Transcript for:
Understanding Service Quality and Gaps Model

hello welcome to my session on service quality the gaps model and how to diagnose quality shortfalls for me service quality is one of the most important topics in service management together with customer loyalty and managing people it is absolutely critical and why is this the case before i go there let us look at first what is quality how important is it how can we explain and diagnose gaps and improve quality and then finally how much should you invest in service quality can you spend too much money on it and of course you can right so the question then is what is the right level so let's look first at what is service quality quality is really an attitude of the consumer on the global evaluation of a service so it's not like satisfaction you know satisfaction is an evaluation how happy are you today quality is really in general how good a company are you and you can see what drives loyalty is always the prediction i mean i buy you today not because i was happy today with you because i predict i will be happy with you tomorrow right so quality is really the key driver of repeat purchase and loyalty it's the prediction of the next purchase here and quality is formed over time based on many uh consumption experiences is influenced by word of mouth and many of these things so quality is relatively stable is an attitude as a belief about your company now when would you say a firm delivers excellent service quality and how we typically define this here is your meet or exceed expectations so you can ask how often and for quality it really means you consistently meet and exceed expectations so that is quality that's the construct of service quality now that we know what quality is you can ask what are the dimensions of service quality and these are five dimensions that are quite generic and apply to any service and you can see here it is tangibles that is anything you see all the touch points all the tangible cues it's reliability deliver do you deliver as promised it's responsiveness so are you willing to help customers especially when things go wrong somewhere the assurance do i do i trust you that you are an expert in this and finally empathy is about caring individualized service now you may ask how important are these dimensions and tangibles is interesting especially for service which we call credence services that means even you can't really assess the quality in an objective manner so if you go to if you go to a surgeon how do you know a surgeon that did a great surgery if things go right um you know maybe it wasn't a very complicated case if things go wrong you don't know why things may have gone wrong right may have nothing to do with the surgery quality here so there are certain certain services there's a lot of credence and for example i i take universities or business school education is one of the most credence type of services where i keep joking even after consumption you don't know what you have right so for these types of services tangibles become very important because how do i trust you that that you deliver great service that you deliver great quality and so people use proxies so for surgeons there's a we've done a lot of research on how do patients judge the quality of a clinic judge the quality of a surgeon and it comes down to a lot of tangibles uses plain language explains things to me as patient has nothing beats a clean white coat for example right if you have a very high-end private clinic then it's the furniture the reception the receptionist all of those things are tangibles that support your overall positioning and can therefore be quite important but i've seen tons of surveys looking at the relative importance of these dimensions in one dimension is always top and counts for between 30 to 70 percent of of quality as far as customers are concerned can you guess which dimension yeah we can i could have a long discussion in class on this um but i can tell you that the most important to customers is reliability that you do what you promise that you deliver the value proposition customers came to you for [Music] so if you take a atm machine the most beautiful and convenient interface is completely useless if there's no cache in the machine so nothing beats reliability and products and services and in people here you can see our poor number 30 here who has an unreliable partner who is more interested in his valentine than in winning the game so reliability is really the foundation of quality to deliver what you promised to deliver the value proposition customers came to you for okay and the others depend a bit on the context like empathy for example in many routine services doesn't really matter you don't need empathy at a ticket counter if you buy a ticket and everything is fine you don't want to talk about the weather and how you feel and why you have such a heavy bag full of mba books and so on right you don't want empathy but if you lose your child in the train system or station or somewhere then you want all the empathy they can give you as a very urgent to you and you want them to stop the trains and call you helicopters and all right so just a key takeaway is responsiveness is the core is very important and then the more intangible the more credence type a service becomes also tangibles becomes more important okay now we set meeting or exceeding customer expectations so quality is really how well do you do against expected services and what customers think you're delivering for these five dimensions and that's the quality gap right if you deliver less than what customers expect or if customers perceive you to deliver less than than what they expected there's a problem so that was my first part what is quality i hope we nailed this now now the next is really how important is service quality and we have tons and tons and tons of research that shows that better quality leads to higher loyalty leads to word of