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Consumer Behavior in Service

Marketin

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Pre-purchase Stage

Pre-purchase Stage - Overview Customers seek solutions to

aroused needs

Evaluating a service may bedifficult

Uncertainty about outcomesIncreases perceived risk

Service Encounter Stage

Post-purchase Stage

u o

service suppliers develop?

Understanding customers serviceexpectations

Components of customerexpectations

Making a service purchasedecision

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Pre-purchase Stage Overview

Need arousal Information search

Evaluation of alternatives

Serv ce attr utes Perceived risk

Service expectations

Purchase decision

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Value Benefits (actual or perceived)

Come from features or product attributes

May be economic, social or personal

Costs (actual or perceived)

Economic/Financial

Time

Resources

Social/Personal

Aggravation, worry, feelings of uncertainty, distress

Social embarrassment, inferiority

The Value Equation: Value = Benefits - Costs

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Service Encounter Stage - Overview

Pre-purchase Stage

Service encounters range from high-

to low-contact

Understanding the servuction


Post-purchase Stage

system

Theater as a metaphor for service

delivery: An integrative perspective

Service facilities

Personnel

Role and script theories

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Service Encounters Range from

High-contact to Low-contact

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The Servuction System

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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

- v

Low-contact 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

Medium-contact Services Lie in between These Two

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Theatrical Metaphor:

An Integrative Perspective

Good metaphor as service delivery is a series of events that customersexperience as a performance

Service facilities

Stage on which drama unfolds

This ma chan e 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

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Post-encounter Stage - Overview

Pre-purchase Stage

Evaluation of service


Post-purchase Stage

Future intentions

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Attitudes

Positive or negative feelings concerning

objects, people, or events.

Attitudes are less stable than values.

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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 maintainrelationship with the organization.

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Satisfaction/Dissatisfaction Judgments

Disconfirmation Paradigm

Theor___________

________ Theory

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The Disconfirmation Paradigm

Expectations: beliefs we have before usage

Performance: evaluation of what happened

Disconfirmation: occurs when these two are notequal

positive leads to satisfaction negative leads to dissatisfaction

Example: New movie release

Beware of overpromising

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

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Endowment effect

a person's willingness to accept (WTA)

compensation for a good is greater thantheir willingness to pay (WTP) for it once their

property right to it has been established.

Carmon and Ariely (2000) found thatparticipants' 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

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Attribution Theory

Stability

temporary or frequent?

F

is it my fault or their fault?

Controllability

could it be prevented?

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Equity Theory

Fairness of exchange

perceived relationship of cost of

production to price charged

relative bargaining power of the

two sides

opportunism

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How Customers Express Dissatisfaction

Exit Voice

oya y Neglect

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Components of Exit, Voice and Loyalty

Framework

Exit: the withdrawal from a relationship with aperson or organization

eac on o ec ne n qua y eren a sbetween 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

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Framework

Voice: consumers prefer to communicate theirdissatisfaction stemmed of quality decline,

Heavily dependent to uncertainty of results

of communicating dissatisfaction

Openness of communication channels push

citizens to Voice, than Exit

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Framework

Loyalty: Consumer prefers to being loyal tohis/her previous choice, despite the qualitydecline, without communicating his/her

sat s act on Brand Loyalty: Psychological resistance to change

Dependent to the Cost ofExit

Group Loyalty: Identification with the group Dependent to the previous investment made to the

group, in other words, the previous voice

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Exit-Voice-Loyalty Framework

Source: Journal of Applied Social Psychology15 no. 1, p. 83. V

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Outline of the Exit, Voice and

Loyalty FrameworkQUALITY

PROBLEM

Cost of Exit: Low Cost of Exit: High

Information

Channels

Information

Channels

Loyalty

Problem

Closed Open Open Closed

VoiceLoyalty

Problem

Loyalty: High Loyalty: Low Loyalty: High Loyalty: Low

Loyalty ExitLoyaltyExit

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When the Cost of Exit is Smaller?

When Competing Service Providers are

similar:

m ar y n repu a ons

Similarity in promises

Irrelevant Promises

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Voice Responses

(seeking satisfaction directly from the seller)

Voice Options

Third-party Responses

(taking legal action, filing complaints

with consumer affairs agencies)

Private Responses

(bad-mouthing to friends)

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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

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Expected outcomes

Expected returns vs opportunity costs

Replacement, apology, better goods/service in the

Wasted time, embarrassment, lost opportunities

Importance of the product

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Normative influence

What other think I should do?

Not necessary that someone else should be

actually aware of decision

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Control factors Knowledge

Ease of access to key personnel

Understanding of causes

s

Ability to express complaint

Time

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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 serviceprovider.

Continuance commitment

An individuals calculation that it is in his or her best interest tostay with the organization based on the perceived costs of leavingit.

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Servicesca eServicesca e

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Elements of Physical Evidence

Servicescape

Facility exterior Exterior Design

Signage

Other Tangibles

Business card

Stationary

Parking

Landscape

Facility Interior Interior design

Equipment

Signage

Layout

Air quality/Temperature

ng s a emen

Report

Employee dress

Uniform

Brochure

Webpage

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Typology of Servicescapes

Who Performs in

Servicescape

Physical Complexity of the Servicescape

Elaborate Lean

Self-service

(customer only)

Amusement Park Bank ATM

Interpersonal(both)

Luxury hotelAirline terminal

Budget hotelBus station

Remote service

(employee only)

Research lab Telemarketing

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What is the Purpose of

Service Environments?

