Frances X. Frei

Do Better Customers Utilize Electronic Distribution Channels? The Case of PC Banking

Many service firms are pursuing electronic distribution strategies to augment existing physical infrastructure for product and service delivery. But little systematic study has been made for whether and how characteristics or behaviors might differ between customers who use electronic delivery systems and those who use traditional channels. We explore these differences by comparing customers who utilize personal-computer-based home banking (PC banking) to other bank customers. Case studies and detailed customer data from four institutions suggest that PC banking customers are apparently more profitable, principally due to unobservable characteristics extant before the adoption of PC banking. Demographic characteristics and changes in customer behavior following adoption of PC banking account for only a small fraction of overall differences. It also appears that retention is marginally higher for customers of the online channel.

Cost Structure, Customer Profitability, and Retention Implications of Self-Service Distribution Channels: Evidence from Customer Behavior in an Online Banking Channel

This paper uses the context of online banking to investigate the consequences of using self-service distribution channels to alter customer interactions with the firm. Using a sample of retail banking customers observed over a 30-month period at a large U.S. bank, we test whether changes in service consumption, cost to serve, and customer profitability are associated with the adoption of online banking. We find that customer adoption of online banking is associated with (1) substitution, primarily from incrementally more costly self-service delivery channels (automated teller machine and voice response unit); (2) augmentation of service consumption in more costly service delivery channels (branch and call center); (3) a substantial increase in total transaction volume; (4) an increase in estimated average cost to serve resulting from the combination of points (1)--(3); and (5) a reduction in short-term customer profitability. However, we find that use of the online banking channel is associated with higher customer retention rates over one-, two-, and three-year horizons. The documented relationship between the use of online banking and customer retention remains positive even after controlling for self-selection into the online channel. We also find evidence that future market shares for our sample firm are systematically higher in markets with high contemporaneous utilization rates for the online banking channel. This finding holds even after controlling for contemporaneous market share, suggesting it is not simply the result of increased market power leading to the acquisition of online banking customers.

Projections Onto Efficient Frontiers: Theoretical and Computational Extensions to DEA

Data Envelopment Analysis (DEA) has been widely studied in the literature since its inception in 1978. The methodology behind the classical DEA, the oriented method, is to hold inputs (outputs) constant and to determine how much of an improvement in the output (input) dimensions is necessary in order to become efficient. This paper extends this methodology in two substantive ways. First, a method is developed that determines the least-norm projection from an inefficient DMU to the efficient frontier in both the input and output space simultaneously, and second, introduces the notion of the “observable” frontier and its subsequent projection. The observable frontier is the portion of the frontier that has been experienced by other DMUs (or convex combinations of such) and thus, the projection onto this portion of the frontier guarantees a recommendation that has already been demonstrated by an existing DMU or a convex combination of existing DMUs. A numerical example is used to illustrate the importance of these two methodological extensions.

Measuring aggregate process performance using AHP

When one undertakes a benchmarking study, it is quite typical to collect performance data on a set of business processes from a variety of organizations. While one can compare efficiency on a process-by-process level, how can one compare the overall efficiency of one organization versus another using this process-level data? This note presents a methodology that combines tournament ranking and AHP approaches to create a ranking scheme that deals explicitly with missing data and ties in the tournament scheme.

Measuring the Efficiency of Service Delivery Processes: with Application to Retail Banking

This article presents a methodology that determines the role of design in calculating the efficiency of service delivery processes. The efficiency of these processes is first determined by using a variation of frontier estimation (data envelopment analysis [DEA]-like) techniques. The methodology is then applied to a particular service delivery process in retail banking. The methodology allows one to address the question of how much inefficiency in a business process is due to process-design choice and how much is due to process execution. In addition, the methodology determines which policy group offers the most potential for improvement for a particular firm. Consistent with expectations, the results show that no single process design dominates. However, the methodology demonstrates the trade-offs for a particular institution and offers specific recommendations for either improving an existing process or radically changing to a different design.

The Persistence of Customer Profitability: Empirical Evidence and Implications From a Financial Services Firm

This study addresses three research questions related to persistence in customer profitability. How well does current customer profitability explain future customer profitability? Does current customer profitability fully reflect the future customer profitability implications of demographics and other customer characteristics? How do different components of customer profitability affect its persistence over time? The authors find that a substantial amount of variation in 1-year ahead customer profitability is left unexplained by current customer profitability. They also find that different components of customer profitability have vastly different levels of persistence and that data on customer demographics and other characteristics have little incremental value relative to current profitability in explaining future profitability. Segmenting customers based on how their profitability is generated within a profit tier reveals that the efficacy of predicting future profit tier based on current profit tier varies greatly even among customers in the same current profit tier.

Market Heterogeneity and Local Capacity Decisions in Services

We empirically document factors that influence how local operating managers use discretion to balance the trade-off between service capacity costs and customer sensitivity to service time. Our findings, using data from one of the largest financial services providers in the United States, indicate that customer sensitivity to service time varies widely and predictably with observable market characteristics. In turn, we find evidence that local operating managers account for market-specific customer sensitivities to service times by deviating frequently and in predictable ways from the recommendations offered by a centralized capacity-planning model. Finally, we document that these discretionary capacity supply decisions exhibit a strong learning effect whereby experienced operating managers place more weight than their less-experienced counterparts on the market-specific trade-off between service capacity costs and customer sensitivity to service times. Overall, our results demonstrate both the importance of local knowledge as an input in service operations and the potential for incorporating richer data on customer behavior and preferences into service cost and productivity standard metrics.

How Do Customers Respond to Increased Service Quality Competition

When does increased service quality competition lead to customer defection? And, which customers are most likely to defect? Our empirical analysis of 82,235 customers exploits the varying competitive dynamics in 644 geographically isolated markets in which a nationwide retail bank conducted business over a five-year period. We find that customers defect at a higher rate from the incumbent following increased service quality (price) competition only when the incumbent offers high (low) quality service relative to existing competitors in a local market. We provide evidence that these results are due to a sorting effect, whereby firms trade off service quality and price, and, in turn, the incumbent attracts service (price) sensitive customers in markets where it has supplied relatively high (low) levels of service quality in the past. Furthermore, we show that it is the high quality incumbent’s most profitable customers who are the most attracted by superior quality alternatives. Our results appear to have long-run implications whereby sustaining a high level of service quality is associated with the incumbent attracting and retaining more profitable customers over time.

Value Creation and Process Management: Evidence from Retail Banking

The design and implementation of service delivery processes plays a key role in the overall competitiveness of modem organizations. For example,Roth and Jackson (1995) provide clear evidence that process capability and execution are major drivers of performance due to their impact on customer satisfaction and service quality in banking. Thus, any study of the efficiency of service organizations must focus on the role of process design and performance.

Associations between demographic factors and provider structures on cost and length of stay for hemodialysis patients with vascular access failure.

Vascular access failure (VAF) is a major determinant of morbidity and cost for hemodialysis patients, but little is known about the care patterns and cost implications that are associated with VAF. A total of 952 episodes of VAF in 348 patients were identified using specific procedure codes. Demographic and care pattern characteristics were available as were detailed costs for each episode. The determinants of several important performance measures were evaluated: Cost per episode, inpatient versus outpatient treatment, and length of stay (LOS). Over 5 yr of study, the proportion of VAF episodes that were treated on an outpatient basis increased from 31 to 63%. Average costs of outpatient versus inpatient episodes were