mouth leads to increased share of wallet and therefore leads to higher profitability one of the first studies that's a quite old study now but is very nice because this was the first time people really got aware of this is this study here it's called pims's profit impact market share study and they plotted profitability you can see return on investment here against market share and relative quality so market share that is volume so obviously the more volume you have and we know this from economics you go down the learning curve you have economies of scale economies of scope your overhead your r d is allocated across more units and therefore profitability goes up what was new here on this chart look at relative quality that if you move from inferior to superior in terms of quality in a segment your ri also goes up and what was very surprising how much and you can see the impact so economics really looked at volume and and and and unit cost uh carefully here but not really on quality what surprised many was how important quality is compared to volume and you can see it's almost a mirror right it's 7 14 21 for volume 7 13 20 for quality it's 13 20 27 for volume it's 14 20 29 for quality and you can see the most valuable uh the most profitable position is you are the market leader and you're the quality leader the the most profitability and and the company that springs to mind here is really apple right apple is quality leader and market leader and incredibly profitable now why so why is quality more profitable and this is really shown in this chart here which is the lifetime value of customers and you can see here that as a customer stays with you longer they become more profitable and customers only stay with you if your value proposition needs or exceeds their expectations right so it's all about the quality delivers and so the name of the game is really customer loyalty and the key driver of customer loyalty is service quality now given given that quality is so important how can we look at why aren't we delivering on quality how can we think about improving quality and the what i have here is the gaps model which is a beautiful framework because it helps you to not just say oh there's a quality problem but it helps you to nail it why is there a problem is this a policy is your product is your process issue and so on and so forth so you can really see where the where the issue is here and the other thing is what i love about it it is scalable meaning you can use it for a whole company you can use it for a business unit you can use it for a particular geography of a particular process or particular product or service or even team right so you can see it's it's really a very nice diagnostic diagnostic tool that allows you to conceptually to play play through where are the quality issues and then given on those issues it can tell you or guide you how can you think about fixing those gaps right now let's look at the gaps model here and this is the gaps model now this is academics um they call it the gaps model these they're three very famous researchers in service management services marketing espacio para zornan len barry and valerie zeit hammer they developed the gaps model and also the dimensions of quality we just heard so they spent half their career on on really nailing all the topics around service quality including self call as a measurement tool for quality but they call it the gaps model i promise you if a consulting company had done this they would have trademarked the whole thing called it quality diagnostic tool or something more exciting and also the researchers they looked at they called them gaps the original gaps model has five gaps i added one extra gap here which i explained later but what you see here is gap six in in the this model which is the quality gap and the gap is really the difference between perceived service and expected service so it is not something you can say oh we measure it it is what we deliver now it's what the customer believes you delivered so if you if you're from the traditional tqm literature where you measure tolerance levels and and all of those things the internal measures of quality they're not service quality service quality is customer defined so this gap six i mean again if you want a consulting company you would give all these gaps a proper name in my textbook i call this the quality gap so the service quality gap gap six so this gap is a function of five other gaps that means you close the quality gap if all the other five gaps are also closed so let's look at these gaps gap one is really the gap between what customers really expect and what management thinks customers expect and here management can be again depending on the scale you look at it could be top management could also be a branch manager could be a process owner it could be a product owner so it really depends on who makes decisions on this service and and what that person expects or believes customers expect so we call this the knowledge gap do they have the knowledge about customer expectations now we can have a long discussion why in the world is there a knowledge gap right and i mean in class i have a long discussion on this but let me sort of give you some key reasons here and i'm sure you can think of more but one could be it's not customer centric enough so we don't listen to our customers carefully enough we don't do the right research and and maybe aggregate and don't look by different personas or customer segments where there may be big differences in expectations right it could be that top management has a ton of other problems mergers acquisitions finance strategy that this is not important enough for them to spend time on it so there's no focus on the customer experience um another reason is that top management usually cannot mystery shop their own service so they don't know so if you are a ceo of an airline and you fly on your airline have a guess what service level you