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The Idea in Brief

If you run a service business, your customers aren't just open wallets at the end of your supply chain. They disrupt every step of your core operations with their unpredictable behavior—requesting service at inconvenient times, asking for a bewildering assortment of things, changing their minds.

This customer variability spawns costly inefficiency. How to manage information technology? Frei suggests diagnosing the type of variability you're dealing with—such every bit "inflow variability" (demanding service at inconvenient times) and "request variability" (asking for many different things).

And so decide: will you accommodate or reduce the variability? Typical methods for managing variability piece of work well simply carry trade-offs. For instance, a restaurant that accommodates "off the card" orders ("asking variability") enhances patrons' fine-dining experience—just must charge premium prices to comprehend resulting cost increases. If the restaurant reduces request variability by accepting only menu-listed orders, information technology improves efficiency—but compromises diners' experience.

However some strategies avoid trade-offs—past ensuring a positive customer experience and maintaining efficiency. Consider Starbucks' uncompromising reduction: the company reduces "adequacy variability" (power to state orders clearly and quickly) by grooming customers to club complicated drinks in a prescribed fashion—without detracting from their experience.

Augment typical accommodation or reduction strategies with more artistic ones, and you seize competitive reward.

The Idea in Practice

Diagnosing Customer Variability

Customer variability takes five forms:

Types of Customer Variability

Looking Beyond Classic Accommodation or Reduction

Consider these strategies to arrange or reduce customer variability—without trading off efficiency or the quality of customers' experience.

Artistic Strategies for Managing Variability

What if a manufacturer had to deal with customers waltzing around its shop flooring? What if they showed upwardly, intermittently and unannounced, and proceeded to muck up the manufacturer's carefully designed processes left and correct? For most service businesses, that's business as usual. In a eating house or a rental car agency or most of the other service companies that brand up the bulk of mature economies today, customers aren't simply the open wallets at the stop of an efficient supply concatenation. They're directly involved in ongoing operations. The fact that they introduce tremendous variability—merely complain near any lack of consistency—is an everyday reality.

Dealing with that variability is a primal challenge in making a service offering profitable. But trivial in managers' conventional grooming or tool kits equips them to deal with it effectively. Operations management theory, rooted in the manufacturing context, typically has only one thing to say almost variability: It must be eliminated. Whatever educated director learns to recognize information technology equally the enemy of quality.

In the service context, the challenge is far more subtle. First, it wouldn't be wise to drive out all variability; customers judge the quality of their experience in large part by how much of the variability they introduce is accommodated, non how sternly it is denied. Second, it wouldn't be possible to practise so. While manufacturers accept virtually complete control over the cost and quality of their production inputs, service companies face this i, huge exception: Their customers are themselves fundamental inputs to the production process. That grade of input is, by its nature, capricious, emotional, and doggedly disinterested in the company'south profit agenda.

My research over the past several years has been aimed at helping service organizations overcome the challenge of customer-introduced variability. I've studied a wide multifariousness of service companies, some of which prospered while others experienced escalating costs in the face of eroding customer satisfaction. The framework that has emerged from that report can help managers brand better decisions about how and how much to reduce or adjust the variability customers introduce. As the stories in the post-obit article make clear, in that location are multiple means to combat the effects of any blazon of variability, and the best solution is non always immediately apparent. But by using a systematic procedure to diagnose problems and design and fine-tune interventions, managers can reduce the touch on of variability and enhance the competitiveness of their service.

Five Types of Variability

The get-go footstep in managing the variability introduced by customers is to empathize the forms it can take. Customers introduce variability to operations in no fewer than five ways, and so it is disquisitional to sort out which type is causing mischief earlier designing interventions.

Arrival variability.

The first type of variability that creates challenges for service companies is an obvious 1: Customers practise not all want service at the same time or at times necessarily convenient for the company. Many a grocery store manager has bemoaned shoppers' inability to space their transactions such that checkout clerks remain busy and lines practice not form at the registers. The classic way to address arrival variability is to require appointments or reservations, but that makes sense merely in sure situations. In many service environments, such as retail stores, telephone call centers, or emergency rooms, the customers themselves cannot foresee or filibuster their needs. The resulting inefficiencies have inspired a big body of piece of work in what's known as queuing theory and many solutions (including those described past W. Earl Sasser in "Friction match Supply and Demand in Service Industries," HBR November–December 1976).

Asking variability.

