Firing unprofitable customers

Dear Blog,

Today saw me striking 3 homeruns :)

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DISCLAIMER: Nerdy post below - read at risk of your own boredom. You have been forewarned. Unrelated to comment above.

In other news, really enjoying my service operations class - a welcome surprise, since I thought I would enjoy Marketing much more (I'm not much of a creative person...really). Operations is a possible career path to consider - though often neglected, much value and efficiencies can be added. Exactly where I would like to develop competencies in, since the barriers to market entry is low. High potential growth market. Just like forensic accounting. Plus, I enjoy and am fairly good at those areas. Critical success factors :)

I digress again! Back to the topic.
So often we (business students) put ourselves in the consumer's shoes, and try to meet all of their variable needs (no two customers are the same). In service operations, good companies realize they cannot be all things to all consumers, so they target a segment of a market they believe they can serve best based on the competencies they have.

To serve this target market well, the company might incorporate certain procedures to invariably "filter" off the variability in customers they know they cannot serve well. Sometimes it is better to send some customers who have different needs than you can meet to competitors to help you better focus on meeting needs of your focal customers. These customers may be harder to please, more costly to please (more than the Customer Lifetime Value to be earned), or simply, are unprofitable customers. I bet you, like I, are wondering:

"Companies firing their customers?! Filtering out potential customers?! What!! I have never heard of such a practice".

Well, think harder. These practices are ingrained into how service businesses operate, especially those of successful service businesses.

Here's an example:
1. Southwest Airlines (keep in mind some loyalty reward programs have been instituted since I have studied this case, not all the information is up-to-date)

• Strategy: To be the market leader in budget airline market by providing egalitarian service, low price, no frills airline.
• Operational Execution:  
• Flies out of smaller airports (less crowded, less delays)
• Flies only one type of plane (faster turnaround time to clean plane - standardized operations, decreased variability in tasks)
• Hiring process includes customers and junior team members (emphasizes team work and collaboration)
• Cross-trains employees to perform each others roles (no waiting around, everyone contributes to increase efficiency and turnaround time)
• Does not offer priority boarding or seating even for frequent fliers - seating is first come first serve
• Customers who miss their flight are not allowed to fly in the next available plane even if there is an empty seat if it is out of their fare range - they have to wait for the next available flight within their fare range, or top up.
• Filtering of customers occurs via:
  The last two points above. 
• Customers are all treated equally. Seats are based on a first come first serve basis.
  What customer behavior does this encourage? 
• Customers will arrive early to get preferred seating, and quickly snap up seats once they enter a plane, decreasing the one of the bottleneck of plane turnarounds - seating passengers.
• Customers who miss their flight are not allowed to fly in the next available plane even if there is an empty seat if it is out of their fare range - they have to wait for the next available flight within their fare range, or top up.
  What behavior does this encourage? 
• Timely arrival of passengers - no hold up of plane departure
• Discourages encourage cannibalism within your own firm (where you kill your profits by allowing customers to take advantage of cheaper prices by booking the cheapest flight, missing it, and taking the next available plane with a more expensive seat which is more likely empty).
   
• Why do this?
• Southwest clearly understands their business is in the budget industry. 
• For Southwest, profitability is achieved via increasing efficiency and turnaround time, decreasing down time, and maximizing airline (where revenue is derived). To do this, they have built an operational model (see operational execution above) to support their strategy.
• Southwest understands their focal customers. As a budget airline, they know their key customers are concerned about getting from point A to point B in the fastest, low price possible. Southwest operations from non-crowded smaller airports (such as the Dallas Texas Love Field airport), which is less crowded,  has less flights and thus air traffic delay and less TSA traffic. This, coupled with their first come first serve seating policy and standardized operations then helps them quickly load their passengers, and reduce unprofitable ground time and increase revenue-making airtime.
• They are also aware this target market is unlikely to want extra services (such as frequent flier priority boarding and seating), since they choose a low price, no frills airline. Therefore, they are okay letting go of unprofitable, harder-to-please, unhappy customers who may have different needs go to competitors (i.e. Delta where there is more service/loyalty rewards in place).
•  Results (As of time of case study):
• Southwest's turnaround time is 50% faster than its competitors
• Leader in budget airline industry in USA

Pretty interesting, no? 



Credits to my BYU Professor Sampson, who is one of the most well-respected experts in the field of Service Operations and creator of PCN Diagramming.