will experience yeah that then really is in-flight service other airlines talk about yeah or you as the ceo you will never hang on the line to to try and get through to reservations or resolve a service issue so you don't understand all of these problems customers have customers maybe from very different economic strata education levels countries cultures and you name it yeah so you can't really experience it yourself and you have a very different set of of expectations on your own it was quite cute i mean many years ago uh we i observed the case a mini case study where the ceo of a resort chain was visiting with his family the resort and we were at the same resort and we wanted to jet ski and there were the jet skis parked in the bay outside and we asked can we jet ski and you're told no i'm so sorry but the jet skis are all reserved right so it turned out that the owner was there and over dinner the owner and family may have said something like uh whether nice jet ski perhaps and what did the general manager do of the resort block all jet skis so that if the owner had known that the jet skis were blocked for him he would have been terribly upset but the general manager i mean wanted to deliver the best quality service he can to the owner right so this is the gap one is the knowledge gap here now the second gap is between okay what does management think customers want and translate this into service quality specifications processes policies products and we call this the policy gap and why would custom why would top management believe that customers want a but then specify a we are going to deliver b yeah that doesn't seem to make sense so why is there a gap and you can think about this a bit why wouldn't you give customers what customers want and there are two common reasons for that the first one is very common i hear your dear customer but what you want is just too expensive to deliver so cost too much and then after they think a bit longer they say and by the way it's almost impossible to deliver so we can't do it so too expensive cannot be done are the two most common reasons for the policy gap to me if you are able to overcome this too expensive and cannot be done and obviously it's a hard nut to crack but if you do this you can often realize a quantum leap in quality for your customers and let me give you two quick examples one some time ago i was working for the ceo of one of the large property management companies so they have billions of properties under management and all of their customer service processes are of course for tenants and he wanted to really improve service quality delivered to tenants he wanted to make his properties more attractive compared to competing properties so he brought us in as i was working with the consulting company at that time and and to do customer process customer service process redesign and what we usually do we zoom in in what we call the most hated process so what is the process your customers are so upset about that we really should do something about it and the one process we had there was sort of a plan application that means you go into a property and you want to make amendments to the property or you have been in the property for some time and now you want to make changes to the property the clients we talked to they were coughing blood over this right because i had to put in long architectural drawings and and a ton of work and application and da da da da to make changes to the building and was a large team at the client side working for this process so we really walked in then and and asked [Music] what are customer expectations right and they were really complaining if i want to put a flower pot into the staircase i have to fill in a ton of forms and wait forever to get it approved if i want to put in an office practitioner again a ton of forms get it approved and then we went back to the company why do we need all of this stuff why does it take so long i mean the answer in retrospect is quite simple and it's completely online today but what they hadn't done is they had not stratified the process so whether you wanted a new flatted factory or whether you wanted to have a flower pot was essentially the same process so the first thing is we stratified this process into the simple stuff and the complex stuff and then the simple stuff we went one step further why do you need to know about the flower pot why do you need to know about the office partitioner the answer that came back was more or less it is only for compliance i mean the company also couldn't care less about the flower pot but there was fire safety regulation if that pot blocks escape routes then there's a problem there may be a load so if your pot is too heavy and is on the staircase so there's a certain number of kilos on the square foot you can put right so these were the only questions of the office partitioner same story i mean they don't care about the office petitioner because when you have to return the office back you return it back in the original state but they needed to know hey if you put an office petitioner in here is there a sprinkler in in in both of the rooms is there a smoke detector in both of the rooms and is the fire escape route free so just ticking boxes right uh are you complying with fire safety regulation yeah so next question we asked is hey you know um can your client determine this himself or herself right are they professional enough do they know this and the answer is well our clients are global mncs they have property managers who themselves are more senior than our officers who approve this here so of course they can assess that next question is can you trust your customer so we ask legal and legal said of course never trust anyone right so let me ask legal so what do we have to do that we can trust our customers on this so that we can allow customers to make these changes and just notify us so legal came back and they said it's very simple you have