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Tag Archives: Sogang University

Right Policy, Wrong Decision–How Great Customer Service Will Payoff

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.

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