| In contrast, the higher margins obtained from the closer relationships continue to offset the eroding margins. Under such conditions, friends and partners become more important to maximizing the value of a company´s overall customer portfolio. The results also reveal an important timing issue regarding investments in relationships. Up through the middle market periods, companies must continue to invest in building acquaintance relationships as a basis for building more profitable friends and partners. After a point, however, investments in acquaintances should decrease and the focus should shift to creating closer relationships with customers.
High Touch versus Low Touch Services
Another important implication of economic growth is that more people, at more income levels, can afford more and more services. As service economies develop, market segmentation increases, and "high touch" or people-intensive four- and five-star restaurants and hotels complement more value or price driven offerings. However, higher touch services, such as a Four Seasons Hotel, are imminently less scalable than are lower touch services, such as a McDonalds. Indeed, one of the biggest human resource needs in today´s Asian hospitality industry is for front-line service people who can provide service excellence.
The major difference is scalability. The higher touch the service or more people intensive, the longer it takes to grow the enterprise and the lower the overall economies of scale. To help understand how these different service offerings should manage their customer portfolio, we compare the results in Figure 1, which are akin to low-touch scenario, with a high-touch scenario in Figure 3 that involves significantly lower economies of scale (a 20% reduction in unit cost over time in Figure 3 versus a 50% reduction in Figure 1).
The main effect of the change is a shift in the value of acquaintances visà-vis friends and partners in the customer portfolio. Lower economies of scale reduce a company´s ability to create value through volume or a large number of churn customers, and increase the importance of creating closer relationships with customers. Friendships, which entail a greater investment in creating customer satisfaction, trust, and brand equity, are as important as the more populated acquaintance segment of the portfolio. Taken together, friends and 13 partners contribute more to cash flows than do acquaintances. The implication is that the more high touch the service, the greater emphasis there should be on building closer relationships with customers.
Figure 3: High Touch Services with Lower Economies of Scale
The Diffusion of Service Innovations
A question that often arises in a service economy is what is the next "hot" restaurant, hotel, or club in a given market? Today´s technology allows customers to share experiences, or spread word-of-mouth, much more rapidly than in the past. This has lead to a growth in customer generated media (such as blogs), which accelerates the diffusion of new service concepts in Asia. The diffusion process underlying the scenario depicted in Figure 1 approximates a more traditional diffusion process. In order to examine a market dynamic that involves an accelerated diffusion process, consider a scenario where the word-of-mouth parameter in the underlying diffusion component of the CPLV model increases 200%. The results are presented in Figure 4.
Figure 4: Rapid Diffusion of Service Innovations
First and foremost, the results suggest that while a diffusion process may accelerate, it still takes time for acquaintances to become friends, and friends to become partners. As a result, the pattern of cash flows from different relationships is more complex. Unprofitable acquaintances become quickly profitable with rapid diffusion. Yet, the contributions from acquaintances stall and surge over time as relationships evolve. |