When Should Customers Control Service Delivery? Implications for Service Design

Abstract

W hat do a Mongolian stir-fry restaurant and a medical lab providing home testing solutions have in common? They are both innovative services that base their success on customers controlling part of the service delivery. These providers allow service tasks to be performed by the customers as a means of shaping the overall experience and not strictly as a means of "outsourcing" the service. Motivated by such practices, we explore whether and how should providers allocate the control of different tasks of their service to the customers. We model services as multistep processes with each step affecting customers' experience at other steps. At certain steps the provider may hold an "expert" role and be more capable of performing than the customers, whereas at other steps she may hold an "administrative" role and be less capable of performing than the customers. We distinguish between routine services, where the service outcome must conform to standardized specifications, and non-routine services, where the value of the service outcome relies on subjective dimensions. We show that the optimal design is determined by an economically intuitive rule whereby the provider controls the steps based on the marginal benefit she can derive compared to self-service. For routine services, this rule translates to managing "blocks" of steps because the provider benefits from containing the volatility of the experiences across the service even when this implies the provision of service steps with a negative marginal benefit, that is, steps which she is less capable of performing than the customers. Instead, in non-routine services providers should focus on the value advantage they can ensure through a "core provision" even if this implies forgoing control of steps for which they are more capable of performing than the customers and from which they can derive positive marginal benefit. This implies that in non-routine services the provider exercises more control up to a certain process length; beyond that she delegates more steps to the customers. When customers differ in their abilities to perform the different steps, the provider may offer a service line. Service lines facilitate better segmentation than a single service offering, but their economic benefit exhibits an inverted "U-shaped" relationship with respect to the number of steps that a service comprises. Finally, we find that competition between two providers who differ in their capabilities to perform a service results in service design differentiation where the more capable provider offers a higher-end "focused service" against a lower-end "super-service" offered from the less capable provider.

Service Design for a Holistic Customer Experience: A Process Framework

“…implies that larger values of δ i result in larger σ i . These scenarios map naturally onto a classification of service steps as either routine or non-routine, as also noted in recent literature; see (Bellos and Kavadias 2019).…”

“…Soteriou and Chase (2000) extend this line of work to account for uncertainty, but they do not consider the effect of interdependencies across the customer experiences. Bellos and Kavadias (2019) introduce such an effect, but assume discrete effort allocation. Specifically, they consider a binary decision of whether a service task is offered by the provider or not.…”

On Factors that Moderate the Effect of Buyer‐Supplier Experience on E‐Procurement Platforms

“…For software development project teams, Staats (2012) find frequent task change has a negative effect on team performance. Bellos and Cavadias (2019) find that routine services produce outcomes that conform more to standardized specifications than non‐routine services.…”

Customer heterogeneity and innovation‐based competitive strategy: A review, synthesis, and research agenda

“…Such demand‐side considerations are not new to marketing scholars. While early marketing strategies emphasized a mass marketing paradigm, by the late twentieth century, acknowledgment of increasing CH led to a transition toward niche marketing strategies (Palmatier & Crecelius, 2019). Tools such as cluster analysis (Green, 1971) and perceptual maps (Schmalensee & Thisse, 1988) were applied to understand how customers differ and to guide segmentation, targeting, and positioning strategies.…”

“…Managing customer heterogeneity (CH), that is, differences among customers (e.g., consumers, business firms), is an important consideration for firms seeking innovation‐based competitive advantage. Customer differences are prompted by a myriad of factors that motivate distinctive preferences and behaviors (c.f., Palmatier & Crecelius, 2019) which means that firms have to strategically target innovation resources in order to cater to increasingly niche market segments. Diverse customer needs provide incentives for firms to develop innovations based on idiosyncratic preferences; these offerings help firms differentiate themselves from other providers in the face of increasing competition.…”