Have you ever had an interaction with a company that merited special consideration? What happens to a company when they have the right policy in place but make the wrong decision? Here is a recent example: http://overheadbin.msnbc.msn.com/_news/2012/04/25/11392324-dying-veteran-protests-spirit-airlines-no-refund-policy?chromedomain=usnews&lite
As detailed by this story, a terminally ill veteran was denied a refund by Spirit Air Lines. Why? In an effort to keep costs low, Spirit does not offer refunds. Why is this the right policy but wrong decision in this case?
The analysis of this airline ticket example is essential to understanding when and where to make exceptions to your refund policies. The paper “Refundability and Price: Empirical Analysis on the Airline Industry” by Seong man Moon & Makoto Watanabe of Sogang University is the seminal work in this field. The conclusion of the research is that the premium is paid for a refundable ticket is directly correlates with the distance of travel. This tells us that a long flight such as the one between Florida and New York (1010 miles) can turns out to be the most significant determinant of the relative price between refundable and non-refundable tickets. However if you look at a flight between Los Angeles and Las Vegas (236 miles) the difference in ticket price between refundable and non-refundable is negligible as the customer has the option of making the five hour drive.
So how can you as an entrepreneur use the sophisticated pricing model of the airline industry to deliver better customer service?
1. Understand the nature of the product or service you deliver. If you provide a time sensitive or essential service such as critical health care or something that is difficult for the customer to substitute, this calls for strong scenario analysis planning. Be prepared to make exceptions and deal with customers on a case by case basis even though you may have a sound structure of customer policies. The potential cost of bad publicity is significant especially when a remedy only takes a little compassion and extra effort.
2. If you are selling easily substitutable products like apple pie and lemonade be prepared to offer customer service that rivals Zappos. Make sure your customers walk away with a positive memorable experience even if you have to give out an extra cup of lemonade.
3. Empower employees to use creativity to solve problems. Great Customer service pays off. Reflecting on the Spirit Airlines example, how much money was saved by not refunding the ticket $500-1000? Now if just one or two people choose another airline over Spirit due to the bad publicity, this business decision will result in a potential loss.
Making exceptions to rules or policies makes for remarkable customer service. Happy customers lead to profitability. Just ask Steve Jobs or Tony Hseih of Zappos why exceeding customer expectations is important. Both of these men created considerable wealth and loyal customers–something I know you are also capable of.
The Illinois Lottery and Really Bad Math Skills–Why the Luck of the Irish Won’t Improve your Odds of Winning
As my daughter becomes more involved with Irish dancing, I have become more acutely aware of Irish culture and heritage. The annual Illinois lottery‘s St. Patrick’s day raffle apparently is wildly popular. Today when I attempted to buy a $20 ticket for a chance to become a millionaire, the clerk at my local 7-11 kindly told me that all tickets were sold out. Now some things are shocking and some simply don’t make sense. Sold out lottery tickets ring in my head as a huge entrepreneurial opportunity. What is really at play here? First in raw numbers the chances of winning a large lottery jackpot are similar to being eaten by a tiger and a shark on the same day (NY Times “Economix Putting your odds in lottery context” 10/19/09). Since I don’t plan on swimming with sharks and napping with tigers at the same time, I may have to look at an alternative revenue stream. Surely I am not the first consider why people buy lottery tickets but I would suggest people play the lottery for four reasons:
1. Operant Conditioning using variable reinforcement (termed by June Foyle of Suny NY Clinton). In terms we can understand this means fun caused by the possibility of an unpredictable reward, similar to why we like to watch contested sports. When something is unscripted and our team has a chance to win and we are captivated. Similarly when an individual has a chance to win a cash prize (termed variable reinforcement), even though the odds are high everyone has a dream to pursue.
2. The Availability Heuristic is the concept in which you hear constantly about a winner. Our mind begins to frequently recall success stories often repeating the same instance. This is why the state lotteries run the drawings on TV and make sure the winners do an ample amount of publicity work. As we continually hear about lottery winners, our mind relies less and less on probability and more on the wonderful anecdotes of the lottery winners. In real terms we equate the probability of winning with how often we hear about lottery winners.
3. The Slot Machine Fallacy is the assumption that as a gambler we are “due”. Our run of unsuccessful winning tickets is about to end any day as the numbers are going to turn our way. Again probability is temporarily suspended and we know that winning is imminent. We will be rewarded as our time to win has come.
4. Selective Memory plays along closely with the Availability Heuristic. Hence we choose to remember only the instances in which we win rather then the actual facts surrounding the circumstances. These observations fascinate me as en Entrepreneur because I see the challange as re-creating these elements in a business model. How can a I create a contest that gets people excited to play? What do I do make sure only the positive outcomes of my business are well represented across all media platforms. How do I communicate to customers that if they buy my product or service they will be rewarded? Finally how do I use the power of customer selective memory in marketing my business so I will satisfy consumers based on a high level of emotion?
Lets part today borrowing a concept from Game Theory. If I called you on the phone and told you that had just won a million dollars your audible scream measured by a decibel level would be quite high. However if I called you and reported that you had just won two million dollars would your scream be twice the decibel level as when you were notified that you had won exactly half the sum of money in the previous phone call? As a teaser I will discuss the economic concept of the utility of money in an upcoming post. Stay tuned loyal readers.
Until next time, be good and cultivate your community of friends.