Total cost of service, TCS

From the service provider’s perspective net value is the profit the results from the successful delivery of the service. Government and not for profit enterprises think of profit in terms of financial surplus, reduction in deficits, public good, and public trust. In all cases, long-term viability, success and growth depend on producing a higher net value at the lowest possible cost.

From the service provider’s perspective, the experience of the agent during engagement and fulfillment is just as important as user experience. Agents put in time and effort for dialog and interaction, and the staging of touch points and interfaces requires expenditure. Apart from the personal costs of human agents in terms of quality of life and stress, there are costs in terms of salaries, wages and benefits measure in terms of the number of full-time equivalents (FTE), it takes to serve a user. It is these costs, along with the need for ubiquity and scalability that drives design decisions towards incorporating agent personas in hardware and software, and the increasing use of AI, machine learning, and bots. But everything costs money, so design should find ways to improve the employee and agent experience to reduce the total cost of service. When markets become competitive, every little bit matters.

Quality of experience from the service provider’s perspective becomes costlier when the quality of demand is below a certain level that the service delivery system is designed for. Inherent in demand is variation for which services have built-in tolerance. Some customers are costlier to serve simply because of the quality of demand they bring in which there is a lot more risk than tolerable. Outside of this tolerance, unacceptable costs start to accumulate, reduces the profit or surplus for the service provider. Thus quality of experience matters just as much from the perspectives of the enterprise and agent, who must find ways to minimize the effect of the negative externalities users impose and drive up costs.

profit or surplus = price – total cost of service

net value = payment – cost/quality of experience

TCS = cost/quality of experience

In accounting parlance, fulfillment costs are the “cost of goods sold” and go towards producing the goods being delivered, which are the outcomes from performance and affordance. Those costs are included in the price and to some extent risk and uncertainty in service delivery is already priced in. However, there are additional costs service providers incur. These include costs of dialog and interaction with users over and above a certain normal. It includes the cost of tolerating errors of commission and omission on part of users, and the cost of handling exceptions and special requests. Services are complex adaptive systems, which means over time the service learns how to service users in target markets. From this learning, financial accounting systems help inform pricing decisions that integrate the variation into the demand patterns, and move the quality costs into the cost of goods sold.

The other tactic is segmentation and price discrimination based on quality of demand and usage patterns. Insurance companies have sophisticated models that price policies based on risk profiles, as do lending institutions when they offer interest rates based on creditworthiness. Yet those models only cover fulfillment costs, not engagement. To manage costs associated with engagement, service providers enact policies that control the process of engagement, or charge additionally for certain types of dialog and interaction. This doesn’t always go well with customers who are price sensitive but also expect a certain minimum quality of experience. Therefore, asking users to share this type of costs requires a different kind of framing and rationalization. One of them is helping users better prepare to use the service, by training and educating them to behave and interact in certain patterns. The other is making it easier to help themselves through self-service options, which essentially are a means to delegate some of the agent’s responsibility and authority. All of this has to happen within a framework of goodwill and trust, with a sincere commitment to cooperation and mutual benefit, otherwise it leads to weakening of relationships and contracts and missed opportunities.

Service design is a nonlinear optimization problem1

These are the total costs providers experience across the stages of enrollment, engagement, fulfillment and enjoyment. Payments from customers account ultimately need to cover these costs and a profit margin or surplus. Therefore, for service providers there is pressure to maintain and protect the profit or public trust. The costs due to poor quality of delivery experience can be quite significant. When transaction costs are high, they induce margin pressure, and increase risks.

The inflow of customer loyalty, payments and trust can reduce the total cost to serve in present and future periods. However, for sustainability and growth, service providers to need to create and maintain a cost buffer over and above a working capital. Due to fixed costs, capital investments and expenditure, service providers cannot simply walk away from service offerings the way customers can. Capabilities and resources need to be in a certain state of operational readiness, and resources to be carefully maintained.

Higher levels of quality of demand is a form of assurance against unnecessary and unexpected costs. Goodwill and trust from customers in the form of loyalty, longer contracts, and premium pricing can also reduce the TCS.

For a certain level of price, any reduction in TCS results in an economic surplus (also known as producer surplus) that in turn generates goodwill and trust towards the customers, thus completing the feedback loop. Trust is a big factor influencing transaction costs. Goodwill from customers can be in the form of loyalty, forgiveness and tolerance that defray acquisition and retention costs. From service providers it can be in the form of discounts and rewards that defray the cost of using the service. Each is willing bear additional costs on behalf of the other, without compensation, grudge or complaint.

  1. It is so very important to consider design of outcomes together with design of experience to provide better support for pricing. The design of a service is a nonlinear optimization problem, with the goal of maximizing gains (including avoided losses) and minimizing pain to increase the economic surplus on both sides of the contract. When customers enjoy a higher net value, they are likely to increase their willingness to pay for and make use of the service. Service providers enjoy the surplus in terms of profit (or public trust in the case of government) and are able to invest in further improvement and growth in their capacity to fulfill demand, as customers trust them with more valuable outcomes or contract values.