1. McGraw-Hill© 2000 The McGraw-Hill Companies 1 S M S M McGraw-Hill © 2000 The McGraw-Hill Companies Chapter 17 THE FINANCIAL AND ECONOMIC IMPACT OF SERVICE QUALITY

2. McGraw-Hill© 2000 The McGraw-Hill Companies 2 S M Figure 17-1 The Direct Relationship between Service and Profits Profits ? Service Quality

3. McGraw-Hill© 2000 The McGraw-Hill Companies 3 S M How Quality Generates Profits Is it always worthwhile to spend more on improving the quality of one’s goods and services?

4. McGraw-Hill© 2000 The McGraw-Hill Companies 4 S M 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)

5. McGraw-Hill© 2000 The McGraw-Hill Companies 5 S M However Not the same for all firms and industries Relative importance of each of these factors varied widely across different industries

6. McGraw-Hill© 2000 The McGraw-Hill Companies 6 S M 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

7. McGraw-Hill© 2000 The McGraw-Hill Companies 7 S M Measuring the Effects of Quality Can/should it be measured Must manage limited resources and direct spending where it most counts

8. McGraw-Hill© 2000 The McGraw-Hill Companies 8 S M Offensive and Defensive Marketing Offensive --- marketing used to attract more and better customers Defensive---marketing used to prevent customer defection

9. McGraw-Hill© 2000 The McGraw-Hill Companies 9 S M The Value of New Customers (Offensive Marketing) Quality attracts new customers W-O-M Personal referrals “Willingness to recommend” Enthusiastic testimonial

10. McGraw-Hill© 2000 The McGraw-Hill Companies 10 S M Figure 17-2 Offensive Marketing Effects of Service on Profits Profits Market Share Reputation Sales Price Premium Service Quality

11. McGraw-Hill© 2000 The McGraw-Hill Companies 11 S M 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.

12. McGraw-Hill© 2000 The McGraw-Hill Companies 12 S M 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

13. McGraw-Hill© 2000 The McGraw-Hill Companies 13 S M Figure 17-3 Defensive Marketing Effects of Service on Profit Margins Profits Customer Retention Costs Price Premium Word of Mouth Volume of Purchases Service Quality

14. McGraw-Hill© 2000 The McGraw-Hill Companies 14 S M Figure 17-5 Perceptions of Service, Behavioral Intentions and Profits Customer Retention Costs Price Premium Word of Mouth Margins Profits Volume of Purchases Service Behavioral Intentions Sales

15. McGraw-Hill© 2000 The McGraw-Hill Companies 15 S M Three Issues Emerge--- All customers treated the same? What aspects of services should focus on? Measurement issues?

16. McGraw-Hill© 2000 The McGraw-Hill Companies 16 S M 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

17. McGraw-Hill© 2000 The McGraw-Hill Companies 17 S M Figure 17-6 The “80/20” Customer Pyramid Most Profitable Customers Least Profitable Customers What segment spends more with us over time, costs less to maintain, spreads positive word of mouth? What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Other Customers Best Customers

18. McGraw-Hill© 2000 The McGraw-Hill Companies 18 S M Figure 17-7 The Expanded Customer Pyramid Most Profitable Customers Least Profitable Customers What segment spends more with us over time, costs less to maintain, spreads positive word of mouth? What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Gold Iron Lead Platinum

19. McGraw-Hill© 2000 The McGraw-Hill Companies 19 S M 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

20. McGraw-Hill© 2000 The McGraw-Hill Companies 20 S M Figure 17-8 The Key Drivers of Service Quality, Customer Retention, and Profits Key Drivers Service Quality Service Encounter Service Encounter Service Encounter Customer Retention Behavioral Intentions Profits Service Encounter Service Encounters

21. McGraw-Hill© 2000 The McGraw-Hill Companies 21 S M Measurement Issues Traditional measures relied on profit, sales, and return on investment –must look at both costs of quality and returns on quality

22. McGraw-Hill© 2000 The McGraw-Hill Companies 22 S M 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

23. McGraw-Hill© 2000 The McGraw-Hill Companies 23 S M Figure 17-9 Sample Measurements for the Sample Measurements for the Balanced Scorecard Adapted from Kaplan and Norton Innovation and Learning Perspective Customer Perspective Service Perceptions Service Expectations Perceived Value Behavioral Intentions: Operational Perspective: Right first time (% hits) Right on time (% hits) Responsiveness (% on time) Transaction time (hours, days) Throughput time Reduction in waste Process quality Financial Measures Price Premium Volume Increases Value of Customer Referrals Value of Cross Sales Long-term Value of Customer % 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

24. McGraw-Hill© 2000 The McGraw-Hill Companies 24 S M Figure 17-10 Service Quality Spells Profits Service Quality Spells Profits Service Quality Customer Retention Costs Price Premium Word of Mouth Margins Profits Defensive Marketing Volume of Purchases Market Share Reputation Sales Price Premium Offensive Marketing