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Customer Expectations & Perceptions in Service

www.lcarmirngkosn.com Copyrighit & Learningkosh 2005


Possible Levels of Customer Expectations
High
deal Everyone says this restaurant
is as good as one in France
expectatlons and I want to go'somewherevery
Ordeslres
special for my anniversary.
w

Normatlve "As expensive as this


should restaurant is, it ought to have
expectatlons excellent food and service"

Experience- "Most times this restaurant


based is very 9o0d, but when it
norms busy the service is slow
gets

Acceptable lexpect this restaurant


to serve me in an
Xpectations
adequate manner.

Minimum expect terrible service


tolerable fromthis restaurant but come
expectations because the prioe is low
Dual Customer Expectation Levels and the
Zone ofTolerance
The extent to which customers recognize & are
willing to accept this variation is called "ZONE
of TOLERANCE"

Eg Billing counter of superstore, waiting time


involved Desired Service

Zone of
Tolerance

Adequate Service
i n c h 7005
Zones of Tolerance

The range of expectations between desired and adequate...


1. Can bewide or narrow

2. can change Over timme

3. can vary among individuals


4. may vary with the type of product/service
Customer Expectation & Perception

Customer Expectations- The standards orreference points for performance against


which service experiences are compared.

Customer Perceptions- Subjective assessments of actual service experiences

This gap needs to be closed by firms to SATISFY customers& build LONG TERM
RELATIONSHIPS.
Expected Service
CUSTOMER GAP

Perceived Service

Copyright Learningkosh 2005


GAPS Model of Service Quality
Proposed by Berry, Parasuraman& Zeithml in 1990

Expected
Customer Service
Gap Perceived
LOSTÓMER Service

COMPANY External
Service Delivery
Communication to

Customer- driven service


Desins R standards

Company perceptions of
Gustomer.oxpectations

Copyright LearningKosh 2005


eeui
prese

GAPS Model of Service Quality


Proposed by Berry, Parasuraman &Zeithml in 1990

Expected
Service
Customer
Gap Perceived
LUSTÓMER Service

GAP 4
COMPANY Service Delivery
External
Communication to
GAP 3- ustoneE
CUstomer- driven service
GAP 1 Dasions 2stancards
GAP 2-
Company perceptions of
uatomerpatations

Copyright LearningKosh 2005


Gaps Model of Service Quality

Customer Gap:
difference between customer expectations and perceptions

Provider Gap1 (Knowledge Gap):


not knowing what customers expect
Provider Gap 2 (Service Design &Standards Gap):
having the right service designs and standards
not
Provider Gap 3 (Service Performance Gap):
not delivering to service standards
Provider Gap 4 (Communication Gap):
not matching performance to promises

Copyright Learningkosh 2005


Brond Reasons for Expected service
the Provider External communications to customers
d1:5

Gaps Lack of integrated service mkt communications


Inefficient management of customer expectations
Zethami,. Parasuraman -Over promising
and Berry.Deliering Inadequate horizontal communications
Oualir Service: Balancng
Customer Peneptions and Actual service delivery
Exypectatim Deficiencies in human resource policies
Failure to match supply and demand
Customer not fulfilling roles
Problems with intermediaries/channels
Customer driven service designs and standards
Poor service design
Absence of customer defined standards
Inappropriate physical evidence and servicescape
Company's understanding of customer expectations
Inadequate research
Lack of upward communication
H Insufficient relationship focus
Percelved service Inadequate service recovery

Mwww.learningkosh.com Capyright Learning Kosh 2005


Copyright Learningkosh 2005

Customer Focus in Services


Customer Behaviour in Services
TheCustomer's Point ofView

Wants,
Reflect Needs,
Desires
Preferences

Browse
Experience Gather Cptions

Shop Analyze
Options
Buy
Prepare Make
Decision

Copvright Leaningkosh 2005


The Customers Point &lmprove

of View
(In a hotelindustry
Know Tdenetnitfy Customers
perspective)
Wants,
Bias
/Uedeg Reflect Needs,
Desires
Experience Preferences

Browse
Experience Customer Gather Options Attract

Experience Shop Analyze


Options
Buy
Ar ival Prepare Make
Decision Communicate Sell

Reinforce Book
Market&

Onurightearni
Perceived Risks in
Purchasing and Using Services
Functional unsatisfactory performance outcomes
Financia monetary loss, unexpected extra costs
Temporal-wasted time,delays leadto problems
Physicalpersonal injury, damage to possessions
Psychological fears and negative emotions
Social how others may think and react
Sensory unwanted impacts to any of five senses

Copyright LearningKosh 2005


Complaining Customers: The Tip of the Iceberg
1%-5% complain to
managementor company
headquarlers
45% complain to a
frontineemployee

50% encounter a problem


but do not complain

CopyrightLearningKosh 2005
Unmute

A service guarantee makes business sense!


