MANAGING CUSTOMER COMPLAINTS THROUGH CUSTOMER SEGMENTATION

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1 MANAGING CUSTOMER COMPLAINTS THROUGH CUSTOMER SEGMENTATION Ali Guler Yildiz Technical University Department of Industrial Engineering Istanbul, Turkey Tuncay Bayrak Western New England University Department of Business Information Systems 1215 Wilbraham Rd. Springfield, MA, 01119, USA Phone: ABSTRACT Customer buying behaviors and expectations have changed greatly. Changing customer behaviors should be correctly understood and interpreted to meet business goals and objectives. To better understand the true value of customers marketing managers often segment their customers. To provide appropriate levels of service to each customer segment, customer segmentation should be done based on clear business objectives. The purpose of this research is to evaluate customer complaints through the analysis of data in order to minimize customer complaints and maximize customer satisfaction by shortening the duration of after-sales service. Keywords: Customer Satisfaction, Customer Complaint, After Sales-Services, Customer Segmentation. INTRODUCTION Customer buying behaviors and expectations have changed greatly. Changing customer behaviors should be correctly understood and interpreted to meet business goals and objectives. In other words, to be a customer-centric business, companies should understand the true value of their customers. Companies having difficulty understanding their customers won t be able to successfully fulfill their customers needs, capitalize on them, and create long-term competitive advantage. Further, in today s competitive environment treating every customer the same way may lead to negative consequences. Hence, understanding customer value and realizing that each customer is different is essential for firms competing in various industries. To better understand the true value of customers, marketing managers often segment their customers. By segmenting their customers companies are able to better address their customers needs and provide products and services that are most relevant to each customer

2 segment. By understanding what segment delivers the most revenue firms can maximize customer value and satisfaction. To provide appropriate levels of service to each customer segment, customer segmentation should be done based on clear business objectives. In addition, one would agree that segmentation should lead to improved after-sale service performance and customer satisfaction which may be realized by offering uniquely appealing products and services and focusing on customers with the greatest potential for profit. It is an undeniable fact that after sale-service quality influences customer satisfaction, which in turn plays an important role in achieving a competitive advantage. An important factor for improving after-sale service quality and customer satisfaction is to effectively manage complaints by dissatisfied customers. Further, various opportunities for companies may lie in finding out what the customers complain about. For instance, product or service improvement may be realized through the analysis of customer complaints. Hence, improving after-sale service quality and managing customer complaints effectively and acting accordingly will allow the company to keep the existing customers and make new ones. Thus, the purpose of this study is to analyze and evaluate customer complaints in order to better manage them and to maximize customer satisfaction by shortening the duration of after-sales service time. LITERATURE REVIEW Customers are the most important asset of any company. As pointed out by Kotler and Keller (2006), what should be made, when, for whom, and whether or not the company will survive is determined by the customers decisions. Consequently, customers decisions will determine the ultimate success of the company. However, customers decisions are usually influenced by after sale service quality and how their complaints are handled. For instance, it has been proposed that effective and customer-centric after-sale customer service plays an important role in retaining the existing customers (Wouters, 2004). Similarly, Kim et al., (2006) suggest corporate success depends on an organization s ability to build and maintain loyal and valued customer relationships through after sale service quality. Dennis and Kambil (2003) agree and suggest that service management is the new frontier of competitive differentiation and profit enhancement. Numerous studies suggest firms can capitalize on complaints by dissatisfied customers through after-sales service management. An essential part of after-sale service management is effective consumer complaint handling which has been shown to increase customer satisfaction and build long-term relationships (Strauss and Hill, 2001). Thus, customer complaint management is becoming a critical key success factor in today's business environment (Coussement and Poel, 2008). Although complaint management is often not regarded as a profit center but as a cost center (Stauss and Schoeler, 2004), customer feedback through complaints can be used to retain existing customers, improve after-sale service quality, and generate additional revenues. Moreover, complaints by dissatisfied customers provide managers with an opportunity to learn about problems and take appropriate corrective action to ensure that mistakes do not recur (Namkung et al, 2011). Customer complaints should be valued to improve customer satisfaction and after-sales service quality. As suggested by Cohen et al., (2005) after-sales service is recognized as an important source of revenue and profit, customer acquisition and retention, and competitive

