Customer Service

The Service Profit Chain By Heskett, Sasser and Schlesinger – 1997 Today’s seminars admonish us to:  Treat customers like royalty  Exceed customer’s expectations  Either seek low operating costs or some means to differentiating our business from competitors  Assume that customer is always right The Service Profit Chains thinking maintains that there are direct and strong relationships between profit, growth, customer loyalty, customer satisfaction, the value of goods and services delivered to customers; and employee capability, satisfaction, loyalty and productivity.

Internal Operating strategy and Service delivery system Loyalty

External Service concept

Target Market Customers

Satisfaction Productivity & Output Quality

Service Value

Employees

Satisfaction Loyalty

Capability

Revenue growth Profitability

Service Quality Workplace design Job design / decision-making latitude Selection and development Rewards and Recognition Information and Communication Adequate ‘tools’ to serve customers

Quality & productivity improvements yield higher service quality and lower cost

Satisfaction

Loyalty

Attractive value: Service designed & delivered to meet targeted customer’s needs

Lifetime value Retention Repeat business Referral

Page 1

 Profit and Growth are linked to Customer Loyalty In the 1970s, a major study of Profit Impact of Market Share (PIMS), based on the examination of data from hundreds of companies in many industries, concluded, among other things, that one of the most important determinants of profitability was Market Share.  Customer Loyalty is linked to Consumer Satisfaction Of all the links in the service profit chain, this one has proven the least reliable. Short-term measures of the relationship have been disrupted by such thing as competitive price reductions that may entice customers away from outstanding service providers, regardless of the levels of satisfaction customers say that they have with a service.  Customer Satisfaction is linked to Service Value

Customers today are strongly value-oriented. They seek results and service process quality that far exceeds the price and acquisition costs they incur for a service.  Service Value is linked to Employee Productivity In the Travel Services division of American Express, productivity is defined in terms valued by customers, the speed and accuracy with which tickets are prepared. This recognises the fact that quality of service need not be ‘traded off’ for high productivity.  Employee Productivity is linked to Employee Loyalty

Traditional measures of the losses incurred by employee turnover concentrate only on the cost of recruiting, hiring and training replacements. But in most service jobs, an even greater cost of turnover is loss of productivity and decreased customer satisfaction.  Employee Loyalty is linked to Employee Satisfaction In one study of a property and casualty insurance company’s employees, it was found that 30 percent of all dissatisfied employees registered an intention to leave the company, a potential turnover rate three times higher than that for satisfied employees.

Page 2

 Employee Satisfaction is linked to Internal Quality of Work Life What we call the internal quality of a working environment contributes most to employee satisfaction. Internal quality is measured by the feelings that employees have toward their jobs, colleagues and companies. In general, the frontline service employees value most their ability and authority to achieve results for customers, something we call capability. THE CUSTOMER VALUE EQUATION VALUE

= Results produced for the customer + Process quality Price to the customer + Costs of acquiring the service

Results produced for customer: Customers buy results, not products or services Process quality: The way in which a service is delivered is often as important as results delivered to the recipient According to Parasuraman, Zeithaml and Berry, five universal dimensions of service process quality can be defined:  Dependability: Did the service provider do what was promised?  Responsiveness: Was the service provided in a timely manner?  Authority: Did the service provider elicit a feeling of confidence?  Empathy: Was the provider able to take the customer’s point of view?  Tangible evidence: Was evidence left that the service was indeed performed?

Page 3

Price and Acquisition costs Relationships between price and service acquisition (or access) costs have important implications for service providers: These finding ways to lower acquisition costs for customers often can charge higher prices for their services, particularly if they can convince customers of the value of such efforts. Requirements of those who manage by the Customer Value Equation  Understanding customer needs (marketing research, customer involvement…)  Determining ways in which needs influence attitudes toward the Value Equation  Establishing a return on value-enhancing investments (how best to invest in service improvements that enhance the value equation)  Developing different value packages for various market segments  Developing a single-minded emphasis on value (Capability for assessing proposed actions in the context of the customer value equation)  Ultimately deciding whether value can be provided at a profit (Little margin for error = little opportunity for profit?) STRATEGIC SERVICE VISION Service delivery system

Operating strategy Cost to service provider

Service concept

Versus

Value of results to customer

Target market

=

Potential profit to service provider

Actual profit to Service provider Price and access cost to customer

Versus

Value of results and process quality to customer

=

Employee satisfaction Capability

Loyalty

Productivity & Quality

Customer Value Equation

Value to customer

Profit Customer satisfact.