Companies can boost profits by 25 to 85 percent by retaining 5
percent
more of their customers.
Guarantees ease concerns of first-time buyers who may be
trying a new service. skeptical about
Guarantees provide an incentive to customers to tell the company how
can do better. This allows the they
company to improve.
Eg. RADISSON HOTEL'S SERVICE GUARANTEE
"Ourgoal at Radisson is 100% guest satisfaction. If you aren't satisfied
something, please let us know, and we'll make it right or you won't with
pay."
WHEN TO INVOKE THE GUARANTEE

Invokethe Guarantee

1. When something happens that the customer sees as high


in severity, and
2. From the customer's point of view, the company has a high
levelof responsibility for the problem, and
3 The company can't make it rightin any other way that will
satisfy the customer.

Copyright Learningkosh 2005


Making It Right Decision Grid

INVOKE THE
High
GUARANTEE

BEA HERO

FIX IT
MAKE IT RIGHT

EMPATHIZE

Low HOTEL RESPONSIBILTY High

Copyright Learningkosh 2005


.

Building Customer Relationships


Relationship Marketing
Relationship marketing represents a paradigm shift
within marketing- away from an acquisition
transactionfocus towards a retention/relationship
focus.
Eg"Bucket Theory of Marketing"
Primary goal of relationship marketing is to build and
maintain a base of committed customers who are
profitable for the organization.
Itis done through a 4step process,
Getting Customers
Satisfying Customers
Retaining Customers
Enhancing Customers
Relationship Marketing
Relationship marketing represents a
paradigm shift
within marketing- away from an acquisition/
transaction focus towards a retention/ relationship
focus.

Eg "Bucket Theory of Marketing"

Primary goal of relationship marketing is to build and


maintain a base of committed customers who are
profitable for the organization.
It is done through a 4 step process,
Getting Customers
Satisfying Customers
Retaining Customers
Enhancing Customers

Copyright O Learningkosh 2005


EVOLVING THE RELATIONSHIP with CUSTOMERS
Surprise &
Delight
with
unexpeetec
ADVOCATE Recognitio
LOYAL CUSTOMER
Maintenance reqd
FREQUENT CUSTOMER
Strong recognitión required
CUSTOMER 4
Expect special offers/ added value
BUYER
First purchase takes place, recognition starts
ROSPECT
Prospcets chquiring about Product/Service
sUSPECT
Potential Customers being informed by Company
Each previous step must be in place for relationship
to be based on sound foundation
Think!

Repeat Business Statistics

Typical hotel one time guest 70%


Cost to attract
new guest $15
Repeat Customer cost $2.50
Loyal guest will outspend 5-1 ratio
5% increase in retention 25%t proits
Repeat Customer ** **'*' '''* excellent
Source of referrals

Source Guest Information Network


3 Dimensions of the Relationship

This is done by expanding the value of the relationship in three


dimensions:

Deepening the
Lengthening the relationship- Widening the
relationship relationship-
number of interactions number of products or
period of time services that customer
(transactions/
purchases) buys.
Customer Lifecycle &LTV

The life time value of the customer determines the value


of a customer to the firm, over the entirelife cycle of the
Customer.
Customer Life Cycle
5 stages:

CLC 2
1. Prospects
First Time Buyers
3 Early Repeat Buyers
4. Core Customers
. Core Defectors
TIME
Copyright O Learningkosh 2005
Computing CLTV

Probability

Retention
Expected
Recurring Cumulative
Revenues Margin

Recarring
Cests
Net Margin

Acquisitionn
Cest
H Lie Time
Valne

Disceunted
Net Margin
Calculating CLV

CLV

Net Present Value of all cash flows from the customer


=
Expected Cumulative Margins Acquisition Cost(AC)