to change the rental contract where you say as a client you can do this and this and this and if you put an office petitioner here the rules and regulations for that you have to follow so the whole thing is online now that you put in a picture and a drawing and then you click that there's a fire escape route is free and a sprinkler is on both sides smoke detector is on both sides and then you you digitally sign the whole thing and it is done yeah so with this very simple moving so changing contracts and moving the work in the way back to the customer made it very easy for both customer and the company here so a quantum leap in productivity gain for the company and a quantum leap in service quality improvement for the client so this was this first they said we can't do it but if you work hard enough and you can you're creative and and and you do what we what we did here is customer service process redesign you can overcome those things so this is the cannot be done yeah if you can do it there's a there's a there's a big benefit for you here and the second one the two expensive the same thing here i heard this many times yeah i hear you that you like this but it's just not cost effective to deliver that to you and whenever i hear too expensive and whenever you hear too expensive you should think about tiered service and again for this property company we had a standard outsourced contractor for maintenance and repair for lifts and escalators and the standard response time was like two hours and some customers said um that's not good enough for us we have very sensitive vaccines or medication or whatever we can't wait for the guy to come show up in two hours we need a 30 minute response time so the questions to ask for you here is number one um is this the only customer who has this need or is there a whole segment for a premium service so if it's the only customer you still can't think is this customer important enough that i do an exception for this customer if it's a whole segment for heaven's sake develop a premium solution at a premium price so how much should you change charge more i can tell you a lot and why if you move from two-hour response time to a 30-minute response time you're gonna need more engineers more dispatch centers you may have to drop someone else's job to go to a priority client here so maybe you charge a hundred percent more for two hours right and at the same time not every customer may need a two hour response time so why would it make sense in addition to a premium product also to have an economy product so you say i attend to you within five working days and i give you a discount right and why would that make sense for the service provider very simple that it really helps you to spread your load your workload if everyone is on two hours and 30 minutes there will be times there's so much demand you will disappoint customers here and i mean lift maintenance is interesting one of my executive mba students he was with autist elevators and i didn't know that before but he told me even lifts are moody yeah they don't break down random and they tend to break down before long holidays then right after long holidays right and why before a long holiday everyone rushes with their projects and is so busy people come early and leave late and the lift is operating the whole day a very heavy load and that's the likelihood of a breakdown is higher and it is even worse after a long holiday you had to idle lift for four or five days and then they come back on the first day of work and room is so busy and the lift is going up and down up and down and again the likelihood of a breakdown is much higher so what you will have then if everyone has one half an hour two hour response time then after the long holiday we are going to be so busy and not be not able to deliver to our kpis yeah but if you have some customers on a five-day response time you never serve them during the peak let's say at nus business school we have a two two buildings here one building is only four stories if the lift breaks down that's very easy dean can send an email to to or everyone says dear staff dear colleagues dear students um i declare the healthy working week please take the staircase we switched off the lift right so and then most of the time what happens yes you have a five day response time but unless there's sort of a real crunch you probably address even same day or next day so it's the five days only for you that you have a tail end that if things are really tight you can distribute capacity so that means you have a premium standard economy sort of solution a tiered service solution here and that does two things it takes from the peak out those customers who are not so sensitive for the service and it allows you to run at a much higher utilization or load factor of your of your team here and i mean one of the companies always admire singapore airlines and their cargo business never tells you it's too expensive yeah they just ask you does it fit into a 747 and if yes however difficult they will transport transported for you and even very difficult freights they made a name for themselves let's say for flying racing horses between hong kong singapore and london and dubai so these horses fly first class right they are very valuable and and so yeah there's a lot of effort singapore airlines puts into into flying those as and they charge their nose of that for costs of course same as for sea world in australia a lot of the whales and and and sharks and so these animals were air flown singapore airlines so when you hear too expensive think and segmenting the market and then tiering your solution that you can actually spend that extra money to deliver the extra value to your customer so that's the policy gap the third gap is the delivery gap and you may ask why in the world do i have a delivery gap i have a i have a kpi touring pickup why doesn't my stuff pick up into rigs right and then many times people