Customer Service Matched with Customer Margin

Take a look at these news stories

 

The first one is about a tech startup, Backup My Info

We love working with all of our clients, especially the smaller ones, but if we find ourselves spending all of our time helping the small customers get started with our service, we will not be able to grow into a $5 million-a-year business — or even remain profitable.

The second one is about Iron Man XC,

XC provides its 25 athletes with what it refers to as “high-touch” service: breakfast with the pros, a seat up front at the welcome banquet, Ford (a dedicated handler) at your disposal. He books your travel. He’ll find out your favorite snack is Oreos and have a pack waiting in your suite.

For non-XC athletes, a bike tune-up requires a sweaty, anxious wait at an overburdened cycling shop and lost sleep over whether a year of training will be lost to some stoner bike mechanic who fails to true a wheel. Not so for XC guys. Expected wait time: zero.

Was Backup My Info wrong to offer same great service to all customers regardless of what they spend with them?

What about Iron Man XC? Don’t you think the non-XC athletes who trained the whole year would love to have great mechanic service (with zero wait)? Why aren’t they offered the same great high touch service?

Customer Service and loyalty publications are rife with advice on how crucial it is to delight your customers, go the extra mile, keep them happy etc.  But such an advice is pointless or even downright dangerous in leading businesses down path to destruction. A generic one size fits all advice to provide same great service and experience to all customers is wrong.

The starting point of any marketing strategy is customer segmentation – finding out the needs of different customers, what alternatives are available them to fill those needs and what are they willing to pay for a service that offers to fill those needs.

For sure everyone would love to be treated as XC athletes if offered at same low price. But – if that high tough experience is not what they are hiring the product/service for or have no willingness to pay for such a service then it makes no business sense to offer that to them.

If you cannot charge for it you should not be offering it. That does not mean you start with same great customer service for all and try to distribute your costs as price to customers. You start with which customers value the service, find out what they are willing to pay and deliver that at costs that generate profit from each customer (Customer Margin).

Customer Margin is the total revenue a customer generates (from all transactions) less the cost to acquire and serve them.  You want a mix of customers that deliver positive customer margin – delivering same great service to all is not the way to get there.

2x2_revenue_cost2

Do you know your customer margin?

Other readings:

  1. Pricing the Customer’s Experience by Wim Rampen
  2. Beating Customer Expectations – An Experiment

 

Do you have to enchant your customers to gain loyalty?

What does it take to gain customer loyalty?
Beating their expectations is one way. But by how much?
Do you have to beat their expectations by a mile?
Do you have to forgo profits in the form of lower prices and higher service?
Can your business profitably beat customer expectations?For any marketer trying to gain customer loyalty in the form of repeat purchase, these are valid questions. After all there is no point in gaining loyalty of customers at the expense of profit.This article is about answering these questions using consumer behavior research.

Background and Hypotheses Development

Sometime back Tom Hulme sent me a tweet on his experience with Nespresso. Tom enjoyed using  his Nespresso machine but one day the water container broke. Tom said,

Did Nespresso price its part correctly?
Did it have to price it so low to gain loyalty?

I posited that Nespresso gave away too much, priced it incorrectly and should have given choices.

These discussions  led me to propose the  following two hypotheses

H1: Brands do not have to beat customer expectations by too much. They can get the sameeffect by beating it just enough.

H2: When customers are given choices at different price points, they will self-select themselves to the right version and will exhibit same loyalty as those receiving large price discount.

The loyalty here refers to attitudinal loyalty as there is no easy way to measure behavioral loyalty.

Experiment Design

I designed a between groups experiment to measure the difference between the stated attitudinal loyalty of different groups.  There are four groups in this experiment, all of them are filled in on Nespresso and were primed with a fixed willingness to pay of $30.

Since customers do not not what they are willing to pay and some of my experimental subjects may not know the cost of parts I used the price of $30 to normalize their willingness to pay.

Different groups were given different price rent by quoting them different price for the replacement part.

Group A:   WTP = $30, Quoted Price = $2.99
Group B:   WTP = $30, Quoted Price = $25.99
Group C:   WTP = $30, Quoted Price = $19.99
Group D:   WTP = $30,  Choices: Basic $9.99, Exact $19.99, Premium $28.99

Group B and Group C are similar but test different price points.

I designed the experiment using survey format (thanks to SurveyGizmo and its very powerful split testing functions) and ran it as a survey on people in my network and bunch of MBAs from Haas School of Business, Berkeley.

Respondents were asked to state their likelihood of repurchase  on a 6 point scale (a measure of loyalty). I also asked them to rate their likelihood to recommend the brand to others, more on this later.

Results

For testing the first hypotheses I compared the sample mean using 1 tailed t-test.  Between Group A ($2.99)  and Group B ($25.99) there was statistically significant difference (p=0.023) between the two samples. This could mean that beating customer expectation by a mile, in the form of very low price will have higher effect on loyalty than beating customer expectation just by a foot.

Between Group A ($2.99) and Group C ($19.99), the difference is not statistically significant (p =0.243). This is a critical finding. While $25.99 was no enough, $19.99 engendered the same level of loyalty as $2.99. That is a huge price difference. Brands do not have to give away the farm in  the name of loyalty. This also points to lost profit opportunity for Nespresso.

Next  let us take the second hypothesis that choices and self-selection (Group D) would perform at least as good as giving steepest price discount (the $2.99 option Group A).

Comparing sample means show there is statistically significant difference between mean likelihood ratings of Group A and Group D (p = 0.014). This is a big surprise for three reasons.

For one thing, when customers were given choices and self-select themselves to the version they prefer, they are more likely to feel ownership and increased utility.

Second, this Group was offered the same $19.99 price for the “Exact Match” version. This was the only option offered to Group C. While Group C showed no difference from Group A, this group did. Presence of choice negated any positive effect from $19.99 price.

Third,  if we looked at the sub-group  that chose the lowest priced Basic version ($9.99), there still is statistically significant difference between this sub-group and Group A.

One conclusion we can make is that presence of options for replacement parts causes customers to incur cognitive cost that is reflected in the form of low loyalty rating.  However, this requires further consideration before casting aside versioning.

One interesting corollary is the correlation between loyalty measured as intention to repurchase and likelihood to recommend. As I stated before, I asked respondents to rate both. There is very high correlation (0.99) between the two metric. Likelihood to recommend is not a better measure as contend.

Marketing Implications

Loyalty does not have to mean “delighting, enchanting, astonishing” customers. You can beat customer expectations by just enough. This is attitudinal loyalty and may not translate into behavioral loyalty. So in general using price discount to generate future sales is not recommended.

Statistical significance does not mean economic significance. The mean loyalty rating for lowest price group was 4.4 vs. 3.68 for $25.99 group. Will gaining loyalty at the cost of $22 per customer generate more profit in the form of future purchases?

For pricing replacement parts, brands need to do Willingness to Pay studies just as they do for the full product. There is no reason to sell the replacement part at cost due to fears of customer backlash. Same principles of value based pricing apply for parts.

While multi-version pricing is effective in most scenarios, offering choices for replacement parts comes at a cost to customer (See 4 costs of versioning). While versions enable profit maximization its effect on customer loyalty needs to be considered.