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Purpose of Service Environments

Shape customers experience and their behaviors

, ,

Part of the value proposition

Facilitate service encounter and enhance productivity

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Shape customers experience and their behaviors

Message-creating medium

symbolic cues to communicate the distinctive nature andquality of the service experience

-

make servicescape stand out from competition and attractcustomers from target segments

Effect-creating medium use colors, textures, sounds, scents, and spatial design to

enhance desired service experience

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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

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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

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Facilitate service encounter

and enhance productivity

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Process Layout

How will layout affect attitude of customers?(Distance walked, proximity to rest rooms, viewfrom window)

10

How will layout affect quality of service? (attitudeof employees, communication with other depts,compatibility with organizational hierarchy)

Costs associated with layout (fixed & variablecosts, cost to customer)

n! Possible layouts (n=10; 3 128 800)

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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.

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Physical design of queues

Single-

Multi-phase

Single-

phaseSingle-

channelTypes of queues

Structure Multi-channel

Multi-

phase

phase

Alternate

paths

Single toMulti

Mixed

Queuing discipline

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Servicescape for efficiencyAutomobile Drivers License Office

Review Payment Violations Eye Test Photograph Issue

In Out1 2 3 4 5 6

15 30 60 40 20 30

ActivityNumber(s)

Capacityper hour

Cycle Timein seconds

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Improved Layout

1,465

55

360

60

652

In

Out

360

60

1,465

55

302030

In

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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

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Service RecoverService Recover

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Behavior

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Service Recovery

Customers do not expectyou to be perfect. They doex ect ou to fix thin s

when they go wrong.

Donald Porter

Senior VP, British Airways

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Customer Response Categories to Service Failures

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Types of Complainers

1. Passives

5

3. Irates4. Activists

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Passives

- Keep quiet- Do not complain-

6

- Feel if they complaint nothing willhappen.

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Voicers

- Vociferous

- Actively complain

7

- Less likely to spread negative word of mouth- Give company a second chance

- By complaining companies improve

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Irates

- More vociferous

- High negative word of mouth

8

- Speak to friends and relatives- Do not give provider a second chance

- Switch to competition.

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Activists

Complain everywhere

- Friends

9

-

- Third parties

Consumers can become terrorists

Feel consequences are positive.

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Understanding Customer Responses toService Failure

Where do customers complain?

What proportion of unhappy customers complain?

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Understanding Customer Responses to ServiceFailure

Why do customers complain?

Obtain compensation

ent t e r anger

Help to improve the service

Altruistic reasons

Why dont unhappy customers complain?

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Strategies to Reduce CustomerComplaint Barriers

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Service Recovery Systems

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Eight Most Common Remedies CustomersSeek with Serious Problems

Have the product repaired or service fixed Be reimbursed for the hassle of having experienced

a problem Receive a free roduct or service in the future

Explanation by the firm as to what happenedAssurance that the problem will not be repeatedA thank you for the customers business

An apology from the firmAn opportunity for the customer to vent his or herfrustrations to the firm

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Three Dimensions of Perceived Fairness inService Recovery

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Distributive Justice or Outcome Fairness

- Outcome or compensation- Match their dissatisfaction

- What can it be

17

-

- Apology- Future free service

- Reduced charges

- Replacements

- Equality

Company pay for mistakes

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Procedural Justice

Procedural Fairness

18

- Policies- Rules- Timeliness of the complaint process- Easy access to complaint process- Quick handling

Eg. Hallo Tunes

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Interaction Justice

- Customers expect to be treated politely, with care andhonesty

19

- Company employees treat customers with fairness

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Components of an Effective Service Recovery System

Do the job right the

first time

Effective Complaint

Handling

Identify Service

Increased Satisfaction

and Loyalty

Conduct research

Monitor complaints

=+

Complaints

Resolve Complaints

Effectively

Learn from the

Recovery Experience

Develop Complaints as

Opportunity culture

Develop effective system

and training in complaint

handling

Conduct root cause analysis

Close the loop via feedback

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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 developrecovery solutions

Rules of Thumb for Adequate Compensation:

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

Who is the affected customer?

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Effective Service Recovery

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Service Recovery

Plays a crucial role in achieving customer

satisfaction by testing a firms commitment tosatisfaction and service quality

Impacts customer loyalty and future profitability

Severity and recoverability of failure (e.g., spoiledwedding photos) may limit firms ability to delightcustomer with recovery efforts

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Unhappy Customers Repurchase Intentions

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Service Recovery Paradox A good recovery can turn angry, frustrated

customers into loyal ones. ..can, in fact, createmore goodwill than if things had gone smoothly inthe 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

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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

rm

the cause of the failure is viewed as unstable by thecustomer

the customer perceives that the company had little controlover the cause of the failure

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

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erv ce uarantees

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How to Design Service Guarantees

Unconditional

Easy to understand and communicate

Meaningful to the customer

Easy to invoke

Easy to collect on

Credible

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Types of Service GuaranteesSingle attribute-

specific guarantee

Explicitminimumperformance

Multi-attribute-specific

guarantee

Explicitminimumperformance

Full-satisfactionguarantee

All serviceaspects areguaranteed to

Combinedguarantee

All serviceaspects areguaranteed (asfor full-

important

attribute isguaranteed(e.g., delivery bynoon the nextday)

few important

attributes isguaranteed

the full

satisfaction ofthe customerwith noexceptions orconditions

attached

satisfaction

guarantee) Explicit

minimumperformancestandards onimportant

attributes areguaranteed (asfor multi-attribute-specificguarantee)

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How to Design Service Guarantees SATISFACTION GUARANTEED

We commit to keeping scheduled appointments

We commit to restoring power outages as soon as we can

We will activate a customers service by the date promised. If we fail, wellautomatically credit that customers account $50. This commitmentdoes not apply during severe storm conditions or emergency events, ifaccess to that premises is not available or is deemed unsafe.

We want you to be happy with your new glasses. Thats whywell repair orexchange them for up to 30 days at no charge to you. This guarantee doesnot cover accidental damage, scratches or breakage.

vs.