Film buffs will recall the diner scene in the moving-picture show Five Easy Pieces, in which actor Jack Nicholson asks for a side order of wheat toast. The dominion the waitress invokes—no substitutions—is a time-honored fashion to limit request variability, or the range of what customers ask for in a service environs. While information technology's hard to imagine operations grinding to a halt over an order of toast, the fact that customers' desires don't sally along standard lines poses real challenges for virtually every kind of service business. At an advertising agency, each client is executing a unique marketing strategy. At a resort, vacationers desire different amenities. Even at a single-service business organisation similar Jiffy Lube, customers show up with unlike makes and models of automobiles.

Adequacy variability.

Perhaps less obviously, service businesses must also work with customers whose own capabilities differ. Whether considering of greater knowledge, skill, concrete abilities, or resources, some customers perform tasks easily and others require manus-holding. This capability variability clearly becomes more important when customers are agile participants in the production and commitment of a service. A cleaning service may arrive, do its work, and leave, having had no real interaction with the client. The customer's item capabilities make little departure to how well the crew does its job. In a medical setting, by dissimilarity, a patient may be more or less able to depict his symptoms, and that will affect the quality of the health care he receives.

Effort variability.

When customers must perform a part in a service interaction, it's upwards to them how much endeavour they apply to the chore. An internal accountant may or may not accept care to hand over well-organized files to her visitor's independent auditor. A shopper at a warehouse club may or may not have the remaining energy to return his massive shopping cart to i of the corrals in the parking lot. Such effort variability has an impact on service quality and cost, either straight for the date at manus or indirectly for other patrons.

Subjective preference variability.

Customers also vary in their opinions about what it ways to be treated well in a service surround. Ane diner appreciates the warmth of a waiter'south first-name introduction; some other resents his presumption of intimacy. When a top partner in a law house lavishes attention on engagements, some clients will exist gratified by the proof of their cases' importance. Others will think those expensive billable hours could exist doled out more judiciously. These are personal preferences, but they introduce equally much unpredictability every bit any other variable and brand it that much harder to serve a broad base of customers.

It'southward possible to think of these five forms of variability sequentially considering they reverberate the process past which many service transactions unfold. The client arrives, makes a request, plays a part in the process requiring some level of capability and effort, and assesses the experience according to personal preferences. At any of these points, life is easier for a service provider if it is dealing with a narrow band of variability. Where the ring is wide, service quality and efficiency are at hazard.

The taxonomy above is important because operational issues in a service business organisation can often be traced to issues created by client-introduced variability. Simply the correct strategies to manage, say, endeavor variability (frequently involving incentives) tin be completely dissimilar from the strategies for dealing with capability variability (typically some sort of grooming). Before managers tin draft an appropriate response, they must diagnose which variability is at issue.

A Classic Merchandise-Off

Wherever customer-introduced variability creates operational problems for a visitor, managers face a choice: Do they want to adjust that variability or reduce it? Generally, companies that emphasize the service experience tend toward accommodation, and those that emphasize operational simplicity—commonly as a means to keep costs low—tend toward reduction. The two approaches are in constant tension.

Wherever customer-introduced variability creates operational issues for a company, managers face up a option: Do they desire to suit that variability or reduce it?

Consider a classic analogy of a reduction strategy: the eating house menu. Menus, by their nature, are a way to constrain request variability. They put a limit on what would otherwise exist an space number of potential orders and therefore make information technology possible for a restaurant to offering meals of consistent quality at a reasonable cost. But customers chafe under too many constraints (once again, recall Jack Nicholson'south rage in Five Easy Pieces). For them, the power to asking variations in preparation, ingredients, and side dishes—or to gild off the menu entirely—is part of a premier dining experience. When restaurants do non accommodate special orders, they reduce the complication of the operating environment but also may diminish service quality. Companies that use reduction strategies tend to concenter price-conscious customers who are willing to trade off an excellent service experience for low prices. People who cull discount airlines, bulk retailers, picture show matinees, and off-height travel options essentially reduce their collective variability by conforming to a visitor'southward operational needs, even at the run a risk of an inferior service experience.

Accommodation strategies take dissimilar forms, depending on the concern and type of client-introduced variability. Very often, accommodation involves asking experienced employees to recoup for the variations amidst customers. For example, in a business where customers have divergent views of how service should be delivered (a business, that is, with high subjective-preference variability), a veteran employee learns to diagnose customer types. By making on-the-fly adaptations to suit their preferences, he essentially "protects" the customers from having to brand many adjustments of their own.

