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"Frei, Frances"
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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.
Journal Article
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.
Journal Article
Are Self-Service Customers Satisfied or Stuck?
This paper investigates the impact of self‐service technology (SST) usage on customer satisfaction and retention. Specifically, we disentangle the distinct effects of satisfaction and switching costs as drivers of retention among self‐service customers. Our empirical analysis examines 26,924 multi‐channel customers of a nationwide retail bank. We track each customer's channel usage, overall satisfaction, and retention over a 1‐year period. We find that, relative to face‐to‐face service, customers who use self‐service channels for a greater proportion of their transactions are either no more satisfied, or less satisfied with the service they receive, depending on the channel. However, we also find that these same customers are predictably less likely to defect to a competitor if they are heavily reliant on self‐service channels characterized by high switching costs. Through a mediation model, we demonstrate that, when self‐service usage promotes retention, it does so in a way that is consistent with switching costs. As a robustness check, we examine the behavior of channel enthusiasts, who concentrate transactions among specific channels. Relative to more diversified customers, we find that self‐service enthusiasts in low switching cost channels defect with greater frequency, while self‐service enthusiasts in high switching cost channels are retained with greater frequency.
Journal Article
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.
Journal Article
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.
Journal Article
Process Variation as a Determinant of Bank Performance: Evidence from the Retail Banking Study
This paper explores the relation between retail banks' branch-based processes and financial performance. There are 11 processes included in this study, which represent the bulk of the activities performed in a typical retail branch (e.g., opening checking accounts). The first finding of this study is that the financial performance of banks that perform better across these processes tend to be better than that of other banks. In addition to the variation in process performance across banks, there is also substantial variation across processes within banks. That is, banks that performed well in one process often performed quite badly in another. We present an analytical model that shows that improvement in process variation can be more important than improvement in aggregate process performance when dealing with certain customer segments. Empirical evidence from the Wharton Financial Institution Center Retail Banking Study of bank holding companies in the United States provides support.
Journal Article
MEASUREMENT OF MULTIPLE SITES IN SERVICE FIRMS WITH DATA ENVELOPMENT ANALYSIS
Data envelopment analysis (dea) has become an increasingly popular method to measure performance for service firms with multiple sites. DEA is superior to many traditional methods for firms that have multiple goals. The promise of DEA is that the complex, multi‐objective problem of performance measurement can be reduced to a single number. Unfortunately, the practice of DEA often belies the promise. Misconceptions concerning the purpose and implementation of DEA can cause DEA applications to be less than successful. Here, the technique is explained, and a guide to the implementation of DEA is proposed, utilizing DEA studies of retail bank branches.
Journal Article
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 (l)-(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.
Journal Article