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Discouraging Abusive and

pportun st c ustomerBehavior

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Addressing the Challenge of Jaycustomers

Jaycustomer: A customer who behaves in a thoughtless orabusive fashion, causing problems for the firm, itsemployees, and other customers

More potential for mischief in service businesses,especially when many customers are present

No organization wants an ongoing relationship with anabusive customer

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Seven Types of Jaycustomers

The Cheat: Thinks of various ways to cheat the firm

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, ridingfree on public transportation

Firms must take preventive actions against thieves, but make allowances forhonest but absent-minded customers

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Seven Types of JaycustomersThe Rulebreaker

Rules guide customers safely through the serviceencounter

Government agencies may impose rules for health andsa ety reasons

Some rules protect other customers from dangerousbehavior 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 toomuch or inflexible

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Seven Types of JaycustomersThe Belligerent

Shouts loudly, maybe mouthing insults, threats, andcurses

Service personnel are often abused even when they are notto e ame

Confrontations between customers and service employeescan easily escalate

Firms should ensure employees have skills to deal withdifficult situations

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Seven Types Of JaycustomersFamily Feuders

People who get into arguments with other customers

often members of their own family

Service vandalism includes pouring soft drinks into bankcash machines, slashing bus seats, breaking hotelfurniture Sources: bored and drunk young people, and unhappy

customers who feel mistreated by service providers takerevenge

Prevention is the best cure

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Seven Types Of JaycustomersThe Deadbeat

Customers who fail to pay (as distinct from thieves whonever intended to pay in the first place)

Preventive action is better than cure e.g., insisting onprepayment; as ng or cre t car num er w en or er s

taken Customers may have good reasons for not paying

If the client's problems are only temporary ones, consider long-term value of maintaining the relationship

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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 thesituation

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Dealing with Customer Fraud Treating all customers with suspicion is likely to alienate

them

Only 1-2% of customer base engages in premeditatedfraud so why treat remaining 98% of honest customers aspotential 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

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Service Quality

Possible Levels of Customer Expectations

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The Zone of Tolerance

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Desired Service

Delights

Adequate Service

Zone ofTolerance Desirables

Musts

Factors That Influence Desired Service

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Factors That Influence Adequate Service

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Six Service Quality Gaps

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Closing the Six Service Quality Gaps

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Dimensions of Service Quality

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Appearance of physical elementsTangiblesTangibles

Dependable and accurateperformanceReliabilityReliability

Promptness; helpfulnessResponsivenessResponsiveness

Competence, courtesy, credibility,security

AssuranceAssurance

Easy access, good communication,understanding of customerEmpathyEmpathy

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Measures of Service Quality

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Measures of Service QualitySoft Measures

Not easily observed, must be

collected by talking to customers,

employees or others

Hard Measures

Can be counted, timed, or

measured through audits

Typically operational processes or

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, andcustomer advisory panel

Standards often set with referenceto percentage of occasions onwhich a particular measure isachieved

SERVQUAL

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SERVQUAL

Survey research instrument based on premise that customersevaluate firms service quality by comparing:

their perceptions of service quality actually received with

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

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Providing service as promised

Dependability in handling customers serviceproblems

Performing services right the first time Providing services at the promised time

Maintaining error-free records

RELIABILITY Giving customers individual attention

Employees who deal with customers in a caringfashion

Having the customers best interest at heart Employees who understand the needs of their

customers

Convenient business hours

EMPATHY

Keeping customers informed as to when

services will be performed Prompt service to customers

Willingness to help customers

Readiness to respond to customers requests

RESPONSIVENESS

Employees who instill confidence in customers

Making customers feel safe in their transactions

Employees who are consistently courteous

Employees who have the knowledge to answercustomer questions

ASSURANCE

Modern equipment Visually appealing facilities

Employees who have a neat, professionalappearance

Visually appealing materials associated withthe service

TANGIBLES

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Tools to Analyze and

ress erv ce ua ty

Problems

Control Chart for Departure Delays


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Tools to Analyze and Address Service Quality Problems

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Fishbone diagramCause-and-effect diagram to identify potential causes of

problems

Pareto ChartSeparating the trivial from the important. Often, a

majority of problems are caused by a minority of causes(i.e., the 80/20 rule)

BlueprintingVisualization of service delivery, identifying points where

failures are most likely to occur

Cause-and-Effect Chart for Flight Departure Delays

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Return On Quality (ROQ)

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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 toproductivity improvement programs

To determine feasibility of new quality improvement efforts, determine costs andthen 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?

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liability

100%

Satisfy Target Customers

Through Service

Recovery

Optimal Point of

Serv

ice

R

A B

InvestmentSmall Cost,

Large ImprovementLarge Cost,

Small Improvement

C D

Satisfy Target Customers

Through Service Delivery

as Planned

= Service Recovery

Assumption: Customers are equally (or evenmore) satisfied with the service recovery than

with a service that is delivered as planned.

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Effective Pricing is

Success

What Makes Service Pricing Strategy

Different and Difficult?d l l fi i l f i i

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Harder to calculate financial costs of creating a serviceprocess or performance than a manufactured good

Variability of inputs and outputs:

pricing?

Importance of time factor same service may have morevalue 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

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Revenue and Profit ObjectivesSeek profit

Cover costs

Patronage and User-Based ObjectivesBuild demand

- Demand maximization

- Full capacity utilization

Build a user base

- Stimulate trial and adoption of new service

- Build market share/large user base

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Pricing Strategy

Pricing Tripod

The Pricing Tripod

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Floor and Ceiling of Price

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Value to customer

Costs

Competition

Three Main Approaches to Pricing

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Cost-BasedPricing

Set prices

Value-BasedPricing

Relate price to

Competition-Based Pricing

Monitor

financial costs

Activity-BasedCosting

Pricing

implications ofcost analysis

by customer

pricing strategy

Dependent on theprice leader

Cost-Based Pricing: Traditional vs.

