Organization
Tobias Kreß, Andreas Penkert, Carsten Schulz
The End of the
“Watering Can Principle”
Every customer receives the service he deserves
Nowadays companies can‘t offer every customer equal, best ­possible
­service quality, this would be neither economically nor appropriate.
­Integrated ­formulation for customer equity calculation serve as a basis for
individualized and differentiated Customer Services.
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Detecon Management Report • 2 / 2010
The End of the “Watering Can Principle”
oth, manufacturing and service companies are operating
B
­today in an environment characterized by fundamental trans-
formation and change: accelerated technological innovation and
substantially shorter product life cycles, more complex customer
needs, ever more sophisticated customer demands, and generally saturated markets. Competition has become stiffer and is
putting more pressure on companies to adapt continuously to
these difficult general conditions – at a strategic and operational
level.
The professional management of lasting customer relationships
was a major commercial success factor for companies long ­before
any of this happened. The results of an OVUM customer study make this abundantly clear: 69% of the respondents ­stated
that they would terminate a business relationship completely
if the service were poor.* Consequently there are good reasons
why companies are focusing on customer satisfaction more and
more frequently as a key corporate goal; the growing of awareness of customer service, the main interface between companies
and customers, as one of the load-bearing pillars of commercial
­activities is inexorable. The challenge here is to achieve economic balance between service excellence, customer satisfaction,
and profitability!
Standardized customer service with the best possible features
for every customer as it was commonly practiced until only a
few years ago is neither economical nor sensible for companies.
Differentiation in the customer relationships which is oriented
especially to their customer lifetime value (CLV) is evidently
en vogue. The concept of customer service differentiation, i.e.,
the segmentation of customers on the basis of concrete (value)
criteria and the provision of tailored service according to that
value segmentation, has been familiar for a long time and is
by no means a new trend. However, most of the models for
customer value assessment as practiced in the past have been
one-dimensional and based on monetary parameters. Especially,
the use of the ABC analysis, the profitability analysis, and the
future potential analysis has been very common.
Since the value which a customer relationship has for a company is subject to a number of influencing factors, the focus of
these one-dimensional models is too narrow. Most of the models used today by practitioners are multi-dimensional. A basic
distinction is made between scoring models and customer lifetime value. The most comprehensive evaluation of a ­customer
relationship is achieved through the use of the customer lifetime
model. This model encompasses both monetary aspects and
“soft” criteria such as the relationship potential (customer references and customer information).
Fundamentally, this model distinguishes between transaction
and relationship potential. The transaction potential essentially
* OVUM: 2009 Business Trends: Consumer Preferences in Contact Center
Interactions. End-user Analysis of the Contact Center Market, January 2010
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Detecon Management Report • 2 / 2010
Organization
comprises the current business volume, the growth potential,
and the cost reduction potential. The recommendation potential (reference potential), customer feedback on optimizations
within the company (information potential), and cooperation
potential flow into the relationship potential.
Nowadays no one disputes that customer service, being the
company’s “business card”, represents a major pillar of corporate
strategy. Caught on the horns of the dilemma of service excellence and cost pressure, enterprises must master the challenge
of readjusting services within a matrix of customer value factors
as well as individual characteristics and behavioral patterns of
customers – the qualitative properties.
The offer of selective, individual service makes good sense from
the customers’ as well as the companies’ viewpoint. For ­example,
the assumption that a service level must be as high as possible in
every single case is today no longer unchallenged. The belief that
every customer wants detailed advice over the telephone when
there is a question is also considered to be a fallacy. Customer
behavior – especially with respect to the performance of service
– has become substantially more complicated today and will become even more complex in the future, driven primarily by the
advance of mobile communications media and the interactive
“2.0 Generation” of the internet.
A future-oriented customer service strategy must be capable of
dealing with the development of complex customer needs and
changes in user behavior; even more, it must exploit these factors for differentiation. Companies must develop a previously
unknown degree of flexibility and offer services with a sharper
focus on consumers. Customer service differentiation and the
provision of individualized services are the strategic response to
the general conditions under which companies must operate
today.
Assess and characterize customers!