Copyright O Learningkosh 2005


Understanding the Discount Rate
1. Unfiecarted proit eaned
er Syes 2 (15%
Dircurted proitrate)emedoverSyes
discut

50 Ter $50.00
+$30 1.15 - $26.09
+40 +S40 1.15 $3025
+$55 55 L19- S26.16
+$72 +$72 1.154- S41.17
+$88 S88 1.15 -S43.76
The net present value of 5eas prot
earned trom this austomer is $127.43

Copyright LearningKosh 2005


Unmute

Exercise1-Calculate the CLV


The cost of acquisition of a customer is Rs 2500 and it costs Rs 500
peryear to retain that customer.
The revenue from the customer is Rs 1000 in first
year, Rs 1500in the
second year and thereafter it is Rs 2000 every
year.
Ifthe discount rate is 15%, compute the lifetime value of a customer
considering the lifetime to be 5 years

Answer: Rs 1281
CLOSING GAP 2
Service Design& Standards Gap
Copyright O LearningKosh 2005

Service Design
Service Process &
Physical Evidence
SERVICE PROCESS DESIGN

WhyService Service
Design? Blueprinting
It is about produces a visualization
creating
of customer interactions
and taking decisive PROCESS
and behaviors
and deliberate linkedwith provider SERVICE Points of
actions that will onstage & backstage BLUE PRINT
CONTACT
promote, support, events
and sustain positive Createsstandardization EVIDENCE
service experiences. *to align your service
goals with the client's
expectations and needs.

Copyright LearningKosh 2005


Service Blueprint

Components of a Service Blueprint

Line of interaction
Customer Actions
- - - - - - - - - -

"Onstage" Contact
Line of visibility
Employee Actions
-
----

Line of internal interaction "Backstage" Contact


.---- Employee Actions
Support Processes
Flowcharting a Hotel Visit:
Front stage vs. Backstage
Physical Hotel exterior, lobby, Elevator, corridor,
Evidence employees, key room, belboy
Make Arrive, Check-in Goto
Front stageCustomer reservation at reception room
Actions valetppark
Employee Doorman Receptionist
Actions greets, valet verifies, gives
Bellboy leads
way to room
Face-to-face takes car key to room with bag
Phone
Contact Rep.
recorrds,
confims

Backstage Valet Make up


Parks Car Room

Enter Register
data_ Lguest dataa
Copyright O LearningKosh 2005
Building a Service Blueprint

Step 1 Step 2 Step 3 Step 4 Step 5 Step 6


Link contact Add
ldentify the ldentify the Map the Map contact evldence of
process
customer or
process employee activitles service at
customer rom the actions to needed
toDe and/or each
blueprinted segment customer's
support customer
pom O technology functions
lew actions action stepP

Copyright LearningKosh 2005


Strategic Positionin8
Through Process Structure
Degree of Complexity: Degree of Divergence:
Measured by the number of Amount of discretion
steps in the service blueprint.
permitted the server to
Eg. A clinic is less complex customize the service.
than a generalhospital Eg. The activities of an
attorney contrasted with those
of a paralegal.
5 principles of service design thinking

User-
centered: Co-creative: Sequencing: Evidencing: Holistic:
Services All A service Intangible
should be stakeholders should be services should The entire
environment of
experienced should be visualized as a be visualized in
a service
and designed included in the sequence of
terms of should be
through the service design interrelated physical
process actions artifacts Considered
customers
eyes

Copyright O Learningkosh 2005


Waiting Process Management

www.learningkosh.com Copyright LearningKosh 2005


Waiting Process Management-Ways

Seating v/s
Self Service Pre- Service
Standing

Engaging Information
Reservations
Customers Provision

|Price Incentive Rethink


to use lean Queuing
periods System

Copyright O LearningKosh 2005


Queuing Strategy: Market Segmentation

Essence: divide the market into segments


according to:

(a) customerneeds and/or


(b) business priorities.
urgency of the job
payment of premium price
duration of service transaction
importance of customer
Make waiting fun, or at least tolerable

Copyright OLearningkosh 2005


Alternative Queuing Configurations
Single line single server, single stage

Single line, single servers at sequential stages

Parallel lines to multiple servers

Designated lines to designated servers

Single line to multiple servers ('snake")

"Take a number" (single or multiple servers)

