The End of the Watering Can Principle

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1 Organization Tobias Kreß, Andreas Penkert, Carsten Schulz The End of the Watering Can Principle Every customer receives the service he deserves Nowadays companies can t offer every customer equal, best possible service quality, this would be neither economically nor appropriate. Integrated formulation for customer equity calculation serve as a basis for individualized and differentiated Customer Services. 32 Detecon Management Report 2 / 2010

2 The End of the Watering Can Principle B oth, manufacturing and service companies are operating today in an environment characterized by fundamental transformation and change: accelerated technological innovation and substantially shorter product life cycles, more complex customer needs, ever more sophisticated customer demands, and generally saturated markets. Competition has become stiffer and is putting more pressure on companies to adapt continuously to these difficult general conditions at a strategic and operational level. The professional management of lasting customer relationships was a major commercial success factor for companies long before any of this happened. The results of an OVUM customer study make this abundantly clear: 69% of the respondents stated that they would terminate a business relationship completely if the service were poor. * Consequently there are good reasons why companies are focusing on customer satisfaction more and more frequently as a key corporate goal; the growing of awareness of customer service, the main interface between companies and customers, as one of the load-bearing pillars of commercial activities is inexorable. The challenge here is to achieve economic balance between service excellence, customer satisfaction, and profitability! Standardized customer service with the best possible features for every customer as it was commonly practiced until only a few years ago is neither economical nor sensible for companies. Differentiation in the customer relationships which is oriented especially to their customer lifetime value (CLV) is evidently en vogue. The concept of customer service differentiation, i.e., the segmentation of customers on the basis of concrete (value) criteria and the provision of tailored service according to that value segmentation, has been familiar for a long time and is by no means a new trend. However, most of the models for customer value assessment as practiced in the past have been one-dimensional and based on monetary parameters. Especially, the use of the ABC analysis, the profitability analysis, and the future analysis has been very common. Since the value which a customer relationship has for a company is subject to a number of influencing factors, the focus of these one-dimensional models is too narrow. Most of the models used today by practitioners are multi-dimensional. A basic distinction is made between scoring models and customer lifetime value. The most comprehensive evaluation of a customer relationship is achieved through the use of the customer lifetime model. This model encompasses both monetary aspects and soft criteria such as the relationship (customer references and customer information). Fundamentally, this model distinguishes between transaction and relationship. The transaction essentially * OVUM: 2009 Business Trends: Consumer Preferences in Contact Center Interactions. End-user Analysis of the Contact Center Market, January Detecon Management Report 2 / 2010

3 Organization comprises the current business volume, the growth, and the cost reduction. The recommendation (reference ), customer feedback on optimizations within the company (information ), and cooperation flow into the relationship. Nowadays no one disputes that customer service, being the company s business card, represents a major pillar of corporate strategy. Caught on the horns of the dilemma of service excellence and cost pressure, enterprises must master the challenge of readjusting services within a matrix of customer value factors as well as individual characteristics and behavioral patterns of customers the qualitative properties. The offer of selective, individual service makes good sense from the customers as well as the companies viewpoint. For example, the assumption that a service level must be as high as possible in every single case is today no longer unchallenged. The belief that every customer wants detailed advice over the telephone when there is a question is also considered to be a fallacy. Customer behavior especially with respect to the performance of service has become substantially more complicated today and will become even more complex in the future, driven primarily by the advance of mobile communications media and the interactive 2.0 Generation of the internet. A future-oriented customer service strategy must be capable of dealing with the development of complex customer needs and changes in user behavior; even more, it must exploit these factors for differentiation. Companies must develop a previously unknown degree of flexibility and offer services with a sharper focus on consumers. Customer service differentiation and the provision of individualized services are the strategic response to the general conditions under which companies must operate today. Assess and characterize customers! The opinion that customer service must be differentiated more clearly and oriented to individual customer aspects if companies are to prevail in their competitive environments is broadly accepted: 97% of the surveyed participants in a recent Detecon study on the future trends in customer service agreed. In the opinion of the respondents, this sends a clear signal for the rejection of the concept of standardized customer service which gained prominence in the 1990s. The fundamental value of comprehensive and excellent customer service is also unquestioned: 89% of the participants agreed that it is a rewarding investment for the improvement of customer satisfaction and subsequently the strengthening of loyalty. The differentiation approach is followed by the thesis that in the future customer service will be Figure: Factors of Customer Lifetime Values (CLV) Customer Value (CLV) Transaction Relationship Basic volume Growth Cost reduction Reference Informations Cooperations Intensification Cross-selling Up-selling Potential from declining price elasticity Source: Elements of CLV according to Hippner basics of CRM: concepts and design by Hajo Hippner (Editor), Klaus D. Wilde (Editor) (2006) 34 Detecon Management Report 2 / 2010