Activity-Based Costing

Traditional costing approach

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Traditional costing approachEmphasizes expense categories (arbitrary overheads

allocation)May result in reducing value generated for customers

ABC management systems

Link resource expenses to variety and complexity ofgoods/services produced

Yields accurate cost information

BUT, customers care about value to themselves, notwhat service production costs the firm

Value-Based Pricing:

Understanding Net Value

Net Value Perceived Benefits to Customer

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Net Value = Perceived Benefits to Customer(Gross Value) minus All Perceived Outlays

(Money, Time, Mental/Physical Effort)

Consumer surplus: difference between price paidand amount customer would have been willing

to pay in absence of other options

Competing services are then evaluated viacomparison of net value

Defining Total User Cost

PurchaseMoney

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Physical Effort

Incidental Expenses

Operating CostsTime

Purchase and Service

Search Costs*

Psychological

Burdens

Sensory

Burdens

* Includes all five

cost categories

Encounter Costs

Post Purchase Costs*

Necessary

Follow-up

Problem

Solving

Value-Based Pricing:

Strategies for Enhancing Net Value

Enhance gross value benefits delivered

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Enhance gross value benefits deliveredAdd benefits to core product

Enhance supplementary service

Mana e erce tions of benefits delivered

Reduce costs incurred byReducing monetary costs of acquisition and usage

Cutting amount of time required to evaluate, buy,

use serviceLowering effort associated with purchase and use

Four Definitions of Value

Value is low price

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p

Discounting

Value is everything I want in service

Skimmin ricin

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

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Price competition increases due to:

Increasing competition

Increase in substituting offers Wider distribution of competitor

Increasin sur lus ca acit in the industr

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 andnon-monetary costs

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Yield Management

Maximizing Revenue from

Available Capacity at a Given Time

Most effective in the following conditions:

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Most effective in the following conditions:

High fixed cost structure

Relatively fixed capacity

Perishable inventor

Variable and uncertain demand

Varying customer price sensitivity

Revenue management (RM) is price customization

Charge different value segments different prices for sameproduct based on price sensitivity

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Conceptual Foundation

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Conceptual Foundation

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Basic Economics

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Segmented Market

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Market Segmentation Methods

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Clustering Customers

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Time Segmentation

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Changing Demand Over Time

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Changing Demand Over Time

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Demand Estimation

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Leakage

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Fences

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Pricing

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Same Price, Two Segments

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Two Prices, Two Segments

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Accept / Reject Decision Making

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Discount Allocation

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Littlewood Rule

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Expected Marginal Revenue Curve

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Key Categories of Rate Fences:

Physical (Product-Related) Fences

R t F E l

Product-Related Fences

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Rate Fences Examples

Basic Product Class of travel (Business/Economy class)

Seat location in a theater

Amenities Free breakfast at a hotel, airport pick up, etc.

Free golf cart at a golf course

Service Level Priority wait listing

Increase in baggage allowances Dedicated service hotlines

Dedicated account management team


Non Physical Fences

Transaction Characteristics

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Rate Fences ExamplesTime of booking or Requirements for advance purchase

reserva on Must pay full fare two weeks before departure

Location of booking or

reservation

Passengers booking air tickets for an identical

route in different countries are charged differentprices

Flexibility of ticket

usage

Fees/penalties for canceling or changing a

reservation (up to loss of entire ticket price)

Non-refundable reservation fees

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Non Physical Fences


Buyer Characteristics

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Frequency or volume of

consumption

Member of certain loyalty tier with the firm get

priority pricing, discounts or loyalty benefits

Group membership Child, student, senior citizen discounts

Affiliation with certain groups (e.g., Alumni)

Size of customer group Group discounts based on size of group

Relating Price Buckets and Fences to

Demand Curve

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Planned Upgrade

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Overbooking

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Managing Overbooked Customers

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Overbooking: Basic Model

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Optimal Level of Overbooking

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Minimizing No-show Rate

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Managing Demand andCa acit

Defining Productive Capacity

Productive capacity can take several forms in servicesPhysical facilities designed to contain customers

Physical facilities designed for storing or processing goods

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Physical facilities designed for storing or processing goods

Physical equipment used to process people, possessions, or

Labor

Infrastructure

Financial success in capacity-constrained business is afunction of managements ability to use productive

capacity as efficiently and profitably as possible.

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Efficiency and Utilization

Actual outputEfficiency =

Effective capacity

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c ua ou puUtilization =

Design capacity

Both measures expressed as percentages

Efficiency/Utilization Example

Design capacity = 50 calls/day

Effective capacity = 40 calls/day

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Actual output = 36 calls/day

Actual output = 36 units/dayEfficiency = = 90%

Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day = 72%Design capacity 50 units/day

Relationship between Utilization and

Service Quality

Higher utilization leads to lower service quality!!

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For examp e: 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 flooremployees helps customers find assistance more quickly.

From Excess Demand to Excess Capacity

Excess

demand

Excess

demandToo much demand relative to maximum

capacity

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Demand

exceeds

Demand

exceeds Service quality is perceived to haveop mum

capacity

op mum

capacitydeteriorated

Optimum

capacity

Optimum

capacityStaff is not overworked and customers receive

good service

Excess

capacity

Excess

capacityToo much capacity relative to demand

Addressing Problem of Fluctuating Demand

Two basic approaches of which most firms use a mixof:

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Adjust level of capacity to meet demand ee o un ers an pro uc ve capac y an ow

varies on an incremental basis

Manage level of demandUse marketing strategies to smooth out peaks, fill in

valleysInventorying demand until capacity becomes available

Example: Capacity Planning for Cookies and

Cream-Naive Approach

An enterprising student is considering opening a Cookies andIce Cream shop in space that has become available in a foodcourt. Observations of traffic during lunch hour suggest a

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potential peak demand of 50 customers, each ordering anaverage six baked-to-order cookies, and spending 20 minutes at

.