Copyright Learningkosh 2005


. NNAN

Servicescape & Physical Evidence


Servicescape & Physical Evidence- difference

Servicescape: Physical Evidence


....the environment in which any tangible commodity that
the service is delivered and facilitates performance or
where the firm and customers communication of the service'
interact

Zeithami and Bitner, 2000

DnNroht 0 legrningKosh 2005


Elements of Physical Evidence

Servicescape Other tangibles

Facility exterior Business cards


Exterior design Stationery
Signage Billing statements
Parking Reports
Landscape Employee dress
Surrounding environment Uniforms
Brochuress
Facility interior Internet/Web pages
Interior design
Equipment
Signage
Layout
Air quality/temperature
Zeithaml and Bitner, 2000
Role of Servicescapes

An appropriate Physical Evidence plays the following 4 roles,


1. Package:
Like in Products, servicescape "wraps" the service and conveys
This is a visual metaphor for the intangible an external image.
service.
Eg. Uniform of staff &overall décor of restaurant

2. Facilitator:
A well designed, functional
facility can make the service
It will also ensure smooth work a pleasure to experience.
too. flow and thereby pleasure for employees to perform
Eg Airport signage, banking services
Role of Servicescapes

3. Socializer-
The design aids in socialization of both
Both customers & employees
employees and customers.
understand their expected roles, behaviors and
relationships from the servicescape.
Eg 5 star hotel lobby v/s Mcdonalds

4. Differentiator-
The design differentiate a service provider from its competitors
can
It can also signal the market
segment the service is intended for.
Price differentiation is also often
partially achieved through variations in physical
settings.
Eg Taj Hotels v/s Ginger hotels (both being Tata enterprises)
A
Physical Evidence Should:

Provide Give a Post


pleasure to Purchase
Attract Customers in Satisfaction or
Customers doing Pride of
business Association

Copyright LearningKosh 2005


The Service Quality Gaps Model
Broad Reasons for Expected service *

the Provider External communications to customers


Gaps - Lack of integrated service mkt communications
Inefficient management of customer expectations
cuhami. Parasuraman. - Over promising
nd Berry. Delnering -

Inadequate horizontal communications


uaity Sence:Balamcing Actual service delivery
ustomer Pereptions and
apertations. Deficiencies in human resource policies
Failure to match supply and demand
- Customer not fulfiling roles
-

Problems with intermediaries/channels


Customer driven service designs and standards
E
-
Poor senvice designn
Absence of customer defined standards
-Inappropriate physicaB evidence and servicescape
Company's understanding of customer expectations
Inadequate research
Lack of upward communication
Insufficient relationship focus
Perceived service Inadequate service recovery

www.learningkOsh.com Copyright LearningKosh 2005


Your Copyright LearningKosh 2005
microphone is muted.

LURGENT

Service Delivery
People& Intermediaries-Place
People in Service Organizations

People are referred to all of the human actors who


play a part in service delivery and thus influence the
buyer's perceptions; namely
a. The firms personnel
b. The customer&
C. Other customers in the service environment.
-

The Services Marketing Triangle

Company
(Management)

Poviders Customers
TheServices Marketing Triangle
Company
(Management)
Internal External
Marketing Marketing
enabling the
promise
seting he
proise

PrTderss Interactive Marketing Customers


"delivering the promise

www.learningkosh.com rin h LAarninakoch20nc


Ways to Use the
Services Marketing Iriangle
Overali Strategic Assessment Specific Service
How is the service Implementation
organization doing on all three What is being promoted and
sides of the triangle? bywhom?
Where are the weaknesses?
MAWRR How will it be delivered and
by whom?
What are the strengths? wwwM

Are the supporting systemns


in place to deliver the
M
promised service?

Copyright Learningkosh 2005


Service Employees Interact with Both Internal
and External Constitents
External Environment

A Internal Environment

Convrioht Ioaninakoch 2oGe


Service Employees

Who are they?


kesiii
"boundary spanners"
What are these jobs like?
emotional labor

Many sources of potential conflict


Person v/s role
Organization v/s client
Client v/s client
Quality v/s productivity

CopyrightLearningkosh 2005
Customer's Role in Service Business

" "

Customers are referred to as partial employees in a service


organization.
Customers perform 3 roles in Service Delivery-
1. PRODUCTIVE RESOURCES- Eg Introduction of self service reduces
the cost for
companyand also makes the customer an of the
integral part
delivery process
2. CONTRIBUTORS to QUALITY & SATISFACTION- Eg a patient taking
medicine as prescribed by doctor is where the customer contributes to the
quality of service
or the level
of satisfaction.

