Realizing Market Power for Service Value Networks

algogenius (cc)

Editor’s note: we are pleased to welcome Christian Haas of the Karlsruhe Institute of Technology, Steven O. Kimbrough of The Wharton School, and Clemens van Dinther of the Karlsruhe Institute of Technology, who have published a new study on the important area of service value networks, forthcoming in the Journal of Service Research and now available in the journal’s OnlineFirst section.

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“Strategic Learning by e-Service Suppliers in Service Value Networks” is the product of an international collaboration among service science and computational economics researchers at the Karsruhe Service Research Institute (KSRI) of the Karlsruhe Institute of Technology and researchers at The Wharton School of the University of Pennsylvania. The study employs leading-edge techniques in machine learning to produce insights into strategic aspects of the operation and managment of  Service Value Networks (SVNs). These insights will be valuable for suppliers, operators, and customers, who must assess and respond to possible market failures in SVNs.  Further, the methods employed in this study are exemplary for studying other forms of e-Services markets.

SVNs are an important emerging market institution for providing e-Services. In SVNs, e-Service platform providers assemble final products from components provided by e-Service suppliers. Normally, product assembly is in real time and in is response to a customer’s expressed requirements. Salesforce (http://www.salesforce.com) is but one well-known and prominent example of an SVN e-Service provider.

As is the case for any market institution, questions arise and must be addressed regarding the performance and operating characteristics of the market in which SVNs operate. Can there be departures from pure competition? Can market power be realized and if so, how and by whom? These and related institutional operation questions have gained force and urgency since the deregulation of California’s electric power markets and the resulting debacle involving Enron and other firms. As in the case of California’s electric power markets, institutional operation questions are especially apt during the design and early implementation of a new market institution. Thus, the questions are apt for SVNs. This paper investigates just such questions and provides results concerning institutional operation questions for SVNs.

Specifically, the paper examines whether and how market power may be achieved by SVN suppliers who may learn to collude tacitly and legally. Two machine learning techniques—genetic algorithms and Probe and Adjust—are made available to supplier agents in an agent-based model of an SVN regime. In both cases we find that tacit collusion among the agents is possible, to the detriment of the SVN’s customers and to the SVN itself. Both learning regimes are simple and rely on readily available information. Thus, it is a robust finding of the study that tacit collusion is a serious risk in SVNs.  With knowledge of this possibility, however, managers can hope to diagnose and prevent such collusion when it occurs.

Bios

Christian Haas is a PhD student at the Karlsruhe Institute of Technology,
Germany. He received a Master of Science in Computer Science
from the Georgia Institute of Technology in 2008, and a Diploma in
Business Engineering from the Karlsruhe Institute of Technology in
2010. His research interests include the application of learning methodologies
in strategic contexts, incentive engineering in social networks,
and service science in general. In his PhD, he is currently
working on two-sided market mechanisms and dynamic behavior in
social collaboration systems.

Steven O. Kimbrough is Professor of Operations and Information
Management at the University of Pennsylvania. He also holds a secondary
appointment at, and is active in, the Philosophy Department
at Penn. He works as a decision scientist, with an overarching interest
in rationality and computation. His principal research areas are in procedural
(post-classical) game theory, evolutionary computation, and
applied logic. He also works in the area of text mining and analytics.
He is an inventor on three related patents in this area.

Clemens van Dinther received the venia legendi for Business Administration
from the Karlsruhe Institute of Technology (KIT). He teaches
at KIT and as a guest lecturer at RWTH Aachen. Currently, Clemens is
working at ista Deutschland GmbH as Director for Energy Management
and Business Process Outsourcing. His research interests are
in the application of electronic services, computational economics,
strategic decisions, application of learning methods, Smart Grid, and
Regulation in the Energy Sector.

Do Incentives Increase Word of Mouth?

kevin dooley (cc)

Editor’s note: We are pleased to welcome Jochen Wirtz of the National University of Singapore, Chiara Orsingher of the University of Bologna, Patricia Chew of SIM University, and Siok Kuan Tambyah of the National University of Singapore, who published “The Role of Metaperception on the Effectiveness of Referral Reward Programs” in the Journal of Service Research.