think that the the policy gap is really because of what staff skills staff attitude and i can tell you yes sometimes this is an issue but most of the time it is not the key issue most of the time you have a delivery gap because capacity in place is insufficient support tools processes don't work yeah so it's it's you're not enabling your front line to shine to be heroes i mean um for example in singapore we have a tax deadline which is the same day every year i think i think it's 15th of april the first year i was in singapore i had to do my tax declaration so i tried to call in the revenue authority on the 13th of april guess what i'm not the only one who has questions right so so you can see however good your staff they will never be able to deliver this huge peak of course that is before the deadline maybe shortly after the deadline and for the rest of the year is going to be low so you have to think of other ways how you fix this delivery gap here and if insufficient capacity is the issue yeah then you have to look at either the increased capacity of call center staff here which is very expensive to cater for certain peaks if that doesn't work maybe you can lower the peaks right one way which one could do for example rather than having everyone has the same tax deadline you split it across 12 months so people with the surname letters starting with abc they have a deadline in january and xyz have the deadline in december so that means there's an equal load yeah i mean singapore didn't do this they have a very easy tax system it's all online now and quite self-explanatory that's the other way right how you you take demand out in some way so the gap three is all about uh capacity in place support process skill set and attitudes of your front line that's gap three the service delivery gap now gap four also called the communications gap so what you have is you have external communications that could be personal selling sales force business development uh and so on it could be mass communications it could be the website whatever you deliver you're promising you're delivering promises here and your delivery doesn't match yeah i mean i don't know you look at ads for airlines they feature first class is maximum two passengers minimum one cabin crew silverware orchid bottle of champagne and you come on board and you don't see any of that right you miss the small print here first class only okay uh in consulting or in pr and sales is the same thing right if if i am a sales guy i want to do the sale i promise the moon to you until you sign on the dotted line right because i want the sale so i over promise because i want to sell whether it's mass communications whether that's personal selling yeah and i'm sure in many of you in the audience here you're either in sales business development audio and operations and can relate to this what you will have is you will have people in sales who are selling and just imagine if you're in sales you're short of your quarter there's a really difficult project to be sold you can sell it but you over promise and you know it's going to be a challenge to deliver with yourself well if you fulfill your kpis with this of course yourself right and then you turn to your good friend and operation says hey jimmy uh uh this is going to be a very difficult customer i'm sorry but this was a very important sale for the company here this is a strategic customer and a strategic project yeah i guess you heard this before all the difficult stuff is strategic here strategic customer strategic project and i know this is in good hands with you thank you so much for taking care of it bye-bye yeah okay so you see the the incentives are not aligned here yeah so of course i mean you can think from how do i align um that's why in consulting companies you do not tend to have this gap because the partner who sells is the partner who delivers and partners not incentivized on sales but they are incentivized based on contribution generated so they have to worry what does it cost to deliver this this project as promised right so you have to align incentives that's one way yeah the other is also markets if you constantly over promise you say you're going to deliver by 1st of july and you promise that but i as a customer know that sometimes you deliver sometimes you don't sometimes you can be quite late so what do i do with your promise first of july yeah i discount your promise and if this is a mission critical thing for me do i buy from you promise first of july and there's some question mark over whether you will deliver or do i buy from your competitor who says 15th of july but they always deliver yeah so if it's critical for me i i may go with the known delivery date even if it's later so in service very often you don't have to be better it is sometimes good enough to be more reliable okay so the you have to the communications gap here now the the fifth gap the last step is really the perception gap so you deliver but the customer doesn't see what you deliver yeah so they they can't see it maybe it's a credence service so you say you use a healthy oil in your kitchen or you use sustainably sourced food ingredients or local fooding whatever i mean i may or may not be able to taste that and i will just have to believe you like the hygiene conditions in your kitchen and so on so the question is here how do you tangiblize what you're really doing for your customers so often need extra communications you just look at for one of the best practices i like is starbucks they tell you so much you go to the starbucks website you can see all of the stories of where they source their beans who the growers are so that gives you that makes things visible to you you wouldn't know otherwise but basically the the perception gap is you have to ensure that customers see what you put into the service to make that tangible yeah and hotels in the old days i still remember they put a little sign in the bathroom or on the