It costs more than, of grade, to rent, train, and keep employees who can compensate for customers. Like near accommodation strategies, this ane forces the company to bear the brunt of the variability. Therefore, the success of an adaptation strategy usually hinges on a company'southward ability to persuade customers to pay more to encompass the added expense. Generally, only companies at the high end of their competitive landscape can command such a premium. Those at the low end must rely on strategies to reduce variability.

Managing customer-introduced variability does non accept to come down to a stark trade-off between cost and quality.

Simply managing customer-introduced variability does non have to come downward to a stark trade-off between cost and quality. Some companies have met the challenge without dissentious either the service experiences they provide or their operating environments. In a matrix representing the archetype trade-off equally a linear function of toll to serve versus the quality of the service experience, these companies have gone "above the diagonal." (Meet the exhibit "Overcoming the Merchandise-Off.") The matrix shows possibilities beyond archetype reduction and archetype adaptation strategies: the potential for what tin be termed uncompromised reduction and depression-price accommodation.

Managers in service businesses often assume that they face up a tough choice: either accommodate customers' various desires and behaviors at loftier price or pass up to accommodate variability and risk customer defection. But other options be—those above the diagonal of the matrix—which permit companies offer a high level of accommodation at low cost or reduce variability without damaging the service experience.

Here'south an instance of an uncompromised reduction approach. A company can greatly reduce the bear on of variability on its operating environment without compromising the service experience by targeting customers on the basis of variability type. If, for case, a college fears that admitting students of varying intellectual capabilities will complicate its operations, it can choose merely students whose standardized test scores fall within a narrow band. The students go the benefit of a tailored curriculum without the school's having to back up more than one. Too, a company faced with subjective preference variability can target customers who are predisposed to want service to be delivered the aforementioned way. It isn't ever easy to know where customers autumn on the relevant spectrum of variability, and there isn't always sufficient demand within a given ring of customers to sustain a business. However, companies that find such a niche tin can do good from reduced variability without requiring customers to adjust.

Companies that achieve low-toll accommodation nigh oft do it past persuading customers to serve themselves. This strategy is very constructive for loftier arrival or asking variability, both of which complicate labor scheduling. Manifestly, when the client is responsible for much of the labor, the right labor is provided at the right moment. Further, past having customers serve themselves, companies are allowing the service experience to vary with customers' capability and effort (all-around capability and effort variability) and giving customers control of the service environs (accommodating subjective preference variability). The online auction business firm eBay shows how far this model tin be taken: Virtually all the labor of selling and buying on the site is performed by customers, not by eBay employees.

The problem is that many companies, unlike eBay, have established precedents whereby employees perform certain tasks for customers. For those companies to succeed with a low-cost accommodation approach, they must persuade customers to do the piece of work. This "persuasion" is typically achieved through some redefinition of the customer value proffer. That is, customers demand to experience compensated in some way—whether through lower prices, greater customization, or other benefits of being in control—in club to feel good about doing work they think the visitor should be doing.

Solutions in Exercise

One time a management team understands the types of variability customers innovate, and the possibilities for reducing or accommodating variability, the challenge of managing service operations becomes more tractable. Allow's revisit the four strategic responses discussed above: classic accommodation, classic reduction, low-cost adaptation, and uncompromised reduction. (The exhibit "Strategies for Managing Client-Introduced Variability" gives examples for each.) The history of successful service companies reveals that they've used every i of these strategies at one time or another.

In one case a company has determined which blazon of customer-introduced variability is creating operational difficulties, it must choose which of iv basic strategies to pursue. The nautical chart outlines tactics that have proven to be effective in each category.

In the tardily 1990s, for instance, Dell faced the claiming of high arrival and request variability in its customer service operations as the company considered adding large servers to its product array. Information technology knew that these high-end servers, and the corporate customers who bought them, would create meaning new demands for responsive service. Given the competitive context, Dell would accept to be prepared to satisfy these demands around the clock and across a broad spectrum of possible malfunctions. As a new entrant in the market, lacking scale in its service operations, the company faced a trade-off betwixt maintaining an underutilized and expensive service functioning (accommodation of variability) and achieving higher predictability and utilization by, for instance, request customers to schedule appointments (reduction of variability). Dell understood that, from its customers' perspective, accommodation was the just culling, so the visitor set out to notice a fashion to insulate itself from the effects of variability without compromising customers' service experiences.

