Tuesday, February 14, 2006

Value Deficit

Roman Rytov has blogged before about services from the consumer perspective. (For example, my previous post on Self-Service draws on his ideas about customers having access to their own CRM data.) In his latest post, he blogs about flaws of frequent flyer programs and sensitivity to customer needs. He points out that the standard reward point program, as provided by airlines, hotel chains and other service providers, is no longer working. It doesn't provide real competitive advantage to the service provider, and fails to accommodate the needs of different categories of customer.

For many customers, one of the most important differentiators is between private travel (where the customer is paying) and business travel (where someone else is paying). Rytov imagines (probably correctly in most cases) that private travellers would prefer to receive compensation for delays or other service shortfalls in the form of a cash refund ("the internet in your room was a bit slow - okay we'll delete that item from your bill"), while business travellers would prefer to receive extra airmiles or reward points.

But how is the service provider supposed to differentiate between private travellers and business travellers? I don't think this is as easy as Rytov asserts, and I don't think it should be that easy. Am I flying to Las Vegas for a business conference or a weekend of excess - and do I really want this to be public knowledge? Surely the best approach is to allow the customer a choice between alternative compensation schemes, rather than try to second-guess the customer's preference based on an attempted invasion of the customer's privacy.

But there are larger problems with the whole pseudo-economy of reward points, which this kind of differentiated service will not address.
  • The schemes are complicated, with all sorts of arbitrary restrictions, making it practically impossible to compare like with like. Benefits are tied, and are generally not transferable. This increases the transaction cost, and reduces the economic efficiency of the market. This exemplifies a general pattern of dysfunctional service relationships - see review of Support Economy on this blog.
  • The schemes are closed. Given that there is a value deficit, there is a theoretical opportunity for an independent service provider to create some value-adding services, perhaps through some kind of mash-up. But something tells me that the airlines and hotel chains would be less than enthusiastic about such innovation; and I doubt that the schemes are open enough to make such mash-up feasible.
  • The schemes are primarily designed to reward employees, ultimately at the expense of their employers. I am sure there are lots of people who take extra business trips, with questionable value to the business, in order to win or retain some privileged status with the airline. Therefore the whole economy of reward points and airmiles only appears to be value-adding if you ignore the companies that are ultimately funding it.
Of course SOA thinking (such as differentiated service or context-based service) can be used to put sticking-plaster on the current schemes. Rytov is correct as far as he goes - service providers certainly need to be more sensitive to customer needs. But I believe there is an opportunity for much more radical and genuinely value-adding transformation.
  • Can we unbundle the services? Why am I paying the hotel for the internet connection? Why isn't the hotel just providing me with a platform of services, from which I can compose my own experience? Who pays whom for what?
  • Can we decouple the services from the reward point program? Surely there are economies of scale for the providers, as well as increased flexibility for the consumer, if reward points are transformed into some form of exchangeable token. Especially as the reward point program has long since ceased to be a focus of innovation or competitive advantage, and has become a tiresome necessity.

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