Wednesday, August 10, 2011

Hiring the Right Customers

Bryan Caplan over at EconLog asks an interesting question.

Firms are usually picky about who they hire. But when they spot potential customers, their standard slogan is "Come one, come all." Sure, there are some exceptions. A few restaurants still have dress codes, and some rental car companies won't rent to under-25s. But by and large, firms welcome paying customers of all shapes and sizes.

You can read the whole post to get a better understanding of the entire question. Here's my answer:

Bryan needs to take a class in Services Marketing. (BTW, we've got a great services marketing group at the ASU business school.)

In marketing you worry about the 4 P's - Product, Pricing, Placement and Promotion. Any reasonable marketing class will cover those areas. The trick is that those things work for physical products. For Services you've got 3 additional P's - Process, Physical Evidence and People. It's the People part that answers his question.

Services are produced and consumed simultaneously. (If you ever figure out how to store a service, let me know. We're going to make a lot of money.) Services are often face to face. You're working directly with the customer and you have to adjust your service delivery based on your real time interaction with that customer.

In many cases you are dealing with several customers at the same time. Customers can interact and that will affect the delivery of services to each customer.

I teach economics at Mesa Community College. I deliver educational services. I have up to 35 students in each of my six classes. As any student will tell you, one disruptive student will ruin the class for everyone else. Given that problem, you have some options.

You can let them ruin the class for everyone and decrease the value of your service. This negatively impacts the future profitability of your classes.

You can fire the disruptive customer (drop them from your class) and carry on with the remainder. This decreases profitability but maintains the value of the delivered service for others.

You can deal as best you can with the disruption and try to minimize the impact on other students. This maintains the income stream from the problem student while minimizing the detrimental impact of others.

At the Community College we take all comers so that rules out the option used by other institutions - Admissions selects who shows up. This helps ensure a quality experience for all involved.

Every service delivery organization makes these choices. In rare cases, they do actually fire customers. They do that because certain customers are not only not profitable, but reduce profitability with their other customers.

With that preface, let me answer Bryan's 4 questions directly.

1. Service delivery business owners can very quickly assess whether a potential customer is profitable or not. If they can't, they won't be in business very long. As a test, ask any server in a restaurant. They'll point out the big tippers and the lousy tippers as they walk in the door.

2. Yes, good customers are offered better deals than bad customers. This is especially true in professional services where it is easy to price discriminate.

3. Tolerate times or not, service businesses are selective. The selection methods may be subtle - not marketing to a particular potential client, or overt - suggesting that a client go elsewhere next time or refusing to take a customer as a client.

4. Bad behavior on the part of service delivery personnel is easy to deal with in the private sector. They get fired. In the public sector, it is more problematic. Bad Behavior on the part of customers can also be dealt with. In most cases their price goes up. In other cases, they get fired (asked to go elsewhere or dropped as a client.)

If you would like examples, just talk to service delivery business owners, especially those that focus on professional services - doctors, lawyers, accountants, financial advisors... and education professionals.

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