3 differentiation. Some studies such as a study by Dennis and Kambil (2003) made an attempt to quantify after sales service revenue derived from the sale of service. The authors claim that across manufacturing companies, after-sale services and parts have been shown to contribute about 25 percent of all revenue, but 40 percent to 50 percent of all profits. Customers usually complained about a product or a service if they are not satisfied with an attribute of their product or service. Customers are likely to complain at any service stage following a service failure (Namkung et al, 2011) and, as pointed out by Barlow and Moller (2008), the most important reason customers complain about a product or a service is that they believe that corrective action will be taken. Thus, the firm should create a belief that if customers complain they will receive justice (Buttle and Burton, 2002). Although, as suggested by Cohen et al., (2005), a goal of a firm s after-sale services is to maximize the benefit their customers derive from ownership and use of the products they have purchased, the design and management of the after sale service may be a challenge for firms. For instance, providing after-sale service involves costs such as the cost of parts consumption, fault diagnosis, material handling, transportation, and repair (Cohen et al., 2005). More importantly, managers should be cognizant of the fact that when service failures occur, the recovery process is likely to have a greater impact on loyalty than the original service failure (Buttle and Burton, 2002). Because retaining existing custom is as a critical function for companies as acquiring new customers, firms need to assess their customers value and build strategies to retain profitable customers (Kim et al., 2006). To achive this goal, firms usually segment their customers. Customer segmentation is usually designed to increase customer value or profitability through careful customer targeting (Hwang et al. 2004). Hence, the goal of separating the profitable segments of customers from non-profitable ones is to be able to differentiate marketing activities toward these activities (Jonker et al. 2003). Market segmentation is inherently a multicriterion problem (Liu et al., 2010). However, to effectively segment customers IBM corporation proposes What, Whom and How as three key factors in delivering customer value (Liu, 2001). Chan (2008) elaborates on the model and suggests that when segmenting customers, it is important to consider what value should be delivered to customers, which customers value should be delivered to, and how to identify and contact suitable consumers. Scope of the Research and Method RESEARCH METHODOLOGY This study was conducted at Oztiryakiler Inc, located in Istanbul, Turkey ( It s one of the largest industrial kitchen appliance and equipment manufacturers in Turkey which exports its products to 100 countries and is one of the top 500 exporters. In this study, we analyzed a total of 3108 customer complaint reports received by the company in the years 2009, 2010, and However, we had to exclude 474 out of 3108 pieces of customer complaint data from the study as they contained incomplete information. It should be pointed out that some of the complaint reports analyzed in this study contained

4 information about multiple products. The variables of interests in this study include a customer name, a defective product name, the number of defective products, the cost incurred by the customer to have the defective products repaired, the arrival date of the complaint by dissatisfied customers, and the total sales. Data collected at Oztiryakiler Inc., was analyzed using the commercially available software package PASW Statistics 18.0 and Excel. The products customers complain about are classified into two groups. The two groups consist of pots-pans, and electronic devices. Customers report their complaints about a product via telephone or and the customers usually wait a week after delivery of a defective product. On the first day of a week the product arrives at the company, a report is prepared and the product is sent to the service area where it waits in queue to be repaired. It usually takes a day for the serviceman to start repairing the product. It sometimes takes three days to start repairs after receipt of the product. This process often creates idle time. Because it takes a day to repair a product, the product is sent to the warehouse on the fifth day. Once the final report is prepared, the customer is notified via telephone or . DATA ANALYSIS AND RESULTS Despite the company s high ranking with respect to the quality of its products, it s realized that the company could improve customer satisfaction and after-sale service quality by segmenting its customers and by analyzing complaints by dissatisfied customers. In the following sections, we report on our analysis and findings. We should point out that in this study we used the Turkish Lira (TL) as the basic monetary unit. We first analyzed how many products customers complained about and how much customers had spent having the products repaired. Table 1 summarizes this analysis. Table 1. Months, the number of defective products and the costs to the customers in Turkish Lira (TL). Months Total Number of Products Total Amount , TL , TL , TL , TL , TL , TL , TL , TL , TL , TL , TL , TL As seen in table 1, the company received the highest number of complaint reports about defective products in the months May, August and October, respectively. However, the

