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Chapter 17

THE FINANCIAL AND ECONOMIC IMPACT OF SERVICE QUALITY

McGraw-Hill McGraw-Hill

2000 The McGraw-Hill Companies

2000 The McGraw-Hill Companies

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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
McGraw-Hill 2000 The McGraw-Hill Companies

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Figure 17-1

The Direct Relationship between Service and Profits

Service Quality

Profits

McGraw-Hill

2000 The McGraw-Hill Companies

SM

Figure 17-2

Offensive Marketing Effects of Service on Profits

Service Quality
Market Share
Reputation

Profits
Sales

Price Premium
McGraw-Hill 2000 The McGraw-Hill Companies

Figure 17-3

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Defensive Marketing Effects of Service on Profit

Costs

Service Quality

Customer Retention

Volume of Purchases Price Premium

Margins

Word of Mouth

Profits

McGraw-Hill

2000 The McGraw-Hill Companies

SM

Figure 17-5

Perceptions of Service, Behavioral Intentions and Profits

Costs
Volume of Purchases Price Premium

Margins

Customer Retention

Service

Behavioral Intentions

Word of Mouth

Profits
Sales

McGraw-Hill

2000 The McGraw-Hill Companies

Figure 17-6

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The 80/20 Customer Pyramid

What segment spends more with us over time, costs less to maintain, spreads positive word of mouth?

Most Profitable Customers

Best Customers

Other Customers
Least Profitable Customers

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?

McGraw-Hill

2000 The McGraw-Hill Companies

SM

Figure 17-7

The Expanded Customer Pyramid

Most Profitable Customers

Platinum Gold

What segment spends more with us over time, costs less to maintain, spreads positive word of mouth?

Iron
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?

Lead
Least Profitable Customers

McGraw-Hill

2000 The McGraw-Hill Companies

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Key Drivers

Figure 17-8

The Key Drivers of Service Quality, Customer Retention, and Profits

Service Encounters
Service Encounter

Service Encounter

Service Quality
Service Encounter

Behavioral Intentions

Customer Retention

Profits

Service Encounter

McGraw-Hill

2000 The McGraw-Hill Companies

Figure 17-9

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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
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

% Loyalty % Intent to Switch # Customer Referrals # Cross Sales # of Defections

Innovation and Learning Perspective Number of new products Return on innovation Employee skills Time to market Time spent talking to customers

McGraw-Hill

Adapted from Kaplan and Norton

2000 The McGraw-Hill Companies

Figure 17-10

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Service Quality Spells Profits

Costs

Defensive Marketing

Volume of Purchases Price Premium

Margins

Service Quality

Customer Retention

Word of Mouth

Profits
Sales

Market Share

Offensive Marketing

Reputation

Price Premium
McGraw-Hill 2000 The McGraw-Hill Companies