Dell's solution was to outsource on-site customer service to third-political party providers, who served more ane client and thus were less disrupted past the variability imposed past Dell'due south customers than Dell would have been had it acted solitary. The motion posed some run a risk: By giving upwardly this client contact in exchange for lower costs, Dell could accept lost control of its client relationships. The visitor prevented that through strict vigilance, staying in close touch with customers to discuss their needs and to assess their experiences with the tertiary-party providers. By maintaining this contact, Dell finer made the providers' role less prominent. In the stop, the company achieved a low-cost accommodation of the variability its customers brought to the service relationship.

Starbucks provides an excellent example of the deft handling of capability variability. The coffee shop concatenation allows customers to choose among many permutations of sizes, flavors, and preparation techniques in its beverages. In the interests of filling orders accurately and efficiently, Starbucks trains its counter clerks to telephone call out orders to beverage makers in a particular sequence. It is all the better when customers themselves can do so. Therefore, Starbucks attempts to teach customers its ordering protocol in at least two ways. Information technology produces a "guide to ordering" pamphlet for customers to peruse, and it instructs clerks to repeat the society to the client non in the way it was presented just in the correct way. The tone is not one of rebuke, but nevertheless about customers learn to avoid the implied correction past stating their gild in the way that helps Starbucks's operations—with no hit to the service experience. Indeed, for some customers, getting the social club right is an aspiration, a minor victory on the way to the part. Information technology's a clever solution, achieving an uncompromised reduction of variability.

Companies facing issues relating to effort variability frequently resort to the archetype accommodation approach: They simply require employees to practice the work for the lazier customers, with an obvious impact on operating costs. Some companies, still, try to hogtie those customers to piece of work a little harder. As decades of enquiry on employee motivation have emphasized, there are two ways to change behavior: instrumental means and normative means. Instrumental means are formal rewards and penalties for specified behaviors—the basic carrots and sticks of discipline. Normative means rely more subtly just often more than effectively on shame, blame, and pride. In the case of Zipcar, an auto-sharing service, motivating customers to brand the effort asked of them is specially of import because their actions influence not only themselves only as well other customers. A automobile returned to its parking space late by one user spells real inconvenience for the next. While late fees are a common instrumental control for this type of situation, they run a risk being perceived by the customer as a license to exist belatedly. Indeed, tardily fees oft help compensate a business organization for customers' costly choices, but they are not always effective in changing their behavior.

Normative controls, which make customers want to behave, can be far more successful, merely these incentives are difficult to craft. Why would one customer necessarily care almost the inconvenience suffered by another? To utilize normative controls effectively, companies need to create an surround in which customers intendance almost the impact of their behavior on others. Such an environment exists on eBay, where customers serve one another with great intendance, in large office because of the customer-to-customer commitment the company has built through tools such as feedback stars, which publicize buyers' and sellers' past behavior. Normative controls tin can be particularly important when instrumental incentives take failed. (As Steven Levitt and Stephen Dubner relate in Freakonomics, when a day care center instituted late fees for parents who were not on time to pick up their children, lateness got worse. The fee reduced the parents' guilt, which had been a powerful normative incentive.) Companies like Zipcar must non only decide how they need customers to comport but likewise come up with effective ways to promote that beliefs.

The best strategy for irresolute customers' behavior is not always obvious, nor is the best strategy for managing a specific type of variability. Tiffany & Visitor, the luxury jeweler, suffered from missteps in 2001, when it failed to anticipate how customers would react to what seemed similar a logical solution. Its problem was one that many retailers would like to have: The brand's popularity was soaring amidst the so-chosen mass affluent segment—a fast-growing market of moneyed consumers. Consider that Tiffany'south hallmark had long been the graciousness of its service. As customers began crowding into its stores, this traditional service experience was being undermined. In particular, management noticed, with then many people milling effectually the floor information technology was difficult for employees to uphold the starting time-come up-first-served norm.