5 company generated the highest amount of revenue reparing the defective products in the months August, September, and October, respectively. We then wanted to see the same information by year. Customers had to incur some cost as the majority of the products they complained about were out of warranty. Table 2. Years, total number of defective products and the costs to the customers. Years Number of defective products Total amount , TL , TL 2011(first two months) , TL Table 2 summarizes the total number of defective products customers complained about and how much they had to spend having the products fixed. As seen, the company was able to generate some revenue repairing the defective products. For instance, it repaired 4710 units of products in 2010 and generated 104, TL. It repaired a fewer number of products in 2010 but was able to generate more reveue in the same year. The number of defective products are also put into two main categories; pots-pans and electronic equipment. While customers complained more about electronic equipment than pots-pans, the company was able to generate more revenue repairing the pots-pans. Table 3. Type of defective products, number of defective products, and cost to the customers Type Total complaints Total costs Electronic Equipment , TL Pots-Pans , TL Total , TL As seen in table 3, customers complained about 4028 pots-pans and 4580 electronic equipment, a total of 8608 defective products. Customers had to pay 183, TL to have the pans-pots repaired. Similarly, it cost the customers 123, TL to get the 4580 electronic equipment repaired. Having analyzed the defective products by type, we were also interested in discovering the total revenues generated by the company selling products to those customers who were dissatisfied with some of the products. Table 4 illustrates how much revenue the company generated by year from the customers some of whom reported complaints about some products. For instance, in 2009 the company sold products worth 9,713, TL to the customers who reported some problems with various products. Table 4. Total sales to customers who complained Year Total Sales ,713, TL ,073, TL 2011(first two month) 3,047, TL

6 Figure 1. RFM analysis based on the number of products Figure 1 shows a screenshot of the analysis of the number of the products about which a complaint is reported. Customers are given scores of 2, 3, 4 and 5 and divided into groups. When giving these scores, the lower and upper limits for each group were taken into consideration. Figure 2 summarizes the result of this analysis. Number of Products in Each Segment Segments Figure 2. RFM analysis of segments and the total number of products in each segment Figure 2 illustrates the numbers of complaints reported by the customers in each group. For instance, the number of complaints reported by the customers in group five is Looking only at the number of defective products does not really help us draw meaningful conclusions. We should also look at the number of customers in each segment

7 Table 5. RFM analysis summarizing the number of customers in each segment Scores Customers Table 5 shows that there are 201 customers in the second segment, 349 customers in the third segment, 203 customers in the forth segment, and finally 35 customers in the fifth segment. Therefore, we can conclude from these data that there are 128 (4468/35) defective products per customers in the fifth segment, 12 products per customer in the fourth segment, 4 products in the third segment, and 1.5 products in the second segment. Looking at the number of products alone to segment the customers won t be enough. We need to include the total sales amount and the number of products in the analysis to reach more definitive conclusions. Figure 3. RFM anaylysis by sales amount Figure 3 shows that customer segmentation is made based on the size of the total sales amount, and the customers are divided into five groups of clients 1, 2, 3, 4 and 5. Figure 4 summarizes this analysis

8 Total Sales 12,386, TL 7,033, TL 3,001, TL 1,401, TL 11, TL Segments Figure 4. total sales made to the customers in each segment Figure 4 illustrates how much revenue the company generated selling its products to its customers in different segments. For instance, the company generated 12,386, TL selling products to those in the fifth segment. Although segment five has the fewest number of customers, the company generates the highest amount of revenue from it. When we take the number of customers per segment into consideration, seeing customers and segments along with the sales made to each customer group allows us to draw more meaningful conclusions. Table 6. RFM analysis of total sales and number of customers per segment Score Number of customers As seen in table 6, there are 24 customers in the first segment, and the proportion of the sales to the number of customers in the first segment is TL (11,980.25/24). Similaly, in the second segment, the proportion of the sales to the number of customers is 6,551.09TL. The company generated the highest amount per customer by selling products to the customers in the fifth segment; 399, TL. Having segmented based on total sales and the number of producst, a similar segmentation is done to see how much the customers had to pay for the products they complained about (figure 5)