4 The End of the Watering Can Principle strongly characterized by individualization and personalization. 93% of the respondents agreed with this thesis. Before companies can specifically and successfully establish differentiated customer service, they must first become thoroughly familiar with their customers, understand them, and assess them. Besides the quantitative evaluation, a qualitative analysis is especially useful here as a means of obtaining data about the expectation structures, purchasing behavior, and other individual characteristics of the customers. The customers are not the only ones to profit from the greater transparency provided by the growing information society and the technological innovation process companies also find expanded opportunities for the collection and analysis of data and information. The consolidation and structuring of extensive information through the use of appropriate support systems and processes is an integral part of modern customer feedback management. The customer profiles generated this way contain the quantitative and qualitative characteristics for the creation for a transparent evaluation basis. Value-based, but also individual differentiation of the service portfolio! Customer value is also clearly designated as a significant differentiation property in the Detecon study: 75% of the respondents believe that the type and scope of services should always be oriented to the value of customers for a company. The degree of individuality and exclusivity of services should rise from low to high customer value, starting with economical/solutionoriented basic services in the lower value segments and leading up to the premium-oriented services for top customers. These results confirm that service differentiation based on customer value is already familiar and established. But as described above, the postulate here is that the futureoriented differentiation of customer service must take another substantial step forward and include an additional, qualitative dimension. In this setting, the question regarding the criteria according to which service differentiation is already being practiced today in the surveyed companies was of great interest in the Detecon study. Indeed, the customer value-based aspects dominated here as well: customer development (73%), customer turnover volume (72%), and customer profitability (64%). Duration of the business relationship (47%), degree of customer loyalty (45%), and customers channel pre ference (42%) trailed well behind. Nevertheless, the significance of these characteristics for differentiation of customer service clearly stands out by virtue of their widespread acceptance. The differentiation approach based strictly on customer value broadly offers three different customer service strategies which can be used to serve the individual customer segment groups. Reduce costs: This strategy pinpoints in particular customers with a low or negative CLV. Because the growth has been integrated into the CLV, a low CLV means that, as things currently stand, lucrative business will not be possible with these customers in the future any more than it is today. Since the revenue side cannot be increased, a rise in customer value must be achieved in this case by reducing service costs. The possible loss of unprofitable customer relationships is deemed to be acceptable. Develop customers: In the case of customers with a high CLV resulting from great growth, the customer service strategy should build on the development of the business relationship. Current and future needs of the customers must be identified and realized so that the returns from the customer relationship develop as predicted. Retain customers: Customers with a high CLV resulting from a currently high basic volume must be retained at all costs, and their bond to the company must be strengthened. The maximum transaction has already been realized in these customer relationships. The customer service strategy in this case must seek to secure a continuation of the customer relationship with the least possible disruption. In practice, differentiation of the service concretely means that an appropriate service portfolio must be allocated to every customer profile on the basis of its value and needs characteristics, e.g.: Type of care: Self-service or individual, personal advice? Additional services free or subject to charge? Channel management: Which channel is preferred by which customers? Sales: What up-selling offers do customers receive based on their purchase interests? 35 Detecon Management Report 2 / 2010

5 Organization Besides the detailed analysis of the current situation, the future-oriented question regarding the targeted development of the customer groups must be answered: which profiles have development? Which ones are already especially profitable today or can become so in the future? Which groups have a value which is consistently too low for the company? Future-oriented service differentiation should function in multiple dimensions. The groundwork is initially laid by a valuebased differentiation of the scope of services: basic services covering needs, extensively automated, for customers with low or negative CLV who display little or no for development; excellent service with outstanding products for highvalue customers with long-term for loyalty and value development. A more detailed differentiation of the service according to the individual, soft aspects e.g., purchase offers, additional services, channel offers as recorded in the customer profiles comes into play within a service portfolio defined for a customer value segment. Specific, active channel management according to customer value and preferences! An important leverage point for increasing efficiency in customer service can be found in the expanding communications channels. Substantial for the customer service of the future can be exploited by channel utilization and allocation oriented to value and needs. Value-based: comprehensive and personal customer advice should focus on the customer groups with high profitability and great development. Customers who are currently unprofitable and are predicted to generate low turnover in the future should be managed more by using standardized service with a high degree of automation so as to keep the costs which cannot be amortized as low as possible. Need-oriented: there are many users, especially among the younger buyer groups with an affinity for online services, who 36 Detecon Management Report 2 / 2010

