An approach to prioritize customer-based, cost-effective service enhancements

Abstract

Service firms routinely enhance their offerings to satisfy and retain current customers and to attract new customers. We show theoretically that service improvements can be prioritized by simultaneously taking into account the likely incremental revenue (through increased customer value) and the incremental cost of making the improvement. The customer values obtained from a sample of respondents, and cost estimates obtained from managers of the service providing organization are combined to prioritize improvements using a ‘bang for the buck’ (i.e. value/cost) rule. Such a prioritization would be helpful to come up with a ‘short list’ of service improvements. The items on the short list can be evaluated in detail for their ‘Return on Quality’. The approach for prioritization is illustrated in the context of improving passenger train service between a pair of cities in India. An adaptive self-explicated approach is used for obtaining customer values and cost estimates. The customer values so elicited display substantial cross-validity.

Keywords:

• service enhancements
• customer preferences
• customer values
• cost estimates
• financial accountability

Acknowledgements

The authors thank Rahul Chaudhary, Abhisairama Reddy, and Sabari Srinivasan for data collection, Alex Makarevich for data analysis, the Initiatives on Consumer Insights, IIM Bangalore (ICI@IIMB) for financial support, and the Indian School of Business, Hyderabad (where the first author is a Visiting Professor) for secretarial assistance. The authors thank 16 senior managers from Indian Railways and the train passengers who filled out the surveys. The authors are also extremely appreciative of the constructive comments provided by three reviewers and the Editor-in-Chief on previous versions of the paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Let R' = f(V) denote (approximate) revenue R' as a nonlinear increasing function of V, the total value of the service. (For each value of V, the price for the service is assumed to have been chosen in order to maximize profit.) Let R'o and Vo denote the current values of revenue and value for the service. Because ΔV for the service improvement is very small in relation to V, the first-order Taylor series approximation yields ΔR' = R' – R'o = b (V – Vo) = b ΔV, where b is the derivative f '(V) evaluated at the current value Vo.

2. The two-stage approach can be theoretically justified analogous to the two-stage approach for new product design (Srinivasan, Lovejoy, & Beach, 1997, p. 160).