9 Figure 5. RFM analysis of the cost of the products customers complained about We segmented the products into four groups just like we did the total sales. The total costs of the defective products to the customers are illustrated in figure 6. Total Cost ,097 TL 102,248 TL 36,571 TL 16,508 TL Segments Figure 6. total cost to the customers in each segment Figure 6 depicts the total costs of the products the customers complained about. For instance, it cost 16,508 TL to the customers in the second segment. As seen, the customers in the fifth segment had to incur the highest cost (153,097 TL) to have the defective products repaired

10 Table 7. RFM analysis of customers per segment based on the cost of the defective products Score Number of customers Table 7 allows us to compute the cost incurred by each customer in each segment. For instance, each customer in the second segment incurred 69,65 TL (16,508/237) because of the defective products. It appears that segment 5 is the most profitable segment as the company was able to generate 4, TL (153,097 TL/34) per customer in segment 5. MANAGING CUSTOMER COMPLAINTS Because the company's sales in 2010 and the first two months of 2011 were less than expected, it decided to analyze its service policy, procedures, and customer complaints. Based on our recommendations, to better manage customer complaints, streamline service operations, and to improve customer satisfaction and after-sale service quality, the company decided to take the following steps. Complaints received by the company are classified according to their degree of importance to the company. Similarly, each customer in each segment is assigned a unique ID number. Customers with the greatest potential for profit are put into category 1 and customers with the least potential for profit are placed in category 5. Becuase customers in category 1 are the most profitable customers, they have a priority over any other categories and segments. Table 8. Card colors and corresponding product and customer scores Category Color 1 Black 2 Red 3 Yellow 4 Green 5 White As seen in table 8, customers are classifed based on their importance to the company. The most important and the revenue generating customers are in category 1 and the least revenue generating customers are in category 5. Based on our recommendation the company also decided to launch a web-based customer complaint management system. Customers are able to log on and report a problem with their products. To report a problem customers first must log on using their ID number assigned by the company. Based on customers ID number the system determines which category a customer belongs to and generates a card to be used by the serviceman to repair the defective products

11 As soon as a defective product is reported by a customer in category 1, the most important and profitable customers, it is given a black card, a report is prepared and the product is sent to the service area. Because of its score and importance, the product is sent to the service area without waiting for the products with similar problems. Because on average the repair process takes a day, the product is sent to the service area the day it arrives. Once it s repaired, it s sent to the finished product section. The customer is notified via telephone or e- mail. The repair process is completed in two days for this category. When a defective product is reported by a customer in category 2, it is delivered to the company, given a red card, a report is prepared, and the product is sent to the service area. Like the products with a black card, these products too are sent to the service area without waiting for the products with similar problems. However, if there is a product in queue reported by a customer in category 1, then these products wait to be repaired. The repair process may begin on the day the product arrives or it may be repaired next day, depending on the number of products waiting in queue. Once it is repaired, customers will be notified. The total processing time may vary between 2 and 3 days for the products in this segment. A similar process is followed for the products reported by the customers in category 3 but the total processing time may vary between 3 and 4 days. Products reported by the customers in category 4 take about 4-5 days. And finally, products reported by customers in category 5 may take 5 days to be repaired. The aforementioned stages are illustrated in figure 7. Identify Customer Category -Customer Log in -Report a problem Issue a ticket Product is sent to the service area Sent to the finished product area Notify customer Figure 7. Stages of Complaints Management CONCLUSIONS The major contribution of this study is that through this analysis, the company was able to identify its customers with the greatest potential for profit and launch a Web-based customer complaint management system. Further analysis showed that errors that occur as a result of misuse make up 95% of the total errors. To avoid this problem, the company decided that

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