Copyright O Learningkosh 2005


Customer's Role in Service Business

" "

Customers are referred to as partial employees in a service


organization.
Customers perform 3 roles in Service Delivery-
1. PRODUCTIVE RESOURCES-Eg Introduction of self service reduces
the cost for company and also makes the customer an integral part of the
delivery process
2. CONTRIBUTORS to QUALITY &SATISFACTION-Eg a
patient taking
the customer contributes to the
medicine as
prescribed by doctor is where
of service or the level of satisfaction.
quality
3. CUSTOMERS AS COMPETITORS-Eg
Customer can do it himself
Some services where the

Copyright © Learningkosh 2005


Strategies for Enhancing Customer Participation

Define Customers' Roles


Clarty level of particlpatilon
dentity speciic joos and tasks
Understand implications tor
productvity. quality. and satisfaction

Recrut. Educate, and Reward Customers Effective


ldentity segmentis)
and recruit appropriate
Educate customers for their roBes Customer
Provide reasons to participate
Reward customer performance Participation

Manage the Customer Mbx


Assess compatibility of segments
Isolate incompatible segments
Enhance segment compatibilty

Copyright O LearningKosh 2005


Place-Distributing Services

www.learningkosh.com
Copyright LearningKosh 2005
Options for Service Delivery

There are 3 types of interactions between customers and


service firms

Customer goes to the Interaction at arm's


service provider (or Service provider goes length (via the Internet,
to the customer
intermediary) telephone, fax, mail,
etc.)
Electronic Channels

not require direct


Electronic Channels are the only service distributors that do
human interactions. Some of the Electronic Vehicles now developing are,

Telephone
Television Channels &
Internet & Web
Eg banking & financial services through internet, distance learning, video
conferencing, medical transcription services etc
Some benefits are,
Consistent delivery for standardized services
low cost
customer convenience
wide distribution
quick customer feedback etc
Managing Supply & Demand of Services

www.learningkosh.com Copyright OLearningKosh 2005


Demand Relative to Capacity
highest
possible

demand

Demand exCeeds capacity


(lost business)
Maximum available capacity
Demand exceeds optimum capacit
Optimum capacity (service quality declines)

Capacity exceeds demand


(wasted resources)

no

demand

Copyright LearningKosh2005
Managing Supply and Demand

Two options:
Manage supply
Need capacity management
watch carefully employee satisfaction
Manage demand
market needs constraints
watch carefully customer satisfaction

Copyright Learningkosh 2005


Capacity Management
(matching supplyto demand)

DEMAND DEMAND
TOO HIGH FLEX CAPACITY
TOO LOW

Stretch time, labor, facilities, and equipment Perform maintenance, renovations


Cross-train employees Schedule vacations
Hire part-time employees Schedule employee training
Request overtime work from employees Lay off employees
Rent or share facilities
Rent or share equipment
Subcontract or outsource activities

Copyright OLearningKosh 2005


Managing Demand
(matching. demand to SUpply

DEMAND DEMANDD
TOO HIGH SHIFT DEMAND
TOO LOW

Use signage to communicate busy days and Use sales and advertising to increase
times business from current market segments
Offer incentives to customers for usage Modify the service offering to appeal to
during nonpeak times new market segments
Take care of loyal customers first Offer discounts or price reductions
Advertise peak usage times and benefits of Modify hours of operation
nonpeak use Bring the service to the customer
Charge full price for the service-no discounts

Copyright LearningKosh 2005


* ******

Q2

Yield Management

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Copyright LearningKosh 2005
Definition

Yield Management Defined- " The process of allocating the

right type of capacity to the right kind of customer at the right


price so as to maximize revenue or yield."

Let us see an example


Yield Management

Actual Revenue
Yield
Potential Revenue

where
Actual Revenue = capacity used X average price paid
Potential Revenue = total capacity X maximum price

Copyright O LearningKosh 2005


CLOSING GAP 4
Communication Gap

Copyright Learning Kosh 2005


Copyright Learningkosh 2005

Service Pricing &


Promotion
Managing Promises
Pricing Quiz

Which dentist would you choose for a filling in yourtooth?