Tiffany dealt with this inflow variability with a tried-and-true device: the beeper. Upon arrival in the shop, customers were given a beeper and told they would be buzzed as soon as a service person was available. Unfortunately, the reaction of the customers Tiffany most wanted to protect—its nearly wealthy and loyal ones—was outrage. Management had failed to recognize that a more problematic form of variability—subjective preference variability—had disrupted the business. While the mass-market customer arriving in the store was well acquainted with beepers, and fifty-fifty felt well served past them, the more demanding luxury client found them to be inconsistent with Tiffany's historic delivery to white-glove service. Only later on the visitor saw a dramatic plunge in satisfaction among the latter group did it confront its fundamental managerial claiming: whether (and how) to serve two singled-out segments of customers through a single retail channel. Tiffany'southward challenge was complicated past the fact that the less expensive silver jewelry was popular with both segments, which made it difficult to come with a solution that segmented service on the ground of product blazon. (Subjective preference variability is besides the focal bespeak of Southwest Airlines' electric current dilemma. See the sidebar "Should Southwest Airlines Exist More Accommodating?" for details.)

As this article was being prepared for publication, a controversy erupted among the customers of 35-year-old Southwest Airlines. Throughout its history, the company has employed an unusual boarding policy: no assigned seats. Instead, customers choose where to sit equally they board the airplane. The resulting cattle call has always produced some grumbling, peculiarly among the delicate members of the herd. More troubling to the analysts who follow Southwest's fortunes, the boarding policy alienates some business travelers, who tend to arrive at airports just minutes before departure—and are mostly willing to pay more for choice seats.

What the policy conspicuously has in its favor is efficiency. Southwest's boilerplate turnaround—the time that elapses between a plane's pulling upward to a gate and its pulling away for the next takeoff—is 40% faster than competitors'. The net outcome is a level of fleet productivity that keeps costs and fares low. For some customers, the no-assigned-seating policy has another thing in its favor: egalitarianism. Passengers who travel infrequently, using their own money—and who want to enjoy the experience—are not necessarily well served by airlines that favor frequent business organisation fliers.

So in June 2006, when Southwest announced an experiment in which flights out of San Diego would have assigned seats, the resistance from longtime customers was dramatic. The experiment was designed to discover how boarding fourth dimension would be afflicted past a less charged only also less chaotic procedure. Apparently, management had not anticipated the effect on the customer feel.

What's going on hither, and how should Southwest continue? It's useful to see the state of affairs in terms of client-introduced variability. Most airlines cater to a wide range of subjective preferences among their customers. But Southwest, in support of its depression-toll model, opted for a strategy of reducing, rather than all-around, variability. People who like the airline'southward arroyo self-select into its customer base. Others adjust their preferences to avail themselves of Southwest's low fares.

It'due south important to recognize that part of the reason so many customers are willing to do this is that Southwest'due south offer is and so apparently egalitarian. Indeed, the airline seems to have realized that any difference from this ethos could be problematic. In the past, it has denied requests for various services from some frequent fliers fifty-fifty when they would have cost nothing to implement and would not have affected disquisitional operating metrics, such as turnaround time. Amongst the credible threat of customer defection, the visitor held fast, knowing that if passengers saw some receiving special perks, their subjective preference for equal treatment would exist violated.

Now that Southwest Airlines has a customer base accepted to open seating, it faces an uphill boxing of beliefs change if it decides to brand a switch. Management of customer-introduced variability will come to the fore as a key to competitiveness and profitability. For the moment, the airline seems sick equipped to take on that challenge. "I am averaging easily 100 letters a day," Southwest president Colleen Barrett told the Baltimore Business Journal. "I am simply literally in a state of shock."

Gateway'southward attempt to manage client variability failed for different reasons. Since its inception, the personal-computer maker had sold its products solely through direct channels. Merely faced with eroding marketplace share, management decided to accost the adequacy variability common in loftier-tech markets. It knew that it would be able to sell more than PCs if information technology provided more hand-holding to consumers who lacked technical knowledge and confidence. This meant entering the retail market—and more than, it meant creating exceptional retail environments that enabled deep customer learning. When Gateway'southward new stores opened in 1996, they were undeniably impressive. Employees were experienced, helpful, and abundant (the employee-to-customer ratio was unusually high). Excellent educational materials were on mitt, and the stores were conveniently located to ensure heavy pes traffic. Gateway succeeded spectacularly at bringing customers with all levels of expertise through the doors.

Fast-forrad to April 2004, when the company was shuttering the final of more than 300 storefronts. How could this have happened? It wasn't that the strategy was ludicrous. The company had accurately diagnosed a problematic class of customer variability, and it had devised a way to manage its impact. Unfortunately, that way was expensive, and Gateway hadn't guaranteed that the people receiving the benefits of all that prepurchase accommodation would also behave the costs. Far too oftentimes, customers took their newly acquired understanding of what they needed and how information technology worked and then placed an social club with i of Gateway's low-toll competitors.

