The document summarizes a case study involving a dissatisfied customer, George Shelton, of the dry cleaning company Presto Cleaners. Mr. Shelton has complained about Presto losing and later finding his shirts, as well as poor customer service. The Presto Cleaners president must decide whether to fix the problem by compensating the customer, or assess problems with Presto's operations and culture. The summary calculates the customer's lifetime value including potential referrals, and compares the costs and benefits of keeping the customer versus losing him through negative word-of-mouth. Key learnings include quantifying a customer's full value, the importance of effective communication, and checking systems for improvements after service failures.

1. University of Washington EMBA Program
Regional 20
“The Case of the Complaining Customer”
TA: Rory McLeod

2. The Case of the Complaining Customer
• Background
– Decision Maker: Presto Cleaner President J.W. Sewickley
• Recently received information on a “service failure”
– Customer: George Shelton
• Angry!!!
– Not very fond of new order system’s performance from the start
($3 for each bag, longer wait, service provider unfamiliarity with
the new system)
– Presto lost (and later found) shirts he submitted for cleaning
– Feels like he got “the run around”/no empathy from Paul Hoffner
& Presto Management or the current complaint resolution system
– After 9 day wait he bought 4 new shirts
– Eventually another customer—having inadvertently picked up
the wrong order—returned his 4 shirts
– Still has not heard from Presto as of October 8 (originally tried to
pick up his 4 shirts on August 10)

3. The Case of the Complaining Customer
• Background (cont.)
– Presto Manager: Paul Hoffner
•
•
•
•
Feels like he made a good faith effort
Considers circumstances to be highly mitigating factors
Customer has outright lied about some key facts
Willing to play the fall guy

4. The Case of the Complaining Customer
• Mr. Sewickley has 2 decisions to make:
– Fix the problem?
• Customer
– Assess and fix the system?
• Employee
• Operations System
• Corporate Culture

5. Case of the Complaining Customer
• Fixing the Problem: To Keep or Not To
Keep Customer?
– Costs vs. benefits to Presto
• Value of Customer
• Compensation needed/given to keep customer (if
any)

6. Case of the Complaining Customer
Sample Calculation of Lifetime Value
Customer Segment: The Sheltons (2001-2002)
Average Expenditure
Purchase Cycle (weeks)
Gross Margin %
Annual Contribution from Exchanges
Forecast Customer Life (years)
NPV of Lifetime Value of Direct Exchanges
*Assumes discount rate of 10%.
$25.00
1
50%
$650
4
$2,060

7. Case of the Complaining Customer
Sample Calculation of Lifetime Value
Customer Segment: The Sheltons (2001-2002)
Average Expenditure
Purchase Cycle (weeks)
Gross Margin %
Annual Contribution from Exchanges
Undiscounted Lifetime Profit
NPV of Lifetime Value of Direct Exchanges
$25.00
1
50%
$650
$2,600
$2,060
Associated Lifetime Value (NPV)
# of Persons Referred
Word-of-Mouth Conversion Rate
Annual Contribution from Exchanges with Referrals
NPV of Associated Lifetime Value
10
50.00%
$1,625.00
$5,151
TOTAL NPV
$7,751

8. Case of the Complaining Customer
Decision Alternative: Giving the Customer What He Wants
Benefits
Customer's Augemented (Basic + Associated) NPV
$7,751
Costs
Apology
Refunding the order
Replacing the 4 Shirts
"Extras"
Value of this Alternative to Presto
$0 (approximate value only)
$35
$300 (liberal estimate)
???
$7,416

9. Case of the Complaining Customer
Decision Alternative: Forget the Customer
Benefits
A more confident Mr. Hoffner
$0 ???
Costs
Missed opportunity to earn augmented NPV
Negative word-of-mouth
Number of current customers who hear the horror story
Likelihood that someone switches upon hearing story
Value of lost customer
Lost Opportunity to Obtain New Customers (Negative word-of-mouth)
Value of this Alternative to Presto
$0
$5,813
15
10%
$3,876
???
($5,813)

10. Case of the Complaining Customer
Building a Defection Tree
SERVICE ENCOUNTER
P1
Satisfied
Dissatisfied
a
b
Do not
Complain
Complain to
Employee
P2
Unhappy,
Leave
c
Complain to
Management
P3
Stay, but
Unhappy
Resolved,
Stay
Unresolved,
Leave
P4
Resolved,
Stay
Unresolved,
Leave
% Customers Lost =(P1)(a)(P2) + (P1)(b)(P3) +( P1)(c)(P4) + negative word of mouth

11. Case of the Complaining Customer
Building a Defection Tree
SERVICE ENCOUNTER
.90
Satisfied
P1=.10
Dissatisfied
.60
.05
.35
Do not
Complain
Complain to
Employee
Complain to
Management
P2=.50
. 50
Unhappy,
Leave
Stay, but
Unhappy
.50
Resolved,
Stay
P3=.50
Unresolved,
Leave
.70
Resolved,
Stay
P4=.30
Unresolved,
Leave
% Customers Lost = .03 + .0175 + .0015 = 4.9%, excluding negative word of mouth
% Lost observed by Management = 0.15% = 3% of Total Lost
For every customer Management loses, there are 33 more out there (x 1.5 negative w.o.m)!!!

12. Key Learnings
– A substantial portion of the customer’s “true” value to the
organization can stem from referrals, network effects, and
reduced service costs that are not part of “basic” LTV
calculations
– Informed decision makers tradeoff the costs and benefits
of service recovery, and they learn from mistakes
• Customers who complain are typically desperate to do business
with your organization
– Customers will typically hold your organization
responsible for their entire experience (whether you think
you’re responsible or not)
• Coordinate points of contact to send a consistent message

13. Key Learnings
– Its usually best to keep customers informed, even
when the news is bad
• Emotion plays a huge role in customer assessments of
service quality. Keeping customers in the dark risks
making things worse.
– In addition to assessing whether or not to fix the
problem, good marketing managers will check to
see whether or not the system needs fixing as well

14. Thank You!