toilet which said disinfected yeah but i mean do you know whether it was disinfector the sign just put there you still don't know right but i mean you're working on trying to communicate better now the last gap is really the the quality gap here this is when you look at all these five gaps if you close them all then there is no more quality gap so you deliver according to customer expectations now two things here the gaps model is [Music] works the best or really shows you the causes of quality best in highly structured services so you think of a mcdonald's mcdonald's is motion design and industrial design of every every movement you make every equipment you make every taste you do how many grams of sugar how many whatever it's completely standardized so if there is a gap one somewhere that will cascade through all the way to customer perceptions because a very tightly organized company however in many companies they're not so structured let's say a professional service firm or my university here right i mean in the end in the consulting company and the university the professionals they want to deliver great value and satisfaction to the customer and they offer often buffer that customer interaction from all the nonsense that goes on inside the organization i'm sure you can relate to that right so many times we do stuff for our customers yeah in spite of all the stuff that happens in our back and why we do this is because all of this stuff is loosely only loosely connected so in the university i mean people have tenure people are professionals people want to be successful in the classroom so never mind what the dean says all the vice dean says whatever stupid decisions they make if i'm in the classroom and i run my courses i do my course design and all of this i can ignore all of that i just make sure i'm successful with what i am doing for my customers right so you can see the more structured the more these gaps will carry through the less structure the more if you have the right front line here the more the front line can buffer and still deliver quality even if internally things are not as good as they should be now you can also ask looking at the gaps model here what do you think are the most difficult gaps or the most difficult gap to close or if that question is too difficult what is the easiest gap to close you can think about this a little bit and many people actually get it wrong here of all of the gaps i mean if you think about how to close them the gap three the delivery gap is the most difficult gap to close why it's a never-ending story that's why service operations are so challenging right you never have the right capacity the right processes the right skill set the right support process and so on in place it's a moving target it's changing all the time right i mean you think your capacity is right but then something happens and you know so the the the the delivery gap to me is an ongoing story you can approximate closing it but it requires constant fine-tuning constant running constant management to me so the gap three delivery gap is the most difficult the easiest gap for me what i think is really gap one and the interesting thing this is either really really really easy or impossible and that completely depends on the attitude and orientation of management so if management thinks customer service doesn't matter whatever you do gap one will be there and my experience is at some point this whole thing blows up and you change management but if you get a new ceo who really wants to drive up quality that's the fastest and easiest gap to close and in my experience i mean in a week i can tell you what's wrong and what's right yes i mean if i want to want to understand customer expectations i usually hunt for two things number one is what is it my customers really love why i want to cement the strengths and what is the customer my customers really hate so these are the weaknesses i need to work on and all i do for gap one is very easy i usually do a content analysis of all the feedback we have whether that's social media complaints compliments i may talk to a few front line people i may talk to a few customers and i can tell you in a week what's right what's wrong so gap one can be close quite fast gap two we discussed policy and processes it's not rocket science we know how to do this but it takes a little bit of time right process redesign for all customer service processes can be two to three year exercise um designing new products and and so on also takes a bit of time so gap 2 is is not that difficult but requires uh yeah quite a significant management push and support here and an investment and takes one to three years so let's get two gap threes there's never ending gap four that i mean we know gab4 is all about um uh aligning kpis between sales and operations and also communications right that that we don't over promise anyway over promise won't last long in the market gap five is all about understanding the tangibles the perception points the touch points customers have and managing those so how do customers judge you so what is it about your app about your website about your facilities about how your call center interacts with customers and so on that makes them judge your quality or in terms of processes what tangible things are there like delivery times and slots and and so on and so forth so we have to understand the perception points here the touch points the moments of truth and therefore then design them in a way that it communicates the right quality okay so that is the gap model here now my last question before ending this chapter is really try to understand can i spend too much money on service quality and of course you can yes you can spend too much money on anything my own experience is though that customer companies tend to under invest in quality not over invest but still we should understand um what is the correct level of spending here what should we shoot for