The opinion that customer service must be differentiated more
clearly and oriented to individual customer aspects if companies are to prevail in their competitive environments is broadly
accepted: 97% of the surveyed participants in a recent Detecon
study on the future trends in customer service agreed. In the
opinion of the respondents, this sends a clear signal for the rejection of the concept of standardized customer service which
gained prominence in the 1990s. The fundamental value of comprehensive and excellent customer service is also unquestioned:
89% of the participants agreed that it is a rewarding investment
for the improvement of customer satisfaction and subsequently the strengthening of loyalty. The differentiation approach is
followed by the thesis that in the future customer service will be
Figure: Factors of Customer Lifetime Values (CLV)
Customer Value (CLV)
Relationship potential
Transaction potential
Basic volume
Growth
potential
Cost reduction
potential
Intensification
potential
Cross-selling
potential
Up-selling
potential
Reference
potential
Potential from
declining
price elasticity
Source: Elements of CLV according to Hippner – basics of CRM:
concepts and design by Hajo Hippner (Editor), Klaus D. Wilde (Editor) (2006)
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Detecon Management Report • 2 / 2010
Informations
potential
Cooperations
potential
The End of the “Watering Can Principle”
strongly characterized by individualization and personalization.
93% of the respondents agreed with this thesis.
Before companies can specifically and successfully establish differentiated customer service, they must first become thoroughly familiar with their customers, understand them, and assess
them. Besides the quantitative evaluation, a qualitative analysis
is especially useful here as a means of obtaining data about the
expectation structures, purchasing behavior, and other individual characteristics of the customers. The customers are not the
only ones to profit from the greater transparency provided by
the growing “information society” and the technological innovation process – companies also find expanded opportunities for
the collection and analysis of data and information. The consolidation and structuring of extensive information through the
use of appropriate support systems and processes is an integral
part of modern customer feedback management. The customer
profiles generated this way contain the quantitative and qualitative characteristics for the creation for a transparent evaluation
basis.
Value-based, but also individual differentiation of the service
portfolio!
Customer value is also clearly designated as a significant differentiation property in the Detecon study: 75% of the respondents believe that the type and scope of services should always
be oriented to the value of customers for a company. The ­degree
of individuality and exclusivity of services should rise from low
to high customer value, starting with economical/solutionoriented basic services in the lower value segments and leading
up to the premium-oriented services for top customers. These
results confirm that service differentiation based on customer
value is already familiar and established.
But as described above, the postulate here is that the futureoriented differentiation of customer service must take another
substantial step forward and include an additional, qualitative
dimension. In this setting, the question regarding the ­criteria
according to which service differentiation is already being
­practiced today in the surveyed companies was of great interest in the Detecon study. Indeed, the customer value-based
aspects dominated here as well: customer development potential
(73%), customer turnover volume (72%), and customer profitability (64%). “Duration of the business relationship” (47%),
“degree of customer loyalty” (45%), and “customers’ channel
pre­ference” (42%) trailed well behind. Nevertheless, the significance of these characteristics for differentiation of customer service clearly stands out by virtue of their widespread acceptance.
The differentiation approach based strictly on customer value
broadly offers three different customer service strategies which
can be used to serve the individual customer segment groups.
Reduce costs: This strategy pinpoints in particular customers with
a low or negative CLV. Because the growth potential has been
integrated into the CLV, a low CLV means that, as things currently stand, lucrative business will not be possible with these
customers in the future any more than it is today. Since the
revenue side cannot be increased, a rise in customer value must
be achieved in this case by reducing service costs. The ­possible
loss of unprofitable customer relationships is deemed to be
­acceptable.
Develop customers: In the case of customers with a high CLV
resulting from great growth potential, the customer service
strategy should build on the development of the business relationship. Current and future needs of the customers must be
identified and realized so that the returns from the customer
relationship develop as predicted.
Retain customers: Customers with a high CLV resulting from a
currently high basic volume must be retained at all costs, and
their bond to the company must be strengthened. The maximum transaction potential has already been realized in these customer relationships. The customer service strategy in this case
must seek to secure a continuation of the customer relationship
with the least possible disruption.
In practice, differentiation of the service concretely means that
an appropriate service portfolio must be allocated to every
­customer profile on the basis of its value and needs characteristics, e.g.:
• Type of care: Self-service or individual, personal advice?
Additional services free or subject to charge?
• Channel management:
Which channel is preferred by which customers?
• Sales: What up-selling offers do customers receive based
on their purchase interests?
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Detecon Management Report • 2 / 2010
Organization
Besides the detailed analysis of the current situation, the future-oriented question regarding the targeted development of
the customer groups must be answered: which profiles have
­development potential? Which ones are already especially profitable today or can become so in the future? Which groups have
a value which is consistently too low for the company?
Future-oriented service differentiation should function in multiple dimensions. The groundwork is initially laid by a valuebased differentiation of the scope of services: basic services
covering needs, extensively automated, for customers with low
or negative CLV who display little or no potential for development; excellent service with outstanding products for highvalue customers with long-term potential for loyalty and value
development. A more detailed differentiation of the service according to the individual, “soft” aspects – e.g., purchase offers,
additional services, channel offers – as recorded in the customer
profiles comes into play within a service portfolio defined for a
customer value segment.