6 The End of the Watering Can Principle actually prefer self-service and similar facilities as interaction channels because of the greater convenience they perceive here. Based on high levels of automation and the very low utilization of personnel capacities, self-services represent the least expensive service channel for the company. Customers who have this preference should be actively managed in this channel because it fulfills their desire for fast service independent of fixed times while at the same time incurring the comparatively lowest service costs for the company. Win-win situation is the target The significance of differentiated customer service of the future is undisputed this is also confirmed by the results of the Detecon Practical example: Deutsche Lufthansa In recent years, passenger aviation has gone through a dramatic market transformation: the large full-service airlines have had to adapt to a highly competitive environment in which more and more no-frills providers are pursuing low-price strategies. Yet at the same time they must continue to serve their highly prestigious premium segment. To span this gap, they are depending more and more on service differentiation strategies such as the case in point of Lufthansa and its mobile service differentiation. The primary goal of mobile services is to expand service access to situations and circumstances in which classic communications channels are not available. Lufthansa focuses a differentiation of its mobile services according to defined target groups analogously to its customer segmentation. Target groups of mobile service at Lufthansa: a. Status customers : first class customers (Honorable Circle, Senator, Frequent Traveler) with more than 150,000 flight miles a year and business class customers (Frequent Traveler) with about 50,000 miles a year. b. Basic customers : economy class customers, Miles&More users c. Non-Members : occasional fliers who do not prefer any particular airline. Differentiation of the mobile service in the target groups: Lufthansa differentiates mobile service first by content: not every service is offered to every target group. For example, the product mobile flightrelated information service (short-notice changes for gates, departure times, etc.) is restricted to the segments Status and Basic; Non-Members are excluded. Another distinction is made according to user friendliness and com plexity: Status customers must reply simply with Y/N to an automated text message when using the mobile check-in service while Basic and Non- Members must themselves log on to WAP to access this service. study. At the moment, the aspect of economic efficiency is clearly prioritized over customer satisfaction as revealed especially in the assessment of the differentiation dimensions; the hard economic customer value factors (development and reference, profitability, contribution margin, etc.) still rank ahead of the soft topics such as customer loyalty, duration of customer relationship, and channel preference, but they also register a noteworthy degree of endorsement, clearly confirming the trend. Differentiated customer service demonstrates two types of value-generating effects; based on carefully analyzed data, services can be efficiently tailored to customer profiles. The aim is to define the ideal service portfolio for customers on the basis of their value and individual characteristics and to realize this structure in practice. Moreover, this type of differentiation provides an effective instrument for the strategic support of forward-looking management and further development of customer groups. Successful service differentiation can turn the challenge raised by the dilemma between service excellence and economic efficiency into a win-win situation: cost-efficient utilization of service resources and profitable customer groups for the company, tailored products and services and heightened satisfaction for the customers. Tobias Kress works as a Senior Consultant in the area of CRM and is a specialist in the field of financial services. He has gained his more than ten years of professional experience in positions with banks and corporate consultancies. His work focuses on CRM and customer care strategies as well as service and sales strategies differentiated according to customer value. Tobias.Kress@detecon.com Carsten Schulz is an expert for CRM and call centers. He heads the Global Competence Team CRM. His more than ten years of experience as a consultant for CRM and call centers have led him to focus his consulting work on innovative CRM and service strategies, customer care organization, and outsourcing. He has developed various loyalty concepts and built up a leading multi-partner awards program. Andreas.Penkert@detecon.com Andreas Penkert works as a Senior Consultant in the field of CRM. Before joining Detecon, he gained several years of professional experience in the areas of customer service management, contact center management, project management, and key account management. His consulting expertise covers the main points of customer service processes and management, quality management and reporting, organization of service units and restructuring, change process management, and CRM innovation. Carsten.Schulz@detecon.com 37 Detecon Management Report 2 / 2010