when we want to improve quality and the next shot helps you to think this through what it shows you is if you are a lousy company in terms of service reliable reliability away down here you can look at a small improvement that can have a quantum leap in service reliability or quality if you're already pretty good you need to spend more money to move up further up the curve if you are world class you're cutting edge it becomes really expensive to close that gap further here because you can't just copy someone you have to do r d you have to think and you have to go further here so the question is how far do you go and let me give you one example here this is a little bit embarrassing for singapore but we are a financial center and the financial center has to have a stock exchange and the stock exchange needs power okay so we had outage of power on the singapore stock exchange that stopped trading clear service failure right so the question is uh what do you do so if you can't rely on public power you then put a uninterrupted power supply to support and that kicks in the minute the public network doesn't deliver your ups kicks in now of course the singapore exchange did have a ups and the problem was it failed too okay so what you have is you have network fails ups fails so the probability of the network failing is very low uh the probability then of the backup failing is also very low but there's a residual and that just happened so what you can do is you can put it back up for the backup of course you have a third option so in case both fail the third one kicks in but you can see you spend a lot of money for a tiny probability here that both of both previous systems fail and then i mean you can see even you have a backup for the backup there is still a residual probability that the network fails that all both three of them fail right so in mathematical terms what you will have is that the failure likelihood approaches zero but never will be truly zero so the question really is how far do you go yeah and let me do a very very uh short little exercise here and for example the singapore airlines here has a offloading this was published in the newspapers i'm not saying any secrets here but of about 1 over 10 000 passengers so you have a ticket you're confirmed and you're denied boarding right one over ten thousand so what would perfect quality mean yeah perfect quality means zero offloading right so if you tell your revenue managers never ever offload a passenger how much overbooking can they do yeah and that is then also zero and i can tell you with zero over booking you can never make an airline profitable because you have so many no shows that you as a network never reach break even right so if i relax that a little bit from i tell my revenue manager okay you can offload one passenger per whatever period you can ask how much overbooking can i do and now i can overbook all flights by one passenger and only if this very unlikely case happens that everyone shows up then after that i don't overbook anymore but that that probability is almost zero right this is approaching zero but it means if i have forty thousand flights a year i can sell forty thousand more tickets if i take a 500 average contribution per ticket that means my incremental contribution is 20 million dollars i just want to show you to go from virtually perfect which means potentially offload one passenger but the probability is very very low to never overbook a never overloaded passenger that cost to me is 20 million dollars right so of course the question now is so zero is clearly not working and one over booking also doesn't work so how far do i go down the line currently i'm one over ten thousand so should i go one over twenty thousand one over five thousand one or one thousand so what he what is here the correct level of overbooking and what data do you need to look at to to determine this right um we could spend a long time here on quantitative analysis but i just want to give you the gist for this so let's assume i um i take singapore to melbourne as a 500 contribution does it mean i upgrade the i go this curve all the way until the incremental customer delivered as promised costs me five hundred dollars and then i fail so basically i go up to contribution and not beyond right so that's the that is the margin now you can look at cost of service failure here so if you offload this gentleman who is traveling to the wedding of his only daughter to melbourne and the wedding is the next day and you offload him today what's going to happen right i can imagine i mean this person is going to be hopping mad and and will tell you at the airport i will never ever fly singapore airlines again yeah um you can ask what's the cost of this and you can do your computation i mean number one do you believe this passenger that he's never ever gonna fly you again and and i mean look you're the hub in singapore and you have the best departure times and the best network so what's likely to happen is that this passenger will say look you were my preferred airline in the past uh now you're my not preferred airline so i fly other airlines more so you're going to lose some share of wallet of this customer so maybe he spent ten thousand a year on trevor in the past and now he spends of these ten thousand with you and now he only gives you two thousand of these ten thousand you lose eight thousand in year one now if you're very lucky what happens is in year two he also experiences air france goes on strike air canada loses the baggage and i mean no airline is perfect right so he has other problems with other airlines he says oh actually singapore is not so bad so you regain that passenger's trust and you increase again your share of wallet right so that means that maybe in year one is seven thousand lost year two is three thousand uh yeah one is seven year two is three thousand year three you're back to where you were before so you lose ten thousand dollars