Welcome back to the LRC Simulation Series! In previous lessons, we learned that investments in specific areas can impact loyalty, revenue, and profit. What about cutting back investments in other areas? What would the impact be?
Watch our video below to learn more and scroll down for the transcript:
Welcome to Lesson 4. Here we’ll explore the idea of being choosy with added investments in specific customer experiences.
Recall that some areas do not merit added investment. In our current example, while Product is a strong driver, Service is a moderate driver and Price and Delivery have little to no effect.
By extension, sometimes an optimal solution may allow for a decrease in investment in certain areas that do not impact customer loyalty. In other words, a reallocation of resources. Thus, our preferred solution so far may still not be our best option.
For example, what if we were to invest with an intent to improve customers’ ratings for Product and relax investments for the other attributes? Remember that the values can be thought of as “levels of approval” so for Price, a decline from 6 to 4 denotes a price increase. What would happen to the loyalty profile?
Here loyalty remains virtually unchanged. Again, keep in mind that a lower rating in Price—which is a level of approval—likely denotes an increase in prices.
But what about revenue and profit? Revenue barely drops, yet profit skyrockets!
We can explore cutting back investment even further in other areas, at least for the short term.
Again, for each option predict whether loyalty, revenue and profit will increase, decrease or remain about the same.
Which choice did you make?
In this example, each of the three options leads to a gain in both revenue and profit while experiencing only a very slight decline in loyalty. Therefore, any alternative you may have chosen here would have been a sound decision.
That said, closer inspection shows the revenues for the three alternatives to be virtually identical yet profits increase with each option. Can you reason why?
Charging a mid-level price might maximize economic value. Moreover, for the parameters used here, establishing and maintaining a mid-level price requires only a nominal investment.
The investment required for mid-level scores in Delivery, however is more significant.
In addition, reduced performance does not damage the relationship.
Thus, cutting back in Delivery—which is not a driver for customers—saves money and in this case, increases profit without harming loyalty.
The takeaway is that cutting back investments for financial gain should only be done after careful consideration.
Cutbacks might offer a financial benefit, but the benefit might be neither immediate nor long-lasting.