Managing the Operational Behavior of Customers

Information technology'south articulate from the examples to a higher place that the effective management of variability in service operations often requires a company to influence customers' behavior. That can be a hard goal to achieve, given that a visitor's operational concerns are not usually foremost in its customers' minds. Managers attempting this kind of intervention should plan their actions carefully in a three-footstep process.

Diagnose the trouble.

The operational issues caused by customers' discretionary behavior tin range from the seemingly minor—some customers are tardily to their appointments—to problems that can have a large impact on profitability. Every bit a first step, managers must understand the root causes of problematic client behavior. Unless the behavioral problem is accurately diagnosed, no subsequent action to right it will be effective.

The experience of retail bank First Spousal relationship in the late 1990s makes this betoken dramatically. Considering the bank misdiagnosed the type of customer variability information technology faced, information technology took deportment that were inappropriate to the situation. First Matrimony had created many self-service options for customers—primarily through ATMs, vox response units, and Web pages—and hoped that the cost of the innovations would be more than recouped past lower costs in branch operations. However, when customers connected to visit the branches to transact business in person with tellers, the investment in self-service technology failed to run into expectations. Management concluded that the problem was, in essence, one of adequacy variability: Non all customers had learned what the technology could do and how to apply it. To address this problem, Kickoff Marriage stationed greeters at the doors of its branches to ask customers the nature of their business with the depository financial institution that 24-hour interval. If the transaction could easily be achieved through an ATM (equally was usually the case), the greeter would recommend the cocky-service applied science and offer guidance on how to employ it. Within months of this management intervention, Starting time Union had lost roughly 20% of its almost recently acquired accounts. Not long afterwards, Outset Spousal relationship merged with Wachovia and dropped its proper noun.

The crusade for the loss was non hard to trace: It came down to a misunderstanding of why the cocky-service options had not caught on amid all customers. The variability that was actually at issue was not adequacy variability but try variability. Customers with fourth dimension on their hands preferred to wait in line to have the teller practice all the work.

Managers can avoid that kind of misdiagnosis past conducting a thorough analysis guided by some straightforward questions:

  • What is problematic about customers' electric current behavior? What is the danger of leaving the behavior unchanged?
  • What are the hypotheses of the cause of the behavior? In determining the hypotheses, consider the role of the five types of customer-introduced variability and land hypotheses for each as the cause.
  • Which hypotheses make the nigh sense? Which are less plausible? Is management invested in a particular outcome? What assumptions is the company making well-nigh what customers value?
  • How will these hypotheses be tested? Who volition be responsible for the data they produce? If the upshot has significant implications for strategy or operations, who volition lead the alter procedure?

Had Beginning Union (or Tiffany, cartoon on an before example) gone through this kind of practise, the ineffectiveness of the solution would have been identified well before information technology was rolled out in a full-scale, alive operating environment. First Union hypothesized that customers' resistance to self-service technologies reflected a gap in their capabilities, then the banking concern jumped direct to training them (using greeters) without sufficiently testing the hypothesis. Interim on untested hypotheses is a common error when the logic of what is (presumably) good for customers is widely accustomed. First Union reasoned that if customers only knew how much better off they would exist using ATMs, they would surely choose to serve themselves. Had the banking company tested this assumption—by, say, asking customers why they used item channels and what they idea of alternative channels—it would accept exposed the flaws in its thinking. Managers often confuse capability and effort variability because their symptoms can be identical.

At Tiffany, the company observed overcrowding, hypothesized that arrival variability was the issue, and designed a store-level solution. Had the company been more thorough in exploring the trouble—particularly in analyzing the differences in subjective preferences between customer segments—it could have learned almost the potential incompatibility of the two segments and designed a company-level solution.

Blueprint a mutually beneficial operating function for customers.

With the appropriate diagnosis, companies can blueprint an operating role for customers that creates explicit value for both parties. As in step one, a set up of questions can guide the creation of this mutually beneficial role:

  • What practice customers gain from their new part? Are they better off than before? Are they still better off than they would exist in the hands of competitors?
  • What does the company gain from customers' new role? What is the intended impact of their new behavior on the company'south functioning?
  • Is it realistic that customers volition behave the way the company wants them to? What assumptions are managers making most human motivation?