Customer loyalty Growth

Page 4

SERVICE PROFIT CHAIN

RETHINKING MARKETING Conventional marketing efforts centered around the four P’s of Product, Price, Place and Promotional activities have long influenced those responsible for the sale of consumer and industrial products, with the primary objective of building market share. Nowadays organisations seek out ways not only to retain customers but to encourage them to buy related products or services, essentially resulting in a strategy centered around the three R’s of Retention, Related sales and Referrals. RETENTION: Retention is the continuing, active relationship with a customer that yields a stream of revenue from the sale of the initial product or service. This stream of revenue becomes more and more profitable as existing customers become easier to serve with less need to spend ‘get acquainted’ marketing effort on them. Costs of serving existing customers decline as expectations are established and customers learn the service delivery process. RELATED SALES OF NEW PRODUCTS AND SERVICES: It costs much less to sell new products and services to existing customers than new customers. Sales to those you know and who know you require little marketing introduction, no new credit checks, and much less time. REFERRALS: By far the greatest profit impact of efforts to retain customers and develop their satisfaction comes through the positive referrals they provide to potential customers. Data developed several years ago in a study for the U.S. Office of Consumer Affairs suggest that satisfied customer for consumer services in their survey were likely to tell five other people. On the other hand, dissatisfied customers were likely to tell eleven other people. MEASURING CUSTOMER SATISFACTION AND LOYALTY Customer satisfaction and loyalty can be tracked by means of ‘listening post’ such as customer surveys, feedback volunteered by customers, formal marketing research, reports filed by frontline service personnel, Page 5

and actual customer involvement in certain affairs or organisations serving them. Customers usually tell others about extraordinary experiences, good and bad. We know that in most services, less than a third of dissatisfied customers ever complain to the service provider. The complaints of some are ‘lost’ in the channels of communication. Those who tell others about positive experiences are what we call ‘apostles’. Dissatisfied customers who don’t quietly take their business elsewhere, but take others with them through their criticism, are ‘terrorists’. The best returns on investment are at the extremes of customer satisfaction:  Neutralising the ‘Terrorists’  Preserving and creating ‘Apostles’  Investing to achieve Total Customer Satisfaction  Minimising investments in Low-Satisfaction Customers  Investing in Existing versus New Customers  Creating Terrorists as a By-product of Focus THE SERVICE ENCOUNTER: THE SATISFACTION MIRROR Customer and employee satisfaction measures in multiunit service operations typically track closely with one another. Some management of international companies clearly believe that the goal of complete customer satisfaction is achieved through satisfied employees. That’s why it not only pays its customer contact personnel well in manner that rewards long-term sales success achieved through customer satisfaction, but also provides an attractive selling environment, often including a pianist playing soft music, plush carpet, and well appointed and welllocated stores. In a study reported in 1985, B. Schneider and D. Bowen established a close links between customer and employee satisfaction levels. They concluded that ‘the degree to which employees believe their work is facilitated yields the most consistent information about customer satisfaction. The ‘mirror’ probably occurs in its simplest form in the restaurant where the waitpersons enthusiastic about their jobs not only communicate their enthusiasm to customers but also go out of their way to make customer’s dining experiences pleasant. Customer satisfaction is expressed through both comments and often a larger-than-normal tip,

Page 6

reinforcing the relationship and increasing the waitperson’s enthusiasm for the next customer encounter.

FROM SERVICE ENCOUNTER TO RELATIONSHIP Successful service encounters occur for a variety of reasons. But unless they can be replicated consistently, they do not lead to the kind of relationship that induces customers to fell like ‘owners’ of the service. Face to face (the human touch) is one factor creating the successful service encounter. A series of service encounters between a provider and customer will lead to a productive and profitable relationship only if the provider is able to achieve consistently high quality in the encounter. This is one of the most important factors in McDonald’s success, for example. FACTORS AFFECTING THE STRENGTH OF RELATIONSHIP IN THE SERVICE RELATIONSHIP TRIANGLE

Service organisation Brand strength Transaction supporting systems Working environment Organisation policies Compensation Front-line service provider

Reputation of Firm Proprietary technology, services Accessibility Reliability of billing Overall value received Customer

Need for high levels of trust High perception of risk by customer Need for judgement and flexibility in the delivery A strong ‘satisfaction mirror’ effect

Page 7

THE CYCLE OF CAPABILITY Careful employee and customer selection Employee referrals of potential candidates

High quality training Well designed support systems

Satisfied employees Greater latitude to meet customer’s needs

Appropriate rewards and frequent recognition Clear limits on, and expectations of, employees

Page 8