The Financial and

Economic Impact of Service

Chapter 18
 Objectives
 This chapter’s objectives are to:
 1. Identify the effects of service on profits.
 2. Show how service can affect the attraction of new
customers.
 3. Show the role of service in keeping customers.
 4. Discuss the service drivers of overall service
quality, customer retention and profitability.
 5. Discuss the balanced performance scorecard.
 6. Describe how strategy maps are used in
implementing the balanced performance scorecard.
Service and Profitability: The Direct
Relationship
 Managers first became interested in the relationship
between service and profitability in the 1980s, when
service quality became an important competitive
strategy.
 Many research studies have been conducted into this
potential relationship. (Insert Figure 18.1 below).
 Figure 18.1
The Direct Relationship between
Service and Profits

Service
? Profits
Offensive Marketing Effects of Service:
Attracting More and Better Customers
 Through offensive marketing, service quality can
help firms to attract more and better customers.
 As shown in the following figure, offensive
effects include:
 Market share
 Reputation
 Price premiums
 The figure illustrates that when service is good,
companies are able to gain a positive reputation,
and through this a higher market share and the
ability to charge more than its competitors.
 Figure 18.2
Offensive Marketing Effects of
Service on Profits

Profits
Service
Market
share

Reputation Sales

Price
premium
 Defensive Marketing Effects of
Service: Customer Retention
 When a firm uses defensive marketing, the
approach aims to keep the customers a
firm already has.
 The following figure shows the four
defensive marketing effects of service on
profits:
 Lower costs
 Volume of purchases
 Price premium
 Word of mouth
 Figure 18.3
Defensive Marketing Effects of
Service on Profit

Lower
costs

Volume of Margins
purchases
Customer
Service
retention Price
premium

Word of
mouth
Profits
 Customer Perceptions of Service
and Purchase Intentions
 The link between customer satisfaction, service
quality, and increased purchases is apparent.
 There is also evidence showing that customer
satisfaction and perceptions of service quality affect
consumer intentions to behave in other positive ways.
(Positive word of mouth, increased purchase volume,
etc).
 Relationships have also been discovered
between service quality and specific behavioural
intentions, as shown in the following diagram.
 Figure 18.4
Perceptions of Service,
Behavioral Intentions, and Profits

Lower
costs

Volume of Margins
purchases
Customer
Retention Price
Behavioral premium
Service Intentions
Word of Profits
mouth

Sales
The Key Drivers of Service Quality,
Customer Retention, and Profits
 It can be extremely useful to managers to
identify the specific drivers of service
quality that relate to profitability.
 Once these drivers have been identified, firms
can better understand what aspects of service
quality will be most influential to the
relationship, and therefore where resources
should be invested.
 Figure 18.5
The Key Drivers of Service Quality,
Customer Retention, and Profits
Service Service
Attributes Encounters
Service
encounter

Service
encounter
Service Behavioral Customer
Quality Intentions Retention Profits
Service
encounter

Service
encounter
Company Performance Measurement:
The Balanced Performance Scorecard
 Balanced performance scorecards – strategic
measurement systems that capture areas of
performance other than traditional indicators
such as profit and sales.
 In addition to the financial perspective, the
balanced performance scorecard also captures
the customer, operational, and learning
perspectives.
 The balanced scorecard combines these elements in
a single report, allowing managers to view all
measures together.
Changes to Financial Measurement
 One way that service managers are
changing financial measurement is by
measuring the effect of retaining and
losing customers.
 The monetary value of retaining customers
can be identified, as well as the lost revenue
from customer defections.
 By identifying the value of a loyal customer,
companies are able to measure increases or
decreases in revenue from retention or
defection of customers.
Customer Perceptual Measures
 Customer perceptual measures can be leading
measures of financial performance.
 Perceptual measures reflect customer beliefs and
feelings toward the company and its services, and are
a predictor of how the customer will behave in the
future.
 A decline in overall service perceptions and
expectations, customer satisfaction, perceptual
measures of value, and behavioural intention
measures could result in lost revenue.
 Operational Measures
 Operational measures involve the
translation of customer perceptual
measures into the standards that must be
set within the company in order to meet
customer expectations.
 The balanced scorecard approach requires
that these operational measures stem from
the business processes that have the greatest
effect on customer satisfaction – customer
defined standards.
 Innovation and Learning
 This area of measurement involves a
company’s ability to innovate, improve,
and learn.
 This can be accomplished by launching new
products, creating more value for customers,
and improving operating efficiencies.
 Innovation and learning is very difficult to
measure, however this can be accomplished
by using performance-to-goal percentages.
 The Balanced Scorecard in
Practice
 The balanced scorecard has been used not only
in corporations, but also in government and not
for profit organizations.
 One example of its use is presented by the University
of Virginia Library, where the scorecard was used as
a management tool, allowing the health of the
organization to be evaluated.
 The library was able to identify areas in which it was
doing well, as well as areas that required attention.
 Strategy Maps to Enhance
Balanced Scorecards
 A strategy map is a single page visual
representation of a firm’s strategy, allowing the
company to utilize the balanced scorecard more
effectively.
 The strategy map links the four perspectives of
the balanced scorecard, showing the cause-and-
effect relationship among them.
 This mapping process helps to identify any categories
in which management has not thought through
strategies.
Effective Nonfinancial Performance
Measurements
 Many companies do not identify and act
on the appropriate nonfinancial
measures.
 One study identified four major mistakes
that companies often make:
1. Not linking measures to strategy.
2. Not validating the links.
3. Not setting the right performance targets.
4. Measuring incorrectly.
 Not Linking Measures to Strategy
 Insert Figure 18.9
 Summary
 Through the use of a conceptual framework,
the following variables are linked:
1. Direct relationship between service and profits;
2. Offensive effects of service quality;
3. Defensive effects of service quality;
4. The relationship between service quality and
purchase intentions;
5. Key drivers of service quality, customer retention,
and profits.
 Self-Test
 Online Learning Centre Self-Test