Putting the right price on customer interactions
Consumers are willing
to pay more for choice in their interactions, yet most companies remain
perplexed about which ones their customers really want—and how much to charge
for them.
How can companies best engage with their
customers to offer them new experiences, along with add-ons to existing
products or services they have already paid for?
The quality of these
interactions has become an article of faith in an age when consumers are pickier and have
higher expectations than ever. Businesses have responded with “omnichannel” strategies to open new paths to them and have jumped at
opportunities to launch mobile apps, video consultations, chat boxes, and the
like.
Few companies, however,
are grappling with the implications of this proliferation—not least the
attendant investment and operating costs. It’s not easy to manage and integrate
these varied and complex interactions in a way that makes them feel seamless to
customers. Nor is it straight-forward to work out how many interaction choices
a consumer really wants or needs. More critically, though, the burning issue
for a CEO, a CFO, or a marketing executive is whether the new forms of engagement add value. Do they create enough pricing power or additional
demand to cover costs?
To better understand
some of the issues, we recently collected data from the German and Swiss
health-insurance industries, which have introduced a wide range of interaction
options and are now grappling with the challenges of providing them at lower
cost. Our analysis could be a good starting point for companies in other
industries and geographies to explore the types of interaction platforms that
make the most sense for them.
Insights
Data derived from 2,000
health-insurance customers allowed us to model key factors that influence the
choice of coverage, particularly interaction choices in plans. A conjoint
analysis allowed us to distill the relative importance of these choices and
gave us a basis for uncovering consumers’ willingness to pay for each of them.The findings generated
insights for strategy, pricing, and market share.
Strategic value.
Our analysis showed that
the interaction options available are very important to consumers choosing an
insurer in the first place. They rank this factor higher than a
firm’s brand and, in some cases, higher than or nearly as high as the available
hospital and out-patient coverage, the core of what customers actually buy.
Only the level of premiums figured more prominently. It’s interesting that
interaction options were more of an issue for women, who often handle health
insurance for their families, and for younger purchasers, who generally have
less experience with insurers and tend to look for advice and support to
supplement self-service offerings.
Willingness to pay.
We found that consumers are
generally more willing to pay higher premiums when companies offer more
interaction choices. And, crucially, the higher premiums that customers said
they would accept exceeded the cost of providing additional interaction
options. Consumers said they would pay an additional 14 to
21 euros a month to be able to speak with an identifiable professional at a
service center rather, for example, than receiving only an anonymous response
to an online query. A specific adviser for repeated contacts (a service some
companies have offered recently) added a degree of willingness to pay, but not
much.
We then investigated
the value customers attach to traditional interactions (by phone or mail) and
digital ones (via online portals, phone apps, or videos). We found that
customers would pay considerably more for access to both—much more than for
digital alone. In some cases (a simple address change, for example), they told
us that they would certainly perceive digital interactions to be useful, but in
others (questions, say, about a complex claim that was only partially
reimbursed) they value having telephone access to an individual. Surprisingly,
there was little interest in paying for face-to-face support at physical
locations . Our analysis indicates that consumers don’t want their insurers to
spend money offering it.
Preference gains.
We modeled a market with four
reference policies and looked at how preferences would change if consumers were
presented with a broader choice of interactions within a given brand and with a
fixed set of prices and coverage. When we added a professional interaction
partner and a choice of both digital and traditional interactions to a basic,
low-cost product with limited coverage, a budget brand, and hitherto anonymous
and traditional interactions only, the preference for such a product rose by 40
percent. When we added the choice of a personal interaction partner offline to
a purely digital offering, the result was a preference gain of approximately 60
percent. A deeper analysis of the data found that customers of lower-cost
products were more sensitive to price changes: charging for extra interactions
increased the likelihood that they would switch to another offering. By
contrast, customers of premium products were largely immune to price increases,
indicating that additional profit opportunities may be available.
Fine-tuning
Only a few insurers
have attempted (in a limited way) to fine-tune interaction strategies, and it’s
too early to tell how successful they have been. But our own research—a
modeling exercise, admittedly, but a rigorous one—can point the way for others.
Here are some practical considerations for companies contemplating new
investments in interactions.
Reduce investments for
in-person interactions.
Many
companies still rely on live interactions at company-owned spaces to engage
with customers. This is the most costly channel, but as noted earlier, our
research on the German and Swiss markets suggests that customers, on average,
don’t value it. Redirecting spending to cutting-edge digital interactions or
upgrading service centers, depending on your customer mix, might be a better
bet.
Revisit segments.
Most companies go to great
lengths to differentiate their products and customer segments. Interactions
provide another way to stretch the range of product and service offerings,
distinguish them from those of competitors, and offer more chances to target
and acquire your rivals’ underserved customers. A digital-only product, for
example, is likely to suit the digitally savvy.
Standardize, but with
care.
More granular,
preference-based product configurations provide consumers with options tailored
to their needs. Modular products and menu-driven strategies have a big upside:
increased revenues and customer loyalty, as well as lower costs. That said,
companies need to set the dial carefully: too few options and you miss opportunities; too many
and you confuse customers, spur adverse selection (such as attracting a
reponderance of customers who want costly face-to-face interactions), and
create unnecessary complexity that requires management time.
Be willing to
experiment.
In the digital
era, it’s true that customers expect a lot of services to be free. However, firms should be able to charge significant
premiums by offering a large choice of interactions. Companies should be
confident enough to charge for them explicitly, even in today’s competitive
environment.
By Niklas Barwitz, Boris Körs, and Sirus
Ramezan November 2017
https://www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/putting-the-right-price-on-customer-interactions?cid=other-eml-alt-mkq-mck-oth-1711
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