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Chapter 17
THE FINANCIAL AND
ECONOMIC IMPACT OF
SERVICE QUALITY
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Figure 17-1
The Direct Relationship between
Service and Profits
Service
Quality
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?
Profits
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How Quality Generates
Profits
• Is it always worthwhile to spend more on
improving the quality of one’s goods and
services?
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•
•
•
•
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)
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However
• Not the same for all firms and industries
• Relative importance of each of these factors
varied widely across different industries
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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
–
–
–
–
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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
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Measuring the Effects of
Quality
• Can/should it be measured
• Must manage limited resources and direct
spending where it most counts
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Offensive and Defensive
Marketing
• Offensive --- marketing used to attract more and
better customers
• Defensive---marketing used to prevent customer
defection
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•
•
•
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The Value of New
Customers (Offensive
Marketing)
Quality attracts new customers
W-O-M
Personal referrals
“Willingness to recommend”
Enthusiastic testimonial
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Figure 17-2
Offensive Marketing Effects of
Service on Profits
Service
Quality
Profits
Market
Share
Reputation
Sales
Price
Premium
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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.
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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
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Figure 17-3
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Defensive Marketing Effects of
Service on Profit
Costs
Service
Quality
Customer
Retention
Volume of
Purchases
Price
Premium
Word of
Mouth
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Margins
Profits
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Figure 17-5
Perceptions of Service,
Behavioral
Intentions and Profits
Costs
Customer
Retention
Service
Behavioral
Intentions
Volume of
Purchases
Margins
Price
Premium
Word of
Mouth
Profits
Sales
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Three Issues Emerge---
• All customers treated the same?
• What aspects of services should focus on?
• Measurement issues?
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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
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Figure 17-6
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The “80/20” Customer Pyramid
Most Profitable
Customers
Best
Customers
Other
Customers
Least Profitable
Customers
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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?
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Figure 17-7
The Expanded Customer Pyramid
Most Profitable
Customers
Platinum
What segment spends more with
us over time, costs less to maintain,
spreads positive word of mouth?
Gold
Iron
Lead
Least Profitable
Customers
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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?
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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
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Key Drivers
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Figure 17-8
The Key Drivers of Service Quality,
Customer Retention, and Profits
Service Encounters
Service
Encounter
Service
Encounter
Service
Quality
Behavioral
Intentions
Customer
Retention
Profits
Service
Encounter
Service
Encounter
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Measurement Issues
• Traditional measures relied on profit, sales,
and return on investment
– must look at both costs of quality and returns
on quality
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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
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Figure 17-9
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Sample Measurements for the
Balanced Scorecard
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Financial Measures
Customer
Perspective
Service Perceptions
Service Expectations
Perceived Value
Behavioral Intentions:
% Loyalty
% Intent to Switch
# Customer
Referrals
# Cross Sales
# of Defections
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Price Premium
Volume Increases
Value of Customer
Referrals
Value of Cross Sales
Long-term Value of
Customer
Innovation and
Learning Perspective
Number of new products
Return on innovation
Employee skills
Time to market
Time spent talking to
customers
Adapted from Kaplan and Norton
Operational
Perspective:
Right first time (% hits)
Right on time (% hits)
Responsiveness (% on
time)
Transaction time (hours,
days)
Throughput time
Reduction in waste
Process quality
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Figure 17-10
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Service Quality Spells Profits
Costs
Defensive
Marketing
Volume of
Purchases
Margins
Price
Premium
Service
Quality
Customer
Retention
Word of
Mouth
Profits
Market
Share
Offensive
Marketing
Sales
Reputation
Price
Premium
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