Speaker(s):   Dennis Campbell (HBS) -- Recruiting Talk
Title:                The Cost Structure and Customer Profitability Implications of Electronic Distribution Channels

Abstract

This paper uses the context of online banking to investigate the consequences of employing technology to alter customer interactions with the firm.  Using a sample of retail banking customers observed over an 18-month period at a large U.S. bank, I test whether changes in service consumption, revenue, cost, and customer profitability are associated with the adoption and use of online banking.  I find that customer adoption and use of online banking is associated with (1) substitution primarily from incrementally more costly self-service delivery channels (ATM and voice response unit) with little or no substitution from more costly service delivery channels (branch and staffed call center); (2) a substantial increase in total transaction volume; (3) an increase in cost-to-serve resulting from the combination of (1) and (2); and (4) a reduction in revenues consistent with customers using the channel to more closely manage balances and avoid fees associated with minimum balance requirements.  These effects combine to yield a net reduction in estimated short-term customer profitability.  However, I find that use of online banking is associated with higher customer retention rates.  I discuss the implications of these findings for performance measurement in service firms.