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October 1996 Volume 1.3
Cost has attributes too
Ray Kordupleski
Guest Column In 1987 AT&T, the United States long
distance phone company, made a breakthrough with our customer satisfaction
surveys when we added a cost question. I was able to use the analysis
coming from this research to make a direct linkage through to the
market share fall occurring at that time. Using my analysis, the
company was able to turn the situation around. The Wall Street Journal
in its July 21 1989 edition with a headline of, "Firm Posts
Record Earnings, Long Distance Strength", reported that
for the first time since MCI had been competing against AT&T
in the long distance market, a 7% gain in revenue had been achieved
by AT&T. I have since applied these same techniques in a wide
range of manufacturing and service industries in several countries.
Over the years I have come to understand the complexity of the cost
question, as customers weigh up quality and cost, before making
their purchasing decision.
Price attributes range from factors such as the time
payment is made through to penalty payments associated with hire
purchase. One example coming from my work relates to paying for
airline tickets.
A ticket can be paid for by cheque or credit card.
There are even some airlines that only accept payment by credit
card or by deposit into a bank account. A special fare might apply
if the ticket is paid for 21 days before the flight. An extra charge
for cancellation insurance might be possible. The ticket can be
fully refundable, or perhaps only used as payment towards a higher
priced fare. Service attributes can also drive perceptions of cost.
The service provided by a travel agent to ensure that a clients'
travel needs are matched to the right travel product and price options
will also drive perception of cost. All of these factors form the
subattributes that customers use to weigh up the cost of the service
provided by one airline, with the cost of the service provided by
its competitors.
I now include questions tracking the attributes of
cost in the Customer Value research that I develop for my clients.
When we come to do econometric analysis, the addition of the right
cost questions means we get an 80% model fit. This confirms that
we have a robust tool to guide managers in making decisions that
optimise business results.
RK
(Ray Kordupleski is the President of Customer Value
Management Incorporated, based in New Jersey, USA. His consulting
work takes him to locations throughout the United States, Canada,
Brazil, Great Britain, Australia, and New Zealand. His current clients
include companies in the telecommunication, airline, banking, energy,
and white goods industries.)
What does the Internet
cost?
Last month we looked at how four Internet Service
Providers (Companies W, X, Y, and Z) might be placed on a Value
Map with regard to the Relative Total Quality (RTQ) and the Relative
Competitive Price (RCP) they provide for their customers. Let's
focus on the way these services are charged. These factors form
the attributes of cost (RCP) discussed in Ray Kordupleski's article.
The "companies", "services", and
the metrics described in this article are for illustrative use only.
Customers receiving service from Company W pay a connection
fee of $50 and a flat monthly charge. The $30 monthly charge is
paid in advance at the start of each month by direct debit. If you
do not have a bank account or credit card, it is not possible to
get service from this company. Bills are e-mailed a few days before
the payment date, and clearly show the single monthly charge.
Company X charges customers a connection fee of $30
and a time based charge of $2.50 per hour. Because charging is on
a usage basis, it occurs after the customer has used the service.
Company X has arranged for a phone company to do its billing. The
usage charges are shown as a line item on the phone bills. This
approach has the benefit of being simple for customers to pay, but
the disadvantage of having the charges surrounded by unrelated billing
items. As the bills are sent out monthly, the first usage on any
account will have taken place 5 weeks earlier. This is a long time
for customers to remember. Any attempt to add more usage detail
would be lost in the myriad of other information included on the
bill.
As Company Y charges for service on a flat rate basis
of $44 per month, it is able to charge in advance. It posts out
statements 7 days before the end of each month and requires payment
by the start of the following month. The straight forward charging
is reflected by the simple clear bills provided. A 20% discount
is available for service paid 12 months in advance.
The mix of charging for service at $16 per month and
by data transferred drives quite a complex billing arrangement for
customers of Company Z. Different charges apply for 3 time zones
during the day. Part of the charge is in advance (service), while
some of it is in arrears (data). The bills only provide detail on
the volume of data in megabytes by time zone. They do not provide
details on when the service was used. Customers must mail back a
cheque to the company immediately on receipt of the bill. Some months
a reminder statement is sent out 3 days after the bill, while other
months the statement is not sent even if the bill is unpaid after
3 weeks.
Analysis of these factors reveals the attributes they
fall into. Payment by cheque or credit card are types of payment
options, while flat rate or time charging are the charging
basis. The level of connection fee is another component
of the overall cost. Whether customers pay in advance or in arrears
constitute the payment terms. There is far more to price
perception than just the price of the service charge.
We can map these attributes as a cost tree to understand
better how they fit together.
Relaxing stopover
I've discovered an ideal place to break the journey
from Hamilton to Auckland. At Rangiriri the Battle Site Cafe serves
scrumptious toasted sandwiches and has a bottomless cup of coffee.
Ideal to sip in the courtyard soaking up the sun while watching
the birds and sheep.
Regards,
Rodger Gallagher
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