We were inspired to work on this topic due to an eye-opening incident at an advisory board meeting of an EMBA program one of the authors was a member of. The manager of that EMBA program suggested giving a high-end branded fountain pen to every alumni who would recommend this EMBA program to friends and colleagues who then would apply to the program.  To the manager’s (and author’s) surprise, the EMBA advisory board was up in arms over this proposal.  They were unanimous in stating that they want to help the program, are not in this for any kind of benefit, would recommend the program already anyway to potential participants they considered suitable, and importantly, would definitely not want to be seen to benefiting in any way from their friends’ and colleagues’ potential joining of the program. The author was familiar with the word-of-mouth literature and knew that there was hardly any research that would explain such a negative reaction to a benefit offered to current customers.  This triggered the interest to dig deeper, which then started this stream of research. The rationale of the paper and its findings are explained below.

Today, many service firms operate Referral Rewards Programs (RRP) because they assume such programs will attract new customers, in analogy to what happens with word-of-mouth (WOM) recommendations. At first glance, incentives seem to be an effective way to encourage WOM and referrals. However, they may be in conflict with the perceived objectivity of WOM; incentives provide the recommender with a stake in the receiver’s potential purchase decision and may therefore make the recommendation seem less impartial. Our study analyzes how RRPs’ affect recommendation behavior. We suggest that when recommenders are offered the opportunity of receiving an incentive for a referral, they are likely to engage in a process of metaperception, defined in social psychology as the process by which people judge what others may think of them or their behaviors. If the recommender believes that the potential receiver views the incentivized recommendation favorably, she will be more likely to make that recommendation. If not, recommendation behavior is less likely.

Our findings show that RRPs’ do not work in all circumstances. Incentives can have a positive, neutral and negative effect on recommendation behavior depending on the relative strengths of the negative indirect effect of incentive on recommendation behavior via metaperception, and the positive effect of the perceived attractiveness of the incentive on recommendation behavior. Additionally, when incentives are involved, metaperception favorability decreases more for weak than for strong ties. This suggests that in a strong tie relationship, a recommender is likely to think that a referral reward is not going to alter the judgment that the receiver has of the recommendation but that it does so for weak ties.

For practice, our findings suggests firms to avoid providing incentives to customer with high positive impression management needs and rather emphasize other benefits of providing WOM and making recommendations (e.g., “do something good for the cause”, “for your friend”, or “for the EMBA program” as shown in our introduction).  Moreover, we recommend targeting RRPs at strong rather than weak ties because of the lower negative effects of incentives on metaperception. For example, mobile phone companies could target college roommates, families with family plans. When targeting weak ties, managers should be aware that incentives need to be attractive enough to override their possible negative effect on metaperception.

Future research should focus on different distributions of incentives to see if they would help to counter the unfavorable metaperception (for example, if both the recommendation giver and recipient were to receive an incentive, then the metaperception of the recommendation might be less unfavorable). Moreover, future research should experimentally separate the face value of an incentive (i.e., its objective value) from its attractiveness (i.e., its subjective value) to the respondent. It seems likely that the face value drives metaperception, whereas the perceived attractiveness of the reward motivates recommendation behavior. If so, firms would have to become cognizant of the interplay between face value and the utility of the incentives, as increasing the face value of a reward with low utility could have a negative effect on recommendation behavior.

Unhappy Customers? Here’s How To Deal

Zach Klein (cc)

With the advent of social media, dissatisfied customers can easily vent their frustrations in a very public way. But a study published in the latest Journal of Service Research issue, and highlighted this week on BusinessNewsDaily, shows that companies can turn social media to their advantage in such situations. From BusinessNewsDaily:

“When customers can vent their frustrations directly to employees of the firm, the channel of communication between the service provider and consumer becomes much stronger, allowing for a more open conversation where both parties can create and mutually agree upon possible solutions,” said Yuliya Strizhakova of Rutgers University, who conducted the research with fellow Rutgers professor Julie A. Ruth and Yelena Tsarenko, of Australia’s Monash University. “This direct relationship also allows service personnel to provide the empathy and emotional support that customers are looking for.”