Cookie sheet can accommodate a dozen cookies and bakingtime 10 minutes. One server requires on average 6 minutes totake an order, mix a batch of cookies, make change, prepare andassemble the order. Capacity requirements are determined bycalculating the units of facility, equipment, and labor needed to

accommodate the anticipated peak demand

Little Law

i l

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Littel Law states that theaverage number of customers ina system (L) is equal to the

arrival rate () times the averagewaiting time (W); L= W.

Facility requirements: With 50 customers arrivingduring the peak and each staying approximately 20 minutes,we need (50)(20)/(60)=16.7 ~ 17 chairs.

E i R i A h d

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Equipment Requirements: Assume that orders canbe combined to fill a sheet.

Sheets needed= = 4.17(12 cookies/sheet)(6 cycles/hour)

Labor Requirement is focused on calculating the numberof servers required.

(50 cust/hr)(6 min each)

Servers needed= = 5.0

60 min./hr

Caution needs to be exercised in implementing such

h

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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 anumber of challenges related to:

The need to be near customers

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Convenience

The inability to store services

Cannot store services for consumption later The degree of demand volatility

Volume and timing of demand

Time required to service individual customers

Capacity Strategies

Leading

Build capacity in anticipation of future demand

increases

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o ow ng

Build capacity when demand exceeds current capacity

Tracking

Similar to the following strategy, but adds capacity inrelatively small increments to keep pace with

increasing demand

Strategy Formulation

Strategies are typically based on assumptions

and predictions abo t:

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and predictions about:

Long-term demand patterns

Competitor behavior

Capacity Cushion

Capacity Cushion

Extra capacity used to offset demand

uncertainty

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Capacity cushion = 100% - Utilization

Capacity cushion strategy

Organizations that have greater demanduncertainty typically have greater capacity

cushion

Organizations that have standard products andservices generally have smaller capacity cushion

Managing Capacity

Enables more people to be served at same level of capacity

Stretch and shrink:

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Stretch and shrink:

. .,

Use facilities for longer/shorter periods

Reduce amount of time spent in process by minimizing slack time

Two Capacity Strategies

Forecast of

capacity needed

Forecast of

capacity needed

Planned unused

capacity Planned use of

short-term options

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capac ty eededcapac ty eeded s o t te opt o s

y

Time between

increments

Expansionist Strategy Wait-and-See Strategy

Capaci

Capacit

Economic Trade-off in Capacity

Planning

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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

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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

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Demand Varies by Market Segment

Understand why customers from specific marketsegments select this service

f

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Kee ood records of transactions to anal zedemand patterns

Sophisticated software can help to track customerconsumption patterns

Record weather conditions and other specialfactors that might influence demand

Managing Demand

Take no actionLet demand find its own levels

Interventionist approach

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Interventionist approach

e uce eman n pea per o s

Increase demand when there is excess capacity

Inventorying demand until capacity becomesavailable

Formal wait and queuing systemReservation system

Marketing Mix Elements to Shape

Demand Patterns

Use price and other nonmonetary costs to managedemand

Change product elements

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Change product elements

Modify place and time of delivery

No changeVary times when service is available

Offer service to customers at a new location

Promotion and Education

Hotel Room Demand Curves by

Segment and Season

Bh = business travelers in high seasonB = business travelers in low season

BhBl

Th

Price perroom night

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Bl = business travelers in low seasonh

Tl = tourist in low season

BhBl

Th

Tl

Tl

Quantity of rooms demanded at each priceby 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)

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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 understandtheir demand patterns and to plan their operationsand staffing levels

Characteristics of Well-Designed

Reservations System

Fast and user-friendly for customers and staff

Responsive to customer queries and needs

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. .,online reservations system)

Accommodates preferences (e.g., room with a view)

Deflects demand from unavailable first choices toalternative times and locations

Reservations Strategies Should Focus

on Yield

Yield analysis helps managers recognize opportunity cost ofallocating capacity to one customer/segment when another

segment might yield a higher rate later

D i i d b b d d i f i

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Decisions need to be based on ood 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 therelationship

Setting Hotel Room Sales Targets bySegment and Time Period

Out of commission for renovation

Loyalty Program

Members

100%

Week 7(Low Season)

Loyalty Program Members

Week 36(High Season)

Capacity(% rooms)

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Weekend

package

Groups and conventions

Airline contracts

50%

MNights: TuTime W Th F S Su

Transient guests

W/E

package

Groups (no conventions)

Airline contracts

M Tu W Th F S Su

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AdvocateA great service marketingcompany spends money here

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Customer

Prospect

Suspect

TraditionalAdvertising

Targeting Acquisition Retention Expansion

Duration of Customer Relationship

Value

($

)

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

customer relationship.

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

customer relationship.

Who Do we target

What segments are most profitable

What segments match our ValueProposition

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

Acquisition Emphasis Retention Emphasis

Gain 6 new customers

($500 each)

$3,000 Gain 3 new customers

($500 each)

$1,500

Why Customer Loyalty?

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Retain 5 current customers

($100 each)

$ 500 Retain 20 current customers

($100 each)

$2,000

Total cost $3,500 Total cost $3,500

Total number of customers 11 Total number of customers 23

Maximizing Number of Customers

Source: Adapted from Peppers and Rogers (1996)

Economics of customer retention

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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

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Short Long

Lifetime

Low

Lifetime

Profit

Accountants

They make no distinction between the sales revenuefrom brand new customers and sales revenue from

long term, loyal customers, because they dont knowor care that it costs much more to serve new

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customers than an old one.

Worse accountant treat investment in customeracquisition as one more current expense instead ofassigning it to specific customer accounts and

amortizing it over the life of the customerrelationship.

Understanding the

Lifetime Part of CLV

Comparing ROI to CLV

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way to measure the immediate result of

any sales effort

CLV uses relationship capital to assess thelong-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.

