© 2000 The McGraw-Hill Companies Chapter 17 THE FINANCIAL AND ECONOMIC IMPACT OF SERVICE QUALITY McGraw-Hill © 2000 The McGraw-Hill Companies

Objectives for Chapter 17: The Financial and Economic Impact of Service Examine the direct effects of service on profits Consider the impact of service on getting new customers Evaluate the role of service in keeping customers Examine the link between perceptions of service and purchase intentions Emphasize the importance of selecting profitable customers Discuss what is know about the key service drivers of overall service quality, customer retention and profitability Discuss the balanced performance scorecard to focus on strategic measurement other than financials

Figure 17-1 The Direct Relationship between Service and Profits Quality ? Profits

Figure 17-2 Offensive Marketing Effects of Service on Profits Quality Profits Market Share Sales Reputation Price Premium

Figure 17-3 Defensive Marketing Effects of Service on Profit Quality Costs Margins Volume of Purchases Customer Retention Price Premium Profits Word of Mouth

Figure 17-5 Perceptions of Service, Behavioral Intentions and Profits Costs Margins Service Volume of Purchases Customer Retention Behavioral Intentions Price Premium Profits Word of Mouth Sales

The “80/20” Customer Pyramid 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

The Expanded Customer Pyramid 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

Figure 17-8 The Key Drivers of Service Quality, Customer Retention, and Profits Service Encounters Service Encounter Service Quality Service Encounter Behavioral Intentions Customer Retention Profits Service Encounter Service Encounter

Sample Measurements for the 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

Service Quality Spells Profits 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