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OPSM 405 Service Management

Ko ç Un iversity. OPSM 405 Service Management. Class 8: CRM and service operations. Zeynep Aksin zaksin @ku.edu.tr. Benefits obtained from quality programs (McCabe, Knights, Wilkinson, 1994). Where did you see the benefits of quality programs ? Quality mentality 82%

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OPSM 405 Service Management

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  1. Koç University OPSM 405 Service Management Class 8: CRM and service operations Zeynep Aksin zaksin@ku.edu.tr

  2. Benefits obtained from quality programs(McCabe, Knights, Wilkinson, 1994) • Where did you see the benefits of quality programs? • Quality mentality 82% • Customer satisfaction 63% • Team work 59% • Better communication 57% • Profits 35% • Sales 18%

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

  4. Is the problem in quality programs or in measurement?(Operations Council, 1995) • Difficulty in tying process and internal quality measures to financial performance • Measurement systems remain internal • Disregarding competitors actions • Focus on internal measures that have little impact on results

  5. Satisfaction Profits Relationship between Customer Satisfaction and Profitability Federated Department Stores Wal-Mart Southwest Airlines The Allstate Corporation Colgate-Palmolive Hotel Industry Kaynak: National Quality Research Center, University of Michigan Business School; Annual Reports; Hotel & Motel Management (vol. 210, 02-20-1995; vol. 212, 01-13-1997; vol. 212, 12-15-1997; vol. 214, 01-11-1999); The American Hotel & Lodging Association (1999 AH&LA Lodging Industry Profile and 2000 AH&LA Lodging Industry Profile).

  6. Zero Defections: Quality Comes to ServicesReichheld and Sasser (1990) “Customer defections have a surprisingly powerful impact on the bottom line. As a customer’s relationship with a company lengthens, profits rise.”

  7. Why are customers profitable over time?(Reichheld and Teal, 1996) Price premium Referrals COMPANY PROFITS Reduced costs Increased purchase Base profit 0 Acquisition costs TIME

  8. The economics of service quality • want to satisfy customers to stay competitive • yet customer service and quality comes at a cost • easy to count the costs… • …hard to quantify benefits • one view: delight! • another view: fire your customers! • something in between: CRM • differentiated service based on profitability • nurture profitable relationships • Manage less profitable relationships

  9. ROQ: Quality as an investment Improvement effort Service quality improvement Word of mouth Perceived Serv. Qual. & Satis. Cost reduction Customer retention New cust. attraction Revenues & Market share Profitability

  10. Contractual versus non-contractual settings(Reinartz and Kumar 2000) • Long-life customers don’t always generate more profits for the firm • Short-life customers can be very profitable

  11. What should companies focus on: defections or downward migration? • Many more customers change spending behavior than defect • Satisfaction alone is not enough to explain customer defections and downward migrations • Why do customers change spending patterns? • A change in basic needs • Comparisons to others • Dissatisfaction

  12. 15% 10% Customer percentage 5% 0% Bottom %25 %50-75 %25-50 Top %25 Revenue-Profit Relationship Least profitable Most profitable Profits REVENUE Source: Keiningham, Perkins-Munn, Aksoy ve Estrin (2005) “Does customer satisfaction lead to Profitability?” Managing Service Quality, 15(2)

  13. Making loyal customers profitable(Reinartz ve Kumar 2002) H Profitability L H L Loyalty

  14. How to Measure Customer Value? • Revenues • Is easiest to measure • Reflects past behavior • Doesn’t consider costs • Profitability • Considers both revenues and costs • Reflects past behavior • Can be difficult to measure (need detailed cost information) • Lifetime Value • Considers full lifecycle of customer (past and future) • Most difficult to measure • Need detailed cost information • Need to forecast/predict/project future behavior

  15. Customer Lifetime Value • Margins: annual revenue that a customer generates minus operating expenses a company incurs in serving them • Retention rate • Discount rate

  16. Lifetime Value(LTV) Volume of purchases per period(Q) Margin per unit(p) Discount rate Acquisition,Development andRetention costs (ADR) Basic Model of Lifetime Value (source: L.Aksoy) Probability of Purchase in period t (P)

  17. Strategy based on LTV(Keiningham, Vavra, Aksoy, Wallard, Kumar, 2005) Grouped by profitability Low wallet share High wallet share

  18. Potential strategies(Kumar 2006) • Make loyal customers profitable • Offer right product to right customer at right time • Tie acquisition and retention investments to profitability • Prevent customer defections • Try to direct low profitability customers to cheaper delivery channels

  19. Radikal gazetesi 28 Mayıs 2005

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