The cost of service quality

Unit 4
The 3R’s of marketing

•Long term customer relationship

•Retention of customer
•Profitable recovery strategies
Relation building
• Relationship marketing refers to everything you do to
develop strong, lifelong relationships with your
customers.
• Relationship marketing includes building brand
awareness and positioning your brand as your
customers best option.
• The most important part of relationship marketing is
facilitating two-way conversations with your
customers.
Relation building
• Identify the customers who will directly or indirectly return
profit and who should therefore be targeted for service
quality initiatives
• Not only look on the historic pattern but also the future
revenue the company will get from the customers
• Why relationship?
• Revenue grows as a result of repeat purchase and referalls
• Cost declines due to lower acquisition expenses as service is being
given to the experienced customer
• Employee retention increases thereby decreasing cost of hiring
and training
• Switch from transactional to relationship marketing
 How can relationship be built
• Communicate like a human being
• Every interaction is an opportunity to build relationship
• When you start engaging with a company more than 10 times, you
naturally start building a loyal relationship with them.
• Learn about the customer
• Address customer complaints
• Stay in regular contact with the customer
• Be trustworthy with the customers
• Practice inbound marketing rather than outbound(Pull vs push
strategy)
• Inbound marketing costs 62% less per lead than outbound
marketing and is a generally considered a lead generation tool
Retention strategies

an increase in customer
retention by just 5 percent,
can lead to an increase in
profits by 25 percent to 95
percent.
• Look for the quality share of customers
• Gain in the market share may be counter productive when
the gain is at the expense of the lost customer who offered
more potential than the added one
• Avoid ‘the peanut syndrome’ i.e. increasing cost to give
customers something that they do not care about
• Linking between the profit and loyalty not just fleeting
moments of satisfaction
 gy
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Profitable recovery strategy
• Learn form the mistakes
• The level of recovery will depend upon the importance of the
customer and the severity of the error in terms of its future impact on
the relationship
• May range from ‘do what ever it takes’ to simple lip service to the
customer
• If the mistakes are not rectified then NEGATIVE WORD OF MOUTH can
have more blundering effect in retention and addition of the new
customer
• But the company should not over do during the
recovery
• Customer should not view the compensation in the
recovery as too much which may result in negative
value added in connection with future word of mouth
revenue
• Company’s cost, future revenue and customer’s
expectation level all should be taken into
consideration
Measuring the result of quality initiatives
• Traditional approach where performance evaluation is done of short
term results using the historic measures such as net income or return
on assets
• But for the quality initiatives to be significantly beneficial for the firms
takes an average of 2.5 years(As per general accounting office)
• Due to this quality initiatives expenditure are viewed as investment
not expenses
• Also the benefits from the service quality may be far reaching and
difficult to measure as accounting system shows the affect in one year
but not the program that takes three to five years longer to affect the
profit
• Accounting system only considers allocatable and monetary in nature
• Also the benefits may be indirect and non-monetary as like improved
reputation or goodwill
Total customer benefit model
Allocatability /Type of monetary Non-monetary
benefit

Allocatable • Current sales • Customer satisfaction

• Historic sales • Word of mouth
revenues
• Benefit by associations
• Reference group
affiliation

Not Allocatable • Referral sales • Loyalty/goodwill

• Repeat business • Corporate image
• Growth in sales • positioning
• Earning power
projection
The cost of quality
• The concept of measuring the cost of service quality is not new and
has the base in manufacturing sector
• Prevention cost, appraisal cost, internal failure cost and external
failure
• In service sector the cost of service quality is divided into poor quality
cost (PQC) form both customer and provider perspective i.e. indirect
PQC and direct PQC
• Direct PQC has both controllable(prevention and appraisal) and
resultant component(internal and external error)
• Opportunity cost
• Also overspending in area where it is not possible to solidify the
relationship
Cost quality in Xerox Company
• The cost of conformity(prevention and appraisal)
• The cost of non-conformity( failure to meet the
customer requirements before and after
delivery)
• The cost of lost opportunity
Linking the quality costs with the three R’s
• 3 R’s needs to be linked with the cost of the quality in order
to the effect
• Prevention cost are the investment in people, technology
that supports front line workers, revamped recruiting and
training practices, and compensation linked to the
performance at every level
• Appraisal cost incurred in the delivery of the service cannot
be assessed as in the manufacturing sector due to the nature
of the service and diverse & evolving expectation of recipient
Linking the quality costs with the three R’s
• Prevention and appraisal cost would be incurred to
satisfy the service quality objectives of building and
retaining relationships
• Failure cost relates to the recovery strategy
• May be in the form of compensation paid for not
doing it right the first time, the future forgone
revenue along with the time spent to correct the error
and deliver the apologies
 Measuring and allocating cost
Service quality costs model
Allocatability/types of cost Monetary Non-monetary

Allocatable • Discounts • Time spent with

• Samples customers
• Direct remuneration • Service quality
effort(specific)

Non allocatable • Training • Service quality

• Recruiting effort(general)
• Managers time coaching • Motivation
employees and providing • Lost goodwill
feedbacks • Aggravation or grief
• After costs are measured allocate the cost for
meaningful interpretation and decision making
• For that Activity Based costing(ABC)
• Activity-Based Costing is a methodology that assigns
resources to activities, and activities to cost objects
based on a cause-and-effect relationship.
• ABC is that costing in which costs are first traced to
activities and then to the products.
• It is a costing system which focuses on activities
performed to produce products.
• Activities are responsible for incurrence of Costs.
STEPS TO DEVELOP ABC SYSTEM

Identify activities

Determine cost for each activity

Determine cost drivers

Collect activity data

Calculate product cost

Managerial implications
Total customer benefit model
Allocability Monetary Non-
/types of monetary
• benefit
allocatable A1 A3
Not A2 A4
allocatable

Allocability Monetary Non-

/types of monetary
benefit
allocatable B1 B3
Not B2 B4
allocatable