Title

Product Customization and Customer Service Cost: An Empirical Analysis

Date of Original Version

2008

Type

Working Paper

Abstract or Description

We conduct a field study on a prominent US health insurance firm to examine how customizing a product affects firm’s cost to serve the customers through its call center. In our setting, the product is a complex health insurance policy. Firm incurs substantial cost in serving the customers through its call center, and adjudicating the claims using its information systems. Firm sells either standard products, or in some instances allows customer groups to customize their policy by including, modifying certain aspects of the policy. We show that the process of customization is such that it increases users’ familiarity with his/her coverage and improves the fit with his/her medical needs. This, in turn, reduces their incentives to call the firm’s call center for clarifications regarding their product coverage. In particular, we show that users with customized policies call 30% less frequently than users with standard plan even after controlling for their number of doctor /facility visits. We also show that there is no difference in claim adjudication cost between a standard vs. customized policy. Overall, our results suggest that, customized products may be operationally cheaper to serve than standard products. Thus our paper provides a link between product features and the ex-post cost of serving them.

Comments

Working draft: pl. do not quote or cite without authors’ permission