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Detecon Management Report • 2 / 2010
Specific, active channel management according to customer
value and preferences!
An important leverage point for increasing efficiency in customer service can be found in the expanding communications
channels. Substantial potential for the customer service of the
future can be exploited by channel utilization and allocation
oriented to value and needs.
Value-based: comprehensive and personal customer advice
should focus on the customer groups with high profitability
and great development potential. Customers who are currently
unprofitable and are predicted to generate low turnover in the
future should be managed more by using standardized service
with a high degree of automation so as to keep the costs which
cannot be amortized as low as possible.
Need-oriented: there are many users, especially among the
­younger buyer groups with an affinity for online services, who
The End of the “Watering Can Principle”
actually prefer self-service and similar facilities as interaction
channels because of the greater convenience they perceive here.
Based on high levels of automation and the very low utilization
of personnel capacities, self-services represent the least expensive service channel for the company. Customers who have this
preference should be actively managed in this channel because
it fulfills their desire for fast service independent of fixed times
while at the same time incurring the comparatively lowest service costs for the company.
study. At the moment, the aspect of economic ­efficiency is clearly prioritized over customer satisfaction as revealed especially
in the assessment of the differentiation dimensions; the “hard”
economic customer value factors (development and reference
potential, profitability, contribution margin, etc.) still rank
ahead of the “soft” topics such as customer loyalty, ­duration of
customer relationship, and channel preference, but they also register a noteworthy degree of endorsement, clearly confirming
the trend.
Win-win situation is the target
Differentiated customer service demonstrates two types of
­value-generating effects; based on carefully analyzed data,
­services can be efficiently tailored to customer profiles. The
aim is to define the ideal service portfolio for customers on the
­basis of their value and individual characteristics and to realize
this structure in practice. Moreover, this type of ­differentiation
provides an effective instrument for the strategic support of
forward-looking management and further development of
­customer groups. Successful service differentiation can turn
the challenge raised by the dilemma between service excellence
and economic efficiency into a win-win situation: cost-efficient
utilization of service resources and profitable customer groups
for the company, tailored products and services and heightened
satisfaction for the customers.
The significance of differentiated customer service of the ­future is
undisputed – this is also confirmed by the results of the ­Detecon
Practical example: Deutsche Lufthansa
In recent years, passenger aviation has gone through a dramatic market
transformation: the large full-service airlines have had to adapt to a highly
competitive environment in which more and more no-frills providers are
pursuing low-price strategies . Yet at the same time they must continue to
serve their highly prestigious premium segment. To span this gap, they are
depending more and more on service differentiation strategies such as the
case in point of Lufthansa and its mobile service differentiation.
The primary goal of mobile services is to expand service access to situations and circumstances in which classic communications channels are not
available. Lufthansa focuses a differentiation of its mobile services according to defined target groups analogously to its customer segmentation.
Target groups of mobile service at Lufthansa:
a. “Status customers”: first class customers (Honorable Circle, Senator,
­Frequent Traveler) with more than 150,000 flight miles a year and
business class customers (Frequent Traveler) with about 50,000 miles a
year.
Tobias Kress works as a Senior Consultant in the area of CRM and is a specialist
in the field of financial services. He has gained his more than ten years of professional experience in positions with banks and corporate consultancies. His
work focuses on CRM and customer care strategies as well as service and sales
strategies differentiated according to customer value.
[email protected]
c. “Non-Members”: occasional fliers who do not prefer any particular airline.
Carsten Schulz is an expert for CRM and call centers. He heads the Global
Competence Team CRM. His more than ten years of experience as a consultant
for CRM and call centers have led him to focus his consulting work on inno­
vative CRM and service strategies, customer care organization, and outsourcing.
He has developed various loyalty concepts and built up a leading multi-partner
awards program.
Differentiation of the mobile service in the target groups:
[email protected]
Lufthansa differentiates mobile service first by content: not every service
is offered to every target group. For example, the product mobile flight­related information service (short-notice changes for gates, departure times,
etc.) is restricted to the segments Status and Basic; Non-Members are
­excluded. Another distinction is made according to user friendliness and
com­plexity: Status customers must reply simply with Y/N to an ­automated
text message when using the mobile check-in service while Basic and NonMembers must themselves log on to WAP to access this service.
Andreas Penkert works as a Senior Consultant in the field of CRM. Before
joining Detecon, he gained several years of professional experience in the areas
of customer service management, contact center management, project management, and key account management. His consulting expertise covers the main
points of customer service processes and management, quality management
and reporting, organization of service units and restructuring, change process
­management, and CRM innovation. b. “Basic customers”: economy class customers, Miles&More users
[email protected]
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Detecon Management Report • 2 / 2010