The difficulty in creating value for customers often comes from untested assumptions nearly their behavior and perceptions, like the ones made past direction at First Union. Usually there are many ways to create value for customers—but one of them is not to make customers feel they are worse off than they were before the change.

The difficulty in creating value for service companies is that revenue and cost are often not tightly linked in such businesses. This isn't the case in product-based businesses, where each transaction can be evaluated according to the clear associated revenue minus the toll of production. Service businesses often apply a model more akin to buffet pricing: Customers, having paid a fee, can behave as many transactions as they desire. This makes it difficult to understand the value beingness created at unlike points in the relationship and allows such mistakes as Gateway's foray into high-touch retailing. Indeed, the free riding the company suffered is a major risk for any business organisation in which customers need expensive prepurchase service and rivals offering easy substitutions.

Test and ameliorate the solution.

Because of the inherently complicated nature of customer behavior, information technology is useful to test approaches to influencing behavior before rolling them out on a broad scale. Withal, while airplane pilot tests can reveal disquisitional system flaws at a limited cost, such tests are frequently executed incorrectly. The iii nigh mutual mistakes are as follows:

  • Creating testing environments that are essentially different from the real environment. Sometimes pilots accept place in a better climate than customers volition actually experience. The most common differences in a testing environment are more experienced employees, artificially ample resource, and limited exposure to variability.
  • Creating incentives—whether implicit or explicit—for the test to have a positive outcome. This ofttimes comes in the course of a promise that the test manager will exist responsible for the total-scale rollout if the test has a positive outcome (regardless of whether the company learned anything).
  • Designing a test that has no controls. If customers change their behavior following a test, it is difficult to know whether the change should be attributed to the exam or to other external factors if the test had no controls.

1 way to overcome the terminal fault is to use what Wells Fargo refers to every bit the "challenger-champion" model. For every new initiative, the visitor selects a sample to test the new initiative (the challenger sample) and a similar, matched sample (the champion sample). Subsequently the initiative is tested on but the challenger sample, the company tracks differences in behavior between the two samples.

More generally, we take found that pilot tests are effective when managers can affirmatively answer the post-obit questions:

  • Is the airplane pilot program being tested under typical circumstances? Are the employees, customers, and resources consistent with the company's existent operating environment?
  • Is the goal of the airplane pilot to acquire as much as possible (rather than to demonstrate the value of the new system)? Is this goal clear to both employees and managers?
  • Is it articulate that managers' performance is non based on a positive outcome of the pilot?
  • Are customers and frontline employees involved in evaluating the circumstances of the test and in assessing results?
  • Tin managers articulate the explicit changes fabricated as a result of the pilot test? (If relatively few changes are made, that should exist a ruby flag that the primary motivation of the test was proof-of-concept, not learning.)

Throwing a Customer in the Works

Profitably managing the variability implicit in customer heterogeneity, and developing effective levers to influence it, is a central challenge for service businesses. By extension, information technology is also a primal challenge for developed economies. In the typical mature economy, service providers behave more 70% of commerce—withal the frameworks and tools for managing these businesses lag significantly backside those developed for manufacturing environments.

Understanding the workings of service businesses more thoroughly begins with identifying the things that make them unlike from manufacturers. Chief among these is the presence of the customer in operations. Customers perform roles that are either well or poorly designed for them and engage in behaviors that either benefit or harm the company. They make information technology nigh impossible to manage production in isolation from consumption. Companies that larn to manage the variability customers bring to the works will find that customers are the key to competitive advantage.

Netflix is an example of a company that capitalized on incumbents' mishandling of client variability. When customers hire DVDs, late returns are a major source of tension for both rental companies and customers. Companies have charged late fees—which customers frequently perceive to be callous—in order to encourage people to render movies on time. But late fees accept non only failed to change customers' behavior but likewise have been a pregnant source of customer dissatisfaction. Enter Netflix and its subscription model, which makes late fees obsolete by assuasive people to keep movies for every bit long as they desire. The customer's incentive to render a motion picture is existence able to get the next movie on her request list.

Netflix saw an opportunity in the tension over late fees. The company knew from its research what its competitors didn't: Some customers value having control over how long they keep movies, only not at the high cost (and anxiety) of late fees. This left room for a middle basis, a premium subscription service that guarantees revenues while accommodating variability in usage time. While incumbents were trying to strong-arm their customers into "behaving," Netflix built a winning business model based on a deeper understanding of the true drivers of client behavior.

A version of this article appeared in the November 2006 event of Harvard Business organisation Review.