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Friday, August 7, 2009

A seat can’t be sold on a plane in flight.

Starbuck’s has a fairly well-known promotion running nationwide, selling any iced grande beverage for $2 after 2 p.m. to customers who present a receipt from earlier in the day. The driving factor behind this promotion is a need to balance coffee sales with the costs of their service operation.

It’s not an unusual problem.

One of the largest issues service companies face is balancing customer demand and service capacity. Unlike products companies, where inventory can be built up during periods of slow demand, inventory in service companies is extremely perishable.

Service companies use techniques to predict and / or smooth demand, so they can manage service capacity.

Airlines, (and all network-based business models) use multiple methods – a defined reservation system aimed at managing the flow of bookings, dynamic pricing models aimed at capturing consumer surplus as seats on a given flight get more scarce, lower prices on lanes with less volume, and even (to a limited extent) intentionally overselling flights.

Energy companies give a price break to heavy power users in off-peak times.

Some restaurants and movie theatres don’t accept coupons at peak times.

Starbuck’s also has a demand / capacity problem during their morning peak, when their service operation is unbalanced in the opposite way. They’ve tested a few fixes, the most prominently a separate line for drip coffee customers that are typically quicker to serve.

Rather than speed something based on an ease-of-service aspect of the operation, why not focus capacity management customer benefit? Starbuck’s has (at least) two identifiable sources regular customers: Holders of the Starbucks coffee card and the Duetto Visa card. How about a separate line for card holders, i.e. loyal customers? It solves some of the operations issue and rewards brand loyalty. If that alone doesn’t drive sufficiently consistent volume through the “fast” line, expand it to include anyone filling a Starbuck’s-branded travel mug, helping increase merchandise sales.

I know people who would purchase a coffee card and / or a mug for a chance to skip the line.

Predicting and addressing or smoothing demand is critical in service operations, but if managed, inconsistent demand can also be a source of customer loyalty or satisfaction.

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