Dentist Cost for Distance to Wait Period Time in Anesthesia
Filling Dentist for an
Waiting
Appointment Room
A $50 15 miles 3 Weeks 1.5 hour None

$75 15 miles 1 Week 0.5 hour Novocain

$125 3 miles 1 Week hour Novocain

$200 3 miles 1 Week No wait Nitrous Oxide


& Novocain

Copyright Learningkosh 2005


The Role of Nonmonetary Costs

Timecosts
Search costs
Convenience costs
$
Do you trade time for
Psychological costs money?

Copyright O Learningkosh 2005


Price as an Indicator of Service
Duality

Infers High Quality


Service

Infers Low Quality Service

Quality/Wei ght/Rarity

Copyright LearningKosh 2005


Pricing of Services

Pricing of services is normally based on 3 major criteria,

pst based pricing

Competition based pricing


Demand based pricing

Copyright Learningkosh 2005


Cost Based Pricing

The basic formula for cost based pricing is,


PRICE Direct Costs +Overhead Costs+ Profit Margin

In case of a totally intangible service, a fee for service is


charged, which includes the opportunity cost of time involved in
providing service, may be on hourly basis.
Eg Consultants, lawyers etc

Copyright O Learningkosh 2005


DEMAND based Pricing

All the previous approaches did not take into consideration the
following
Customers may lack reference prices
Customers may be sensitive to nonmonetary prices ( like time, effort,
psychological costs etc)
Customers may judge quality on the basis of price.

Demand based pricing involves setting prices consistent with


customer perceptions of value, ie prices are based on what
customers will pay for the services provided.

Copyright O Learningkosh 2005


Customer's Perception of Value

Customers define value in 4 ways,

Value is low price-eg fast food restaurant


2. I
Value is Whatever want in a Product or Service ( benefits) -eg
MBA degree

Copyright Learningkosh 2005


Pricing Strategies- In Reference to Value Definitions
Value is low price-
Discounting eg airines ticket
Odd Pricing eg Rs 99.99
Synchro-Pricing eg front row in theatre, mobile calls after 10pm
Penetration Pricing eg stimulating trial of new service
Value is what I want in a Service-
Prestige pricing eg club memberships,
star hotels
Skimming pricing eg customers more concerned in service provider than price
Value is the qualityI get for the price l pay-
Value pricling eg super saver pack for tata sky
Market Segmentation pricing eg std room, deluxe room & suite room

Value is all I can sacrifice for it-


Price framing eg compare with anchor's price
Price bundling eg extended service, training with software
Complimentary pricing eg instalation free for tata sky
Results based pricing eg lawyer case files, tax accountants etc

Copyright Learningkosh 2005


Promotion of Services

www.learningkosh.com
Copyright LearningKosh 2005
PROMOTION
This is all about service marketing communications.
Word of Mouth is the most effective means of communication is service
cOMPANY
External Marketing
Internal Marketing Communication
Communication
Vertical Communications
Horizontal Communications Advertising
Sales Promotion
Public Relations
Direct Marketing

EMPLOYEES CUSTOMERS
Interactive Marketing Communication
Personal Selling
Customer Service Center
Service EncOounters
Servicescapes
onwrinht Learninaoch 200t
Integrated Services Marketing Communication
Manage Customer
Expectations

GOAL:
Manage DELIVERY Improve
Service Customer
greater than or equal to Education
Promises
promises

Manage Internal
Marketing Communication

Copyright OLearningKosh 2005


Measurement: The NPS
Word of Mouth and Customer

is based on the
The recently popular Net Promoter Score (NPS)
idea that word of mouth communication, rather
than any other
customer metric, is the best predictor of growth and
therefore
financial performance.
The itself is based on just one survey question: "Would
score

you recommend us to a friend or colleague?"


Word of Mouth and Customer Measurement: The NPS

To get the NPS, customers rate the likelihood (out of 10) that
they would recommend the company.
Then,the proportion of "detractors" (likelihood< 6) is
subtracted from the proportion of "promoters" (likelihood = 9 or
10).
I sthis a "magic number" for companies?
Is NPS
superior, appropriate, or complete?

Copyright O Learningkosh 2005

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