somepackage delivery firms charge extra to pick up or drop off packages in res-idential areas. In these cases, firms adjust prices for individual customersrather than having a standardized price. Finally, firms can practice behaviormodification through incentives. An example is minimum order sizes, inthat customers get some incentives if their order sizes exceed minimumlimits, such Amazon.com’s free shipping on orders more than $25.
Outsource Customers
One strategy to reduce costs is to outsource customers to firms that canprovide those customers with the service at a lower cost. Distribution sys-tems are built on these platforms. Examples are distributing through Sam’sClub for smaller customers or outsourcing merchandising to third-partyvendors. In addition to traditional distribution intermediaries, certain in-dustries use specialized intermediaries. For example, technology firms usevalue-added resellers to market their products and services to customers.Similarly, mortgage originating firms outsource the processing of loans tothird-party vendors.
Fire Customers
The final strategy is to fire customers. Firms such as Southwest Air-lines tell customers whose behavior is egregious that they do not want their
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business (Heskett & Schlesinger, 1997a, 1997b). Similarly, some appliancerepair firms analyze customer costs and drop customers who seek too manyservices. Firing customers is typically associated with negative publicity,but doing so improves service for other customers. Heskett and Schlesinger(1997a, 1997b) suggested that there be guidelines for firing customers (i.e.,customers should be fired if the firm has failed to understand how to meetthe needs of particularly troublesome, unruly, or rude customers).
What Strategies to Use for Individual Customers?
If the behavior of customers is intentional and is meant to cost thefirm in terms of financial, customer service, or employee aspects, thecustomers should be warned and then fired. In relationship marketing,the focus on reciprocity should be important. If customers do not recipro-cate, firms should be under no obligation to continue a relationship withthese customers.
If customer behavior is not intentional, intervention strategies are rec-ommended based on the effect on the firm and customers (see Figure 2).The decision should be based on two factors. The first factor is the severityof impact of the customer relationship on the firm. The second factor is theseverity of impact of the customer relationship on other customers.
FIGURE 2. Customer Intervention Strategies for Customers (Non-Intentional Behaviors)
Increase Prices/
Outsource Customers
Fire Customers
Process Focus
Separate Segments
Severity to Customer
Low High
Severity to Firm
Low
High
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If the customer relationship has a severe effect on the firm and othercustomers, the firm should fire the customer. The customer is disruptive toboth the firm and other customers, and firms should disassociate from thistype of customer. Examples are rude customers who cost a firm in termsof both employee motivation and other customers’ perceptions of service.If the customer relationship has a severe effect on other customers and amoderate effect on the firm, the firm should separate customer segments.With this strategy, the firm does not lose the customer, and customer serviceis not interrupted. Examples are separate lines for frequent flyers and infre-quent flyers. If the customer relationship has a severe effect on the firm anda moderate effect on other customers, the firm should increase prices. Byincreasing prices, the firm covers the cost to serve the customer. If the firmcannot increase prices, the firm should outsource the customer. Examplesare customers who require special assistance due to their lack of knowledge(e.g., firms who charge for help lines). Finally, if the customer relationshiphas a moderate effect on the firm and other customers, firms should focuson service process improvement to further minimize the impact.
CONCLUSION
The Merriam-Webster dictionary defines relationship as “a stateof affairs existing between those having relations or dealings”(www.merriam-webster.com/dictionary/relationship). Relations is definedas “the state of being mutually or reciprocally interested” (www.merriam-webster.com/dictionary/relations). This paper has addressed issues regard-ing what a firm response should be regarding customers who do not con-tribute to relationships (i.e., the customers do not reciprocate or are notinterested in relationship outcomes for the firm). This paper has compre-hensively examined the issue of customer intervention and focused on theantecedents and associated costs of customer relationships. The paper sug-gests that a firm should undertake customer intervention with relationshipsthat are not beneficial for the firm.
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