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We need to discriminate among our customers to

acquire and retain the best.

Customer Groups

High

Good fit between companys

offerings and customers

needs; high profit potential

Good fit between companys

offerings and customers

needs; highest profit potential

Butterflies True Friends

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Projected loyalty

Profitability

Low

Long-term customersShort-term customers

Limited fit betweencompanys offerings and

customers needs; low profit

potential

Little fit between companysofferings and customers

needs; lowest profit potential

Strangers Barnacles

LTV Analysis Goal:

Determine:

Where to ut our retention dollars

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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 acompany 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 acustomer. Discounting is frequently ignored in customer lifetime value

calculations. Contribution margin.

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Retention cost, the amount of money a company has to spend in a givenperiod 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 foranalysis. 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

h i GC l t ib ti t M i th

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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 onlyaffect 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.

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,debt overhead etc. These costs do not vary

with number of customers.

The costs of servicing a customer tend todecrease with the number of years that thecustomer has been buying from you.

The Discount Rate

The profits you receive from your customers come inover several years.

Money received in future years is not worth as much asmoney received today.

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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 futurerevenue

And include the risk factor

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Service Profit Chain

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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

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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

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Understanding Consumer

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Service Environments

The Mehrabian-Russell Stimulus-Response Model

Feelings Are a Key Driver of Customer Responses to

Service Environments

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Response/Behaviors:

Approach Avoidance& CognitiveProcesses

Environmental

Stimuli and CognitiveProcesses

Dimensions ofAffect:

Pleasure andArousal

Insights from Mehrabian-Russell

Stimulus-Response ModelIt is a simple yet fundamental model of how people respondto environments that illustrates:

, ,i t t ti i fl h l f l i th t i t

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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

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Insights from Russells Model of Affect

Emotional responses to environments can be describedalong two main dimensions:

Pleasure: subjective, depending on how much individual

likes or dislikes environment rousa : ow s mu a e n v ua ee s, epen s arge y

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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 anydegree of complexity

Determines how eo le feel in a service settin

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If higher levels of cognitive processes are triggered, theinterpretation 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 leasant increasin arousal can enerate

excitement, leading to a stronger positive consumer

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, g g presponse

If environment is unpleasant, increasing arousal level willmove 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

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18-8

p plighting, and blue/green colors

Fun:

an exciting atmosphere with fast music, bright

lighting, and red/yellow colors

The Servicescape Model

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Desi nin ServicesDesi nin Services

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Service ProductsA service product comprises of all elements of service performance,both tangible and intangible, that create value for customers.

Service products consist of:

,problem-solving benefits customers seek

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problem solving benefits customers seek

Supplementary Services augments the core product, facilitatingits use and enhancing its value and appeal

Delivery Processes used to deliver both the core product and eachof the supplementary services

Core Services and Supplementary Services

In mature industries, core services often becomecommodities

products and create competitive advantage by:

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products and create competitive advantage by:

Facilitating use of core product (a service or agood)

Enhancing the value and appeal of the coreproduct

People-processing and high contact services havemore supplementary services

Market positioning strategy helps to determine whichsupplementary services should be included

Diff l l f i dd

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Different levels of service can add extra

supplementary services for each upgrade in servicelevel

Low-cost, no-frills basis firms needs fewersupplementary elements

The Flower of Service

Information

ConsultationPayment

Core Order-TakingBilling

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HospitalityExceptions

Safekeeping

Enhancing elements

Facilitating elements

KEY:

Designing a Service Concept Service concept design must address the following issues:

How the different service components are delivered to the

customer

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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.

people and systems is easily maintained)

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p p y y )

5. Cost effective6. Value to customers

7. Effective linkages between back operations

8. Single unifying theme9. Ensure reliability and high quality

Documenting Delivery Sequence Over Time

Must address sequence in which customers will use eachcore and supplementary service

Determine approximate length of time required for each

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Information should reflect good understanding ofcustomers, especially their:

needs

habits

expectations

The Service Design Process

Performance Specifications

Physicalitems

Sensualbenefits

Psychologicalbenefits

Service Concept Service Package

Desired service

experience

Targetedcustomer

Customerrequirements

Customerexpectations

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Service

Delivery Specifications

Design Specifications Service

ProviderCustomer

Activities FacilityProvider

skillsCost and time

estimates

Schedule Deliverables Location

Flowcharting Customer

Service Processes

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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

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Shows how nature of customer involvement with serviceorganizations 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 complexthan a eneral hos ital.

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Degree of Divergence Amount of discretion permitted the server to customize

the service. For example, a high-end vs. low-end hotelhas more personalized services.

Structural Positioning of Healthcare Services

HIGH COMPLEXITY

* Hospitals Services

* General Practitioner:

* Forensic-Testing Lab Diagnosis & Treatment

* Diagnostic services only

Specialist:

* Treatment only

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LOW DIVERGENCE HIGH DIVERGENCE

Outpatient Clinic: Limited* Treatment: e.g. Broken

Bones/Minor Burns only

* Retailer of

Orthopedic Supplies

* X-Ray Lab * Medical

Counseling

LOW COMPLEXITY

Complexity Specialization positioning strategy

reduces complexity by reducing the number of steps in the process

it unbundles the service offering

Penetration strategy

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gy

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 inproviding a service

Volume-oriented positioning strategy(production-line)

produces standardized output and reduces costs

b d h f i i f i d

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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

creates flexibility in tailor-made solutions

b t it d t i d

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but it does so at increased expense

Eg. Off-the-shelf vs. Custom-made Software

Structural Alternatives for a Restaurant

No ReservationsSelf-seating. Menu on Blackboard

Eliminate

Customer Fills Out Form

TAKE RESERVATIONSEAT GUESTS, GIVE MENUSSERVE WATER AND BREAD

TAKE ORDERSPREPARE ORDERS

Specific Table SelectionRecite Menu: Describe Entrees & SpecialsAssortment of Hot Breads and Hors Doeuvres

At table. Taken Personally by Maltre d

LOWER COMPLEXITY/DIVERGENCE CURRENT PROCESS HIGHER COMPLEXITY/DIVERGENCE

Pre-prepared: No Choice

Limit to Four Choices

Salad (4 choices)

Entree (15 choices)

Individually Prepared at table

Expand to 20 Choices: Add Flaming Dishes;Bone Fish at Table; Prepare Sauces at Table

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Sundae Bar: Self-service

Coffee, Tea, Milk onlyServe Salad & Entree Together:

Bill and Beverage Together

Cash only: Pay when Leaving

Dessert (6 choices)

Beverage (6 choices)SERVE ORDERS

COLLECT PAYMENT

Bone Fish at Table; Prepare Sauces at TableExpand to 12 Choices

Add Exotic Coffees; Sherbet betweenCourses; Hand Grind Pepper

Choice of Payment. Including House Accounts:Serve Mints

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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

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Given the costs of inputs needed for the system tooperate, analyze the profitability of the system

Major Steps in Service Blueprinting

1. Establish boundaries: Distinguish between frontstage

and backstage

2. Identif se uence of customer interactions

Prepare a f lowchart

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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

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30

task

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

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31

create solutions

T&M Studies can be used for time cost analysis

T&M Studies can be effective for performance

evaluations

Time and Motion Study: Objective

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32

The objective of the Time and Motion Study is todetermine a normal or average time for a job, byusing observers to record exactly how much time

is being devoted to each task.

How it Works Step-by-Step

1. Establish the standard

job method.2. rea own t e

job into elements

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33

j

3. Study the job.4. Rate the workers

performance

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)

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34

7. Compute the standard time

ST=(Nt)(1+AF) or

Standard Time=(Normal cycle

time)(1+Allowance factor)

Time and Motion Study: Problems

1. Observers are not alwayscompetent

.study are not alwaysproficient in the job

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p j

being observed

3. The actions observed are

not always reflective ofthe group as a whole

Time and Motion Study: Problems

Workers may not cooperate with a time and motionstudy:

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1. They may resent the study if it is being used todetermine 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 todisrupt the study

Key Components of a Service Blueprint

Objectives:

Identify fail

Define standardsfor front-stage

activities

Define standardsfor front-stage

activities

Specify physicalevidence

Specify physicalevidence

Identify principalcustomer actions

Identify principalcustomer actions

of excessivewaits

Line of interaction

Line of interactionFront-stage actions

by frontlinepersonnel

Front-stage actionsby frontlinepersonnel

Line of visibility

Line of visibility

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Set servicestandards

Fail-proofprocess

Backstage actionsby customer

contact personnel

Backstage actionsby customer

contact personnel

Support processesinvolving other

personnel

Support processesinvolving other

personnel

Support processes

involving IT

Support processes

involving IT

VerbalizeOrder

Collectpayment

Enter OrderPrepareFood

15 seconds60 seconds

Standardexecution time2 minutes

30 seconds 15 seconds

CorrectOrder

point

Materials(e.g., food, paper)

Front O ice

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20 seconds

( g , , p p )

Select andpurchase supplies

Not seen by customerbut necessary toperformance

Line ofvisibility

Back Office

Blueprint for an Installment Lending Operation

Loanapplication Branch Officer

Pay book

Line of visibility

F

30 min. 1 hr.

Decline

Receivepayment

Finalpayment

Notifycustomer

ConfirmIssuecheck

WW

eny

1 day 2 days 3 days

F

F

CloseaccountDelinquent

Printpayment

bookAccept

Verifyincome

data

Initial

Creditcheck

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y y 3 y

Confirm

Fail point Customer wait Employee decisionF

F

F

W

Initialscreening

Employer

Bankaccounts

Creditbureau

Data baserecords

Branchrecords

Accounting

Verifypayor

System Availability

System Availability, SA =System Availability, SA =MTBFMTBF

MTBF + MTTRMTBF + MTTR

PROVIDERPROVIDER MTBF (HR)MTBF (HR) MTTR (HR)MTTR (HR)

AA 6060 4.04.0BB 3636 2.02.0CC 2424 1.01.0

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44

SASAAA= 60 / (60 + 4) = .9375 or 93.75%= 60 / (60 + 4) = .9375 or 93.75%

SASABB = 36 / (36 + 2) = .9726 or 97.26%= 36 / (36 + 2) = .9726 or 97.26%

SASACC = 24 / (24 + 1) = .9473 or 94.73%= 24 / (24 + 1) = .9473 or 94.73%

Design for High-Contact Services

DESIGN DECISION HIGH-CONTACT SERVICE LOW-CONTACT SERVICE

Facility location Convenient to customer Near labor ortransportation

Facility layout Must look presentable, Designed for efficiency

needs, and facilitateinteraction with customer

Quality control More variable since customer Measured against

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is involved in process;customer expectations andperceptions of quality maydiffer; customer present whendefects occur

established standards;testing and reworkpossible to correct defects

Capacity Excess capacity required tohandle peaks in demand

Planned for averagedemand

Design for High-Contact Services

DESIGN DECISION HIGH-CONTACT SERVICE LOW-CONTACT SERVICE

Worker skills Must be able to interact wellwith customers and use

judgment in decision making

Technical skills

schedule

with completion date

Service process Mostly front-room activities; Mostly back-room

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service may change duringdelivery in response tocustomer

activities; planned andexecuted with minimalinterference

Service package Varies with customer; includesenvironment as well as actual

service

Fixed, less extensive

1-10-100 Rule

The 1-10-100 rule states that as a product or service movesthrough the production system, the cost of correcting an errormultiplies by 10.

Activity Cost

r er en ere correc y 1

Error detected in billing $ 10

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43

Error detected by customer $ 100

Dissatisfied customer shares the experience with others the costsis

$1000

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Design ReviewFailure Mode and Effects Analysis

(FMEA)

A systematic approach for analyzing causese ects o a ures

Prioritizes failures

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Attempts to eliminate causes

Fault Tree Analysis (FTA)

Study interrelationship between failures

FMEA for Potato Chips

Stale Low moisturecontent, expired shelflife, poor packaging

Tastes bad, wontcrunch, thrown out,lost sales

Add m cure longer,better package seal,shorter shelf life

Broken Too thin, too brittle, Cant dip, poor Change recipe,

FAILUREFAILURE

MODEMODE CAUSE OF FAILURECAUSE OF FAILURE EFFECT OF FAILUREEFFECT OF FAILURE CORRECTIVE ACTIONCORRECTIVE ACTION

rough handling,rough use, poorpackaging

display, injuresmouth, chocking,perceived as old, lostsales

change process,change packaging

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Too Salty Outdated receipt,process not incontrol, unevendistribution of salt

Eat less, drink more,health hazard, lostsales

Experiment withrecipe, experimentwith process,introduce low salt

version

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Fault Tree forPotato Chips

Setting Service Standards and Targets

Service providers set standards for each step sufficientlyhigh to satisfy and even delight customers Include time parameters, script and prescriptions for

appropriate style and demeanor

Must be ex ressed in wa s that ermit ob ectivemeasurement

P f ifi d

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Performance targets specific process and teamperformance targets for which staff are responsible for

Evaluated based on distinction between standards and

targets

HARD STANDARDS AND MEASURESThings that can be counted, timed,

or observed through audits (time,numbers of events

Hard vs. Soft Service Standards

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SOFT STANDARDS AND MEASURESOpinion-based measures that cannotbe observed and must be collected bytalking to customers (perceptions, beliefs)

HARD Customer Defined Standards Counted, timed or observed through audits

Customer Priorities Customer Defined Standard

.

On Time delivery 1. No. of packages right, day late2. No. of packages wrong, day late

N f i d i k

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3. No. of missed pick-upsEg. Dell

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 ExpressCustomer Priorities Customer Defined Standard

Resolution of Problem Resolve problem at first contact

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Take all the time necessaryTreatment Listen, do everything possible to help

Courtesy of representative Put card member at easeAddress card member by first name

Seven Service Culture Standards

1. Smile

2. Eye3. Recognition

4. Voice

I f d

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5. Informed

6. Clean

7. Everyone

Setting Standards and Targets for Customer

Service Processes

ServiceAttributes

ServiceProcess

Indicators

ServiceProcess

Standards

PerformanceTargets

Responsiveness e a y

Competence

Accessibility

Courtesy

Communication

to approve

applications

24 hours

applications in 24

hours

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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

Service Encounter Customer Requirements Measurements

Customer-Driven Standards and Measurements

erv ceQuality

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AT&Ts Process Map for Measurements

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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).

SatisfactionRelationship

Reliability Empathy

Requirements:Abstract

Digdee er

Diagnosticity:

LowGeneralconcepts

What Customers Expect: Getting to Actionable Steps

ValueSolution

Provider

Responsiveness Price

Delivers on timeReturns calls quickly

Knows my industry

Digdeeper

s

Attributes

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y y

Delivers by WednesdayReturns calls in two hoursKnows strengths of my

competitorsConcrete

Digdeeper

High

Behaviors

and actions

Select Behaviors & Actions for Standards

The standards are based on behaviors & actionsthat are important to customers

The standards cover performance that needs to beimprove or c ange

The standards cover behaviors & actions

employees can improve

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employees can improve The standards are accepted by employees

The standards are predictive rather than reactive

The standards are challenging but realistic

Kano ModelKano Model

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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)

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p ( ) 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

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Satisfier More is better Competitive

Delighter Latent Need Differentiator

Evaluate Current Performance

Kano Model

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Kano Model Process

Analyze &Brainstorm

ResearchPlot &

DiagramStrategize

Research available

data sources

Determine data

collection strategy

Design datall ti

Analyze results

from data collection

Brainstorm list of

features and

functionalityD l F ti l

Develop Customer

Requirement Matrix

Record

Questionnaire

results in Matrixd S i

Determine Project

selection

Product Development

Service DevelopmentIdentify Marketing

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collection

instruments

Collect and

summarize data

Develop Functional

and Dysfunctional

Questionnaire

Distribute

Questionnaire

and Summarize

Plot results on

Kano Model

y g

Strategy

Research Must Bes - Focus Groups, Lawsuits and

Regulations, Buzz on Internet

Satisfiers - Competitive Analysis, Interviews,Surveys, Searc Logs, Usa ity Testing, CustomerForums

Delighters - Field Research, Marketing/BrandingVi i I d t i l D i P k i C ll C t

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g , g/ gVision, Industrial Design, Packaging, Call CenterData, 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 hadfeature X? How would you feel if the product didnt have feature X?

Kano Questionnaire Answers:

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Kano Questionnaire Answers: I like it. I expect it. Im neutral. I can tolerate it. I dislike it.

Example: Requirements Survey

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Example: Requirements Questionnaire

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Functional vs. Dysfunctional Comparison

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Evaluation Customer Requirements

C.R. A E O R Q I Total Grade1 3 6 14 23 O

2 5 6 11 1 23 O

4 13 10 23 E

5 11 1 2 9 23 A

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5 9 3

Customer Requirement is:

A: Attractive R: Reverse Q: Questionable ResultE: Expected O: One Dimensional I: Indifferent

Example Results

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Summary of Kano ModelAnalyze and rank the voice of the customer data

Develop into Categories

Dissatisfier Must bes Cost of Entry Satis ier More is etter Competitive

Delighter Latent Need Differentiator

Identify and implement strategy

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Customers Role in Service

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Documents

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