Proactive Customer Service: Operational Benefits and Economic Frictions

Abstract

Problem definition: We study a service setting where the provider has information about some customers’ future service needs and may initiate service for such customers proactively, if they agree to be flexible with respect to the timing of service delivery. Academic/practical relevance: Information about future customer-service needs is becoming increasingly available through remote monitoring systems and data analytics. However, the literature has not systematically examined proactive service as a tool that can be used to better match demand to service supply when customers are strategic. Methodology: We combine (i) queueing theory, and in particular a diffusion approximation developed specifically for this problem that allows us to derive analytic approximations for customer waiting times, with (ii) game theory, which captures customer incentives to adopt proactive service. Results: We show that proactive service can reduce customer waiting times, even if only a relatively small proportion of customers agree to be flexible, the information lead time is limited, and the system makes occasional errors in providing proactive service—in fact, we show that the system’s ability to tolerate errors increases with (nominal) utilization. Nevertheless, we show that these benefits may fail to materialize in equilibrium because of economic frictions: Customers will underadopt proactive service (due to free-riding) and overjoin the system (due to negative congestion-based externalