#04-05
"Value Creation in Service Delivery: Relating Market Segmentation, Incentive and Operational Performance"
Abstract: This paper studies service delivery design in settings where firms engage in value creation activities that have the objective of generating additional revenue from customer interactions. The paper provides a general modeling framework to analyze the ties between market segmentation decisions, incentives, and process performance in such service delivery systems. The firm is modeled as a single server queue, in a principal-agent framework. Customers have different value generation potentials, whose realizations are observed by the server but not by the manager of the firm. The manager determines a market segmentation scheme given an overall customer value generation profile, which divides customers into two groups (high and low), as well as a service level for each segment. The server decides which one of the two available service levels (high and low) to provide for each customer, given a compensation scheme offered by the manager. The optimal market segmentation decision, optimal service level choice and a set of optimal linear incentive contracts that enable their implementation are characterized. The robustness of these strategies is explored with respect to model parameters and assumptions. It is shown that a market segmentation scheme that combines revenue generation concerns with their process implications is essential for success. Characteristics of appropriate incentive schemes are identified.
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