The profitability impact of improving service quality

Conditions Necessary for Customer Tiers: An Empirical Example

In our view, four conditions are necessary for customer tiers to be used in a company.

• Tiers have different and identifiable profiles. Profitability differences in customer tiers are most useful when other variables can identify the tiers. As with customer segmentation, it is necessary to find ways in which customers vary across tiers, especially in terms of demographic characteristics. These descriptions can help understand the tier's customers and identify appropriate marketing activities. 

• Customers in different tiers view service quality differently. Customers in different tiers can also have different needs, wants, perceptions, and experiences. Understanding the factors that affect the customer's decision to purchase a new product or service from an existing provider as well as the factors that affect the decision to increase the volume of purchases from an existing provider are crucial for managing customers for profitability. If customers in different tiers have different expectations or perceptions of service quality, these differences will allow the company to offer different groups of attributes to the tiers. 

• Different factors drive incidence and volume of new business across tiers. Differences in characteristics, needs, wants, and definition of service quality are likely to result in different drivers for the incidence and volume of new business. If this condition is met, a company can target customers that are likely to end up in higher tiers.

• The profitability impact of improving service quality varies greatly in different customer tiers. Just as direct marketers routinely qualify lists to test for potential profitability, companies need to qualify their customer tiers for potential profitability. If customer tiers are appropriate, the way customers respond to service and marketing should differ among tiers. Higher tiers should produce a much higher response to improvements in service quality that will be evident in increases in new business, volume of business and average profit per customer. Taken together, the disproportionately greater response to changes in service quality in each of these areas will result in an overall greater return on service quality improvements for the higher tiers of customers.