Read the article, “‘I’m Mad and I Can’t Get That Service Failure Off My Mind’: Coping and Rumination as Mediators of Anger Effects on Customer Intentions,” in the November issue of the Journal of Service Research. The abstract:

Although anger elicited in service failures harms providers, little is known about the ways customers deal with anger. Building upon stress-and-coping theory, we propose a theoretical framework that examines customer coping strategies—expressive, active, and denial—and rumination about the incident as mediators of anger on customer intentions. Across two studies and in more and less conventional service channels, rumination decreases positive behavioral intentions and increases negative word-of-mouth intentions. Customer coping strategies mediate effects of anger on rumination. Specifically, while expressive coping mediates effects of anger on rumination, active coping mediates these effects in more conventional service channels, whereas denial mediates these effects in less conventional channels. Customer tendency to ruminate moderates effects in less conventional channels. Because customers have and use a repertoire of coping strategies that differentially affect rumination and customer intentions, strategies designed to guide customers toward active coping and mitigate rumination should be the cornerstone of service recovery. If and when service failures occur, managers should encourage customers’ active coping to resolve the problem; otherwise, customers may cope by expressing their negative emotions to others or deny the episode, both of which increase customer rumination and detrimental outcomes for the firm.

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Want to Build Better Customer Relationships?

If you’d like to create a more satisfying service experience and increase customer “forgiveness” when a service encounter goes wrong, you’ll find useful tips in the latest issue of the Journal of Service Research. Jan Wieseke of Ruhr-University of Bochum, Anja Geigenmüller of the Ilmenau University of Technology, and Florian Kraus of the University of Mannheim published “On the Role of Empathy in Customer-Employee Interactions” in the August 2012 issue, offering employee- and customer-related strategies for success:

Experiencing pleasant and successful service encounters determines customers’ satisfaction with a service. Where mutual attentiveness, courtesy, and understanding are apparent in customer-employee interactions, satisfying service outcomes can be achieved. By contrast, flawed interactions may result in dissatisfaction, anger and frustration and hence impair a service provider’s attempts to deliver its services in an effective and efficient manner. This gives rise to the question how service providers can stimulate smooth and beneficial customer-employee interactions.

Service research and management support the notion that empathy is a crucial factor for successful service interactions. Yet, research on dimensions and impacts of empathy in customer-employee interactions it still in its infancy. This study conceptualizes and empirically demonstrates the impact of employee and customer empathy on customer satisfaction and loyalty. Employee empathy refers to the caring and individualized attention service employees provide their customers. Customer empathy is defined as a customer’s ability to take the employee’s perspective and to react appropriately to an employee’s thoughts and feelings.

The study reveals that customer empathy strengthens the positive effect of employee empathy on customer satisfaction, leading to more “symbiotic interactions.” The findings also indicate that empathic customers are more likely to respond to a dissatisfying encounter with “forgiveness,” in the sense that customer empathy is able to mitigate negative effects of customer dissatisfaction on customer loyalty.

Based on these results, this article suggests customer-related and employee-related strategies to create successful and valuable service encounters. More precisely, the study gives advice how to match customers and employees on the basis of a proven fit of their psychological profiles, level of empathy and preferred manner of interaction, thus implementing what is called “interaction-routing”.

Employee-related strategies involve

(1) applying candidate profiles, search mechanisms, and recruiting methods that enable firms to hire service employees capable of sensing customer expectations and fostering symbiotic customer–employee interactions;

(2) training service employees, using role plays, videotaping, or mentoring programs to enable them to “walk in the shoes of their customers” and to advance employees’ ability to sense and to react accurately to customers’ thoughts and feelings.

Customer-related strategies pertain to:

(1) the creation of customer pre-encounter profiles which allow a matching of customers and employees, enabling the customer to be directed to a frontline employee with whom he or she is most likely to experience mutual understanding and smooth interaction;

(2) the identification of suitable matches between customers and frontline employees based on customers’ ex post assessments of the interaction and communication quality in service encounters.

Read the article in the latest issue of the Journal of Service Research, and click here to receive e-alerts and get the knowledge and tools you need to cope with our increasingly service-based economy.

JSR Welcomes New Editor Mary Jo Bitner

The Journal of Service Research is proud to announce its next Editor, Dr. Mary Jo Bitner. Dr. Bitner, a highly respected professor and researcher with more than 25 years experience, is recognized for her contributions to the founding and expansion of the service marketing and management field. She is currently a Professor of Marketing at the W. P. Carey School of Business, Arizona State University. In addition, she serves as both the PetSmart Chair in Services Leadership and Executive Director of the Center for Services Leadership. Dr. Bitner will be assuming the role of editor beginning June 2013. Learn more about her research interests here, and catch up on her recent articles in the Journal of Service Research:

“High Tech and High Touch: A Framework for Understanding User Attitudes and Behaviors Related to Smart Interactive Services” –published on June 11, 2012 by Nancy V. Wunderlich of the University of Paderborn, Florian v. Wangenheim of Technische Universitat Munchen, and Mary Jo Bitner of Arizona State University

“Moving Forward and Making a Difference: Research Priorities for the Science of Service” –published in the February 2010 issue by Amy L. Ostrom, Mary Jo Bitner, Stephen W. Brown, Kevin A. Burkhard, Michael Goul, Vicki Smith-Daniels, Haluk Demirkan, and Elliot Rabinovich, all of Arizona State University

The Hidden Costs of Downsizing?

Victor1558 (CC BY 2.0)

Managers who think downsizing will boost profitability need to be aware of its potentially damaging long-term effects, according to a new study in the Journal of Service Research (JSR). Mahesh Subramony of Northern Illinois University and Brooks C. Holtom of Georgetown University, who published “The Long-Term Influence of Service Employee Attrition on Customer Outcomes and Profits” on July 24, 2012 in JSR, kindly provided the following commentary about their findings:

How does losing your key staff affect your service brand and future profits?

In our past work with service firms, we have observed that employee turnover can result in a loss of valuable human capital and affect customer service levels. However, we found very little research linking the decline in customer service levels with the erosion of the firm’s brand image or the resultant negative effects on profitability. Moreover, most past studies examined the performance outcomes of either voluntary turnover or downsizing, but not both. We conducted our research to address these gaps in literature.

Our study examined the influence of service employee attrition on customer outcomes and profits using time-lagged data obtained from more than 5000 customers and 1500 full time staff working for 64 business units of a temporary help services (staffing) firm. We found that high levels of attrition—whether through downsizing or voluntary turnover—have a negative impact on customer perceived service brand image (SBI), which predict subsequent declines in unit profitability. Specifically, high voluntary turnover units had significantly lower customer service scores and staff of units that engaged in high levels of downsizing had significantly lower levels of customer orientation or focus. Both customer service and customer orientation levels, in turn, influenced SBI. Further, units that had strong SBIs tended to be more than four times more profitable than units with weaker SBIs. These findings highlight the financial benefits of creating positive SBI in the minds of customers as well as the importance of controlling employee turnover, and improving customer orientation and service delivery levels.

The primary practical implication of this work as it relates to downsizing is to be cognizant of its potential impact. Similar to the delay in observing the positive effect from marketing actions or service enhancements designed to improve satisfaction, the negative effects of downsizing are most likely to be delayed. Thus, while there are obvious financial savings from planned attrition, there may be material long-term financial implications from downsizing that managers may not predict. However, these hidden costs from downsizing and turnover may be significant and therefore important for managers to anticipate.

Read the article in the Journal of Service Research. To learn more about the journal, follow this link.

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Strategies for Success in Service Innovation

Cathy A. Enz of the Cornell University School of Hotel Administration published “Strategies for the Implementation of Service Innovations” on June 6, 2012 in Cornell Hospitality Quarterly. To see more OnlineFirst articles, click here.

The abstract:

Implementation strategies are the ways in which information about a new service innovation are shared with those employees who must execute on the innovation. This article examines the relationship between innovation success and the frequency of use of various strategies for the implementation of two specific nationwide service innovations in the North American hotels of a global lodging chain. Cost and service quality–based innovations were found to rely on different implementation strategies, suggesting that the connection between an implementation strategy and success depends on the type of innovation. In the hotel chain studied, the most successful strategy for implementing quality innovations was individual counseling, while rewards and focus groups were most strongly associated with success when implementing cost-based innovations. A mix of execution strategies including implementation by persuasion, leader intervention, participation, and even edict were linked to service innovation success. Participative employee-centered implementation strategies emerged as the most critical in the diffusion of service innovations.

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Security Breach: How Managers Should Respond

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After hackers stole millions of LinkedIn passwords this month, resulting in a $5 million class-action lawsuit, the social networking site’s response to its customers reportedly left much to be desired. If managers were to look at such data leaks as more than just system failures, could they respond more quickly and effectively?

Arvind Malhotra and Claudia Kubowicz Malhotra, both of Kenan-Flagler Business School, University of North Carolina at Chapel Hill, published “Evaluating Customer Information Breaches as Service Failures: An Event Study Approach” in the February 2011 issue of the Journal of Service Research. To see the latest articles from the journal, click here.

The abstract:

Firms are collecting more information about their customers than ever before in an attempt to understand and better serve customer needs. At the same time, firms are becoming more vulnerable to the compromise of customer information through security breaches. This study attempts to associate breach reports with the decline in market value of firms using an event study. The results show that firms suffer significant market value depreciation over a short as well as a long time window. Further, the greatest devaluation occurs when larger amounts of customer information are compromised at large companies. Due to the greater potential of customer backlash, negative publicity and liability risk, managers must view customer information breaches as service failures rather than as information system failures. Employing established service failure recovery strategies may allow firms to quickly and proactively address customer privacy concerns and thereby mitigate negative market reaction to information breaches.

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Customer Satisfaction: Priorities for Improvement

Jason Hargrove (CC BY 2.0)

Marketing expert Donald R. Bacon, Professor in the Daniels College of Business at the University of Denver and editor of the Journal of Marketing Education, has a new article that introduces a method for identifying priorities in order to achieve greater overall customer satisfaction.

“Understanding Priorities for Service Attribute Improvement” was published in the May 2012 issue of the Journal of Service Research. To view other articles in this issue, please click here.

Dr. Bacon writes in the executive summary:

In today’s increasingly competitive environment, service managers continually look for ways to improve their services. They generally know that some improvements will have more impact on customer satisfaction than others, but with limited budgets, identifying the specific improvements with the greatest impact is critical. This paper offers managers a new tool to understand which improvements to their services will give the biggest boost to customer satisfaction with the service.

The task of identifying the attributes with the greatest impact is particularly challenging because customers may not care that much about further improvement in some attributes. Thus, the attributes that were top priorities for improvement last year may not be top priorities this year because they have reached a point of diminishing returns. Several methods exist for understanding how customers value additional improvements in a service attribute, such as importance-performance analysis (IPA), regression analysis, and factor regression. However, these techniques have important limitations that are discussed in this article.

This paper introduces marginal utility analysis (MUA), a new method of understanding the relationship between an attribute and the overall customer evaluation of a service. The data necessary for the method can be collected within a typical customer satisfaction survey. With these data, the method estimates the shape of the relationship between each attribute and the overall evaluation of the service. Other techniques assume the same functional form between the attribute and the overall evaluation. MUA does not force an attribute to assume the same general form. Consequently, MUA provides a more accurate and detailed picture of each attribute’s relationship to the overall evaluation. Based on Item Response Theory and Rasch analysis, MUA is entirely different than factor and regression analyses and brings a new and richer perspective to understanding customers’ evaluation of service performance.

MUA is demonstrated using customer satisfaction data collected by a medical professional association following their annual conference. The method displays the results graphically and provides managers with a helpful visual tool for identifying the attributes that are top priorities for improvement now, and those that may become top priorities in the future as conditions change. For example, at low levels of satisfaction, customers value reducing the crowding at the conference more than increasing the amount of continuing education credit available. However, at higher levels of satisfaction, the priorities are reversed; reducing the crowding further is not as valued as increasing the educational opportunities. The method’s output is easy to interpret and should generate insightful conversations among the full management team.

Read the full article here. To learn more about the Journal of Service Research, please click here.

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Dibs! Customer Territorial Behaviors

Monica Arellano-Ongpin (CC BY-SA 2.0)

Update, 5/11/2012: We’re pleased to report that “Dibs” has made an appearance on the Digital Life blog at MSNBC: “Study identifies 4 types of cafe Wi-Fi hogs.” We like Devin Coldewey’s new angle on how technology is changing the way customers use public spaces. Click here to read more.

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They stake claim to favorite spots, spread belongings across empty seats, and linger for hours on their laptops while other customers stand waiting. Territorial behavior at cafes and other servicescapes is on the rise, but if the cozy chairs and free wi-fi were provided to make patrons feel at home, what can a manager—or a fellow customer—do about it?

A new study in the Journal of Service Research (JSR) examines the causes and impacts of these behaviors and offers practical suggestions for dealing with them. Merlyn A. Griffiths of the University of North Carolina and Mary C. Gilly of the University of California at Irvine published “Dibs! Customer Territorial Behaviors” on April 16, 2012 in JSR. To view other OnlineFirst articles, please click here.

Professor Griffiths explains in the executive summary:

We’ve all seen it: personal belongings spread on a café table; the individual customer occupying a table meant for four, pounding away on their laptop, oblivious to other customers’ search for a free table; or the customer camped out for hours nursing one cup of coffee. Customers display territorial behaviors every day in cafés, bookstores, fitness centers and even cruise ship lounges, lobbies and pools. Lingering in service settings may be a de facto result of changes in American work and living patterns. With consumers working from remote sites and home-based offices, their presence is increasing in settings like cafés. Consumer territorial behavior has real impact on other customers and on service operations, and managers are unsure how to respond.

In a research study of consumer territorial behavior within the context of cafés, Griffiths and Gilly find conflicting customer beliefs about territorial rights in cafés. Some customers believe in first come/first priority, where any open seat is theirs as long as they want. Others believe in rent in perpetuity, saying that any purchase provides rights to a seat even after the product has been consumed. Both beliefs result in decreased turnover for managers and frustrate customers who want to sit and consume café products. Others argue that customers only have the right to occupy space as long as it takes to consume their purchase. If everyone subscribed to this belief, consumer territoriality would not be a problem for managers. However, as Griffiths and Gilly find, “When consumers who believe that café space should be reserved for customers to consume café products encounter first come/first priority or rent in perpetuity occupants, conflict arises.” Territoriality thus has a negative effect on repatronage intentions, views of service quality, satisfaction with service, length of stay, and word of mouth communication. The research reveals that customers hold managers responsible when they cannot find a seat and employees are faced with mediating territorial disputes.

Attempts to control customer territoriality through signage and restricting Internet access have had limited success. Instead, better design of space can lead to less inter-customer conflict and smoother organizational processes. Space can be designed to separate patrons with differing needs. Starbucks’ customers post online their reactions to the new design features of some stores: “Accommodations include a separate upstairs section, filled with big wooden tables for working…lots of seating area and plenty of plugs for laptops.” The downstairs flows with customers who purchase and leave or stay only while consuming purchases. McDonald’s adopts a similar approach in their reimagining redesign efforts. Executives suggest zones will offer customers the opportunity to use the restaurant as they want, whether they want to come in alone and flip open a laptop or have a quick lunch with friends.

Managers who ignore customer territoriality risk alienating other customers and frustrating employees who must deal with conflicts. Griffiths and Gilly conclude, “First, managers must decide what kind of place they want to offer customers. Then, they must design space in a way that accommodates different customers’ needs.”

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