1 Managing the Service-Profit Chain “Put customers and front-line employees first!” “Exceed your customers’ expectations and needs. “Know things about your customers that they do not even know about themselves.” Creating and Maintaining Satisfied and Loyal Customers Creating and Maintaining Satisfied and Loyal Employees

2 Customer Loyalty Lifetime revenue of a loyal customer: Domino’s pizza eater:$10,000 Cadillac car owner: $500,000 Boeing Aircraft Purchaser:$Billions A 5% increase in customer retention can increase profits from 25-85%. QUALITY of market share (as measured by loyalty) deserves as much attention as QUANTITY of market share.

3 Customer Loyalty (continued) HOW DO WE MEASURE CUSTOMER LOYALTY?  Longevity of customer relationship.  Frequency of customer transactions.  Dollar value of customer transactions.  Depth of a customer’s relationships (e.g, for a bank: checking, savings, lending)  Intent of a customer to repurchase a product or return for a service.  Customer’s willingness to endorse a product/service or make referrals to friends.

4 Customer Loyalty (continued) WHY DO LOYAL CUSTOMERS BECOME MORE AND MORE PROFITABLE?  Increased frequency and volume of transactions.  Reduced operating costs.  Referrals.

5 Customer Loyalty (continued) WHAT PERCENTAGE OF BUSINESS DEVELOPMENT EXPENDITURES ARE DEVOTED TO THE RETENTION OF EXISTING CUSTOMERS?  Pricing policy that rewards loyal customers.  Creation of new products/services for loyal customers.  Loyalty “reward” program.  Employee compensation that rewards customer retentions as much as new business.

6 Customer Loyalty (continued) ARE CUSTOMERS DEFECTING AND, IF SO, WHY?  What practices/policies are in place to identify IF a customer has defected.  What practices/policies are in place to identify WHY a former customer has defected?  What practices/policies are in place to PREVENT customer defection? In manufacturing, the goal is 0 defects. In service, the goal is 0 defections.

7 Customer Satisfaction  Because service is often performed in the presence of the customer, errors are inevitable.  But a well-executed service recovery can convert an angry and frustrated customer in a loyal one. Research suggests that, when a company recovers well after a service failure, a customer is more loyal that he/she would have been if the service problem had never occurred.  Replacing a customer costs more – up to five times more – than retaining a customer.  The battle for market share is won by pleasing one customer at a time.  A problem that an employee who is close to a customer can identify and correct is an OPPORTUNITY to win a customer for life.  For a service recovery, do NOT hope that a front-line employee will have the resourcefulness to respond correctly. Instead take steps to ensure that each front-line employee has the SKILL, MOTIVATION, and AUTHORITY to make service recovery an integral part of operations.  Studies have shown that more than 50% of all attempts to respond to customer complaints actually reinforce the negative reactions to the service.

8 Customer Satisfaction (continued) 1.Encourage dissatisfied customers to complain. 2.Make it easy for dissatisfied customers to complain. 3.Anticipate the need for service recovery. Be prepared. 4.Act quickly. 5.Hire the right employees and train them how to listen and negotiate. 6.Empower front-line employees. 7.Close the “loop” back to the customer who complained. 8.Learn from service failures in the following ways: Take steps to avoid the problem from occurring again. Improve the service recovery process. Ensure that the learning is transferred throughout the organization. Tax & Brown define service recovery as “a process that identifies service failures, effectively resolves customer problems, classifies their root causes, and yields data that can be integrated with other measures of performance to asses and improve the service system. Eight Characteristics of Effective Service Recovery

9 Customer Satisfaction (continued) WHERE ARE THE “LISTENING POSTS” FOR OBTAINING CUSTOMER FEEDBACK? Five Ways to Listen to Customers: 1.Customer Satisfaction Indices 2.Customers’ Comments, Questions, and Complaints 3.Market Research (including through the Internet) 4.Front-line Employees 5.“Strategic” Activities (e.g., SWA’s involvement of customers in hiring)

10 Employee Loyalty HOW DO YOU CREATE EMPLOYEE LOYALTY?  Compensation.  Incentives that reward loyalty.  Job satisfaction (including empowerment).  Career paths.  Hiring that takes into account predictions about loyalty.  Carefully evaluate policies that routinely transfer employees.  When a employee decides to leave the company, conduct an “exit interview”.  Proper balance between full-time and part-time employees.

11 Leadership HOW MUCH TIME DOES SENIOR MANAGEMENT SPEND PERSONALLY DEVELOPING AND MAINTAINING A CORPORATE CULTURE CENTERED AROUND SERVICE TO CUSTOMERS AND FELLOW EMPLOYEES?

12 BIBLIOGRAPHY My lecture is based in part on the following articles/notes. With the exception of the article from the Sloan Management Review, you can use the product number to obtain the article/note from Harvard Business School Publishing.