in contributions so the cost of that failure i mean ignoring social media and other stuff by now for now means yeah you have two data points here now two numbers one is five hundred dollars contribution and the other is ten thousand dollars cost of failure so if you have only these two and nothing else think about it would it make sense to spend more than five hundred dollars to prevent a ten thousand dollar loss in contribution right and it's quite obvious i mean let's say it cost you 700 or 800 there's money well spent to save these ten thousand dollars in contribution right so by right if it's really if these numbers are hard you can go all the way up to ten thousand and you would only stop improving the service after ex ex after the cost exceed ten thousand because then it's cheaper to disappoint this passenger than to recover somehow or deliver as promised but between these two but usually if you have margin and you have cost of failure a number that's usually always between these two is what we call service recovery cost you're not incur the ten 000. you do something that yes you don't deliver the seat as promised but you do something else you do a smart service recovery that makes the passenger as happy with the recovery than this passenger would have been with the service delivered as promised right number one do you offload this passenger who is uh traveling to the wedding of his only daughter no right you you offload who ideally the german backpacker right so he is not so hung up over getting there on time and how do you do that right and um i know american airlines for example they do something like call reverse auctions here so i could see the students in in some of the big us airports they wait at the semester and they wait at the gate flights are usually overbooked and then at some point the gate agents will say look you know we are overbooked does anyone volunteer to give up his or her seat and we give you 300 and of course then the students they look at each other and says 300 maybe not enough right so then say 400 500 then oh yes 500 right so then the passengers get quite happy they get 500 bucks the seat is available for somebody who really wants to fly i mean it's quite a cute story my son was visiting my wife in toronto so he was flying munich to toronto and they offloaded him on the flight to toronto and he stayed in a five-star hotel he got some meal money for a steak and a glass of wine and so he was very happy and i think 500 euros the compensation because was an intercontinental flight and on the flight back he was so disappointed that he wasn't offloaded right what singapore airlines does is preemptive offloading i mean you over book over book and you look at what we call booking rate and also the number they call it minus 20 minus 30 that says minus 30 means i've got 30 more reservations than i have seats and as the departure date approaches i hope that there are enough cancellations that i'm at zero but if the shifting and cancellations don't come in and i know wow i'm -15 i think five people will not show up that means i'm 10 seats short and they do something called preventive offloading so they call the night before sir uh we are quite overbooked tomorrow would you mind flying on a later date or we give you some conversation or something right and then they they hit me says oh thank you for telling me i know i have to be there i have to give a keynote speech and it's very important that i'm there but thank you for warning me i will come early i will check in baggage and you can't get rid of me right but then they hit my mom and my mom says she's here in singapore on holiday and they ask oh ma'am would you mind flying a day later we'll give you 500 shopping money then my mom would say what i was just oh that is so wonderful thank you so much can i stay for the whole week right so you can see if you do this quite smart here there's a service recovery for um for uh offloading let's say to melbourne it's going to cost you more than 500 than your margin because you have to you have to pay for airport transfer you have to pay for five-star hotel you have to give some money for food and so on so maybe that cost you 750 so my assumption of course is that that the service recovery is so well designed that the customers who experience that are as happy with the recovery than they would have been if they had experienced the service as promised so in services marketing we never say we want a hundred percent reliability but what we are saying is we want a hundred percent satisfied customers and how we satisfy our customers is 99999 times we deliver as promised and the one over ten thousand times where we can't deliver we give you a service recovery that will also satisfy you so you can see the breaking point the optimal breaking point of reliability is let's say if the cost of failure or here in this sense cost of failures cost of service recovery is 750 dollars that means i improve the service until it hits 750 dollars for the incremental customer delivered as promised and then after that i deliver service recovery because that is cheaper so for the tail end but the objective is 100 customer satisfaction good so this was a long session on managing service quality and so if you can think about what are your key takeaways so what is your understanding after this session on what is service quality why is delivering great quality so important then the diagnostic tool on on looking at where are the causes of quality issues and how can you potentially fix them and the last one was can you spend too much on service quality and yeah of course we discussed this and what would be the breaking point between delivering as promised and delivering satisfaction for a professional service recovery so please think yourself now what do you think is your most important takeaway from this session what's the biggest challenge you see for your company and what is the biggest opportunity you see you