S M Chapter 17 THE FINANCIAL AND ECONOMIC IMPACT OF SERVICE QUALITY © 2000 The McGraw-Hill Companies McGraw-Hill
Figure 17-1The Direct Relationship between Service and Profits Service Quality ? Profits
How Quality Generates Profits • Is it always worthwhile to spend more on improving the quality of one’s goods and services?
Evidence of relationship between quality and profits • Lower costs due to efficiencies achieved • Increased sales from current customers • Greater attraction of new customers • Possible ability to charge higher prices • PIMS data (Profit Impact of Marketing Strategy)
However • Not the same for all firms and industries • Relative importance of each of these factors varied widely across different industries
What is ROQ? • Looks at investments in services as a chain of effects • improvement leads to satisfaction leads to behavioral intentions leads to behavioral impact leads to profit • Assumptions • quality is an investment • quality efforts must be financially accountable • it is possible to spend too much on quality • not all quality expenditures are equally valid
Measuring the Effects of Quality • Can/should it be measured • Must manage limited resources and direct spending where it most counts
Offensive and Defensive Marketing • Offensive --- marketing used to attract more and better customers • Defensive---marketing used to prevent customer defection
The Value of New Customers (Offensive Marketing) • Quality attracts new customers • W-O-M • Personal referrals • “Willingness to recommend” • Enthusiastic testimonial
Figure 17-2Offensive Marketing Effects of Service on Profits Service Quality Profits Market Share Sales Reputation Price Premium
Why Improved Retention (Defensive Marketing) Increases Profits • It’s about 5 times more expensive to win a new customer than to keep an old one. • Longer-term customers tend to purchase more. • Familiar customers may be more efficient to deal with.
Secondary issues • Satisfied customers more pleasant to work with --- employee turnover • makes a firm a more formidable competitor • if firm redresses complaints customers are almost as willing to return and sometimes more loyal than those who never had a problem
Figure 17-3Defensive Marketing Effects of Service on Profit Service Quality Costs Margins Volume of Purchases Customer Retention Price Premium Profits Word of Mouth
Figure 17-5Perceptions of Service, Behavioral Intentions and Profits Costs Margins Service Volume of Purchases Customer Retention Behavioral Intentions Price Premium Profits Word of Mouth Sales
Three Issues Emerge--- • All customers treated the same? • What aspects of services should focus on? • Measurement issues?
Assumptions of 80/20 Rule • 20 percent of a company’s customers produce 80 percent of the company’s profit • assumes all customers within each tier is homogeneous
Figure 17-6 The “80/20” Customer Pyramid Most Profitable What segment spends more with Customers us over time, costs less to maintain, Best Customers spreads positive word of mouth? Other Customers What segment costs us in time, effort and money yet does not provide the return we want? What segment is Least Profitable difficult to do business with? Customers
Figure 17-7 The Expanded Customer Pyramid Most Profitable What segment spends more with Customers Platinum us over time, costs less to maintain, spreads positive word of mouth? Gold Iron What segment costs us in Lead time, effort and money yet does not provide the return we want? What segment is Least Profitable difficult to do business with? Customers
Service Elements • Key drivers of service quality, customer retention, and profits are service encounters • Relative importance of various service dimensions will differ but reliability is usually the most critical
Figure 17-8The Key Drivers of Service Quality, Customer Retention, and Profits Key Drivers Service Encounters Service Encounter Service Quality Service Encounter Behavioral Intentions Customer Retention Profits Service Encounter Service Encounter
Measurement Issues • Traditional measures relied on profit, sales, and return on investment • must look at both costs of quality and returns on quality
The Balanced Scorecard • Financial Measures • lifetime value of customers, lost revenue, value of price premium, volume increases, cross sales, etc. • Customer Perceptual Measures • leading indicators • Operational Measures • linked to customer expectations • Innovation and Learning Measures • innovate, improve, and learn
Figure 17-9 Sample Measurements for the Balanced Scorecard Financial Measures Price Premium Volume Increases Value of Customer Referrals Value of Cross Sales Long-term Value of Customer Customer Perspective Operational Perspective: Service Perceptions Service Expectations Perceived Value Behavioral Intentions: Right first time (% hits) Right on time (% hits) Responsiveness (% on time) Transaction time (hours, days) Throughput time Reduction in waste Process quality Innovation and Learning Perspective % Loyalty % Intent to Switch # Customer Referrals # Cross Sales # of Defections Number of new products Return on innovation Employee skills Time to market Time spent talking to customers Adapted from Kaplan and Norton
Figure 17-10 Service Quality Spells Profits Costs Margins Defensive Marketing Volume of Purchases Service Quality Price Premium Customer Retention Profits Word of Mouth Market Share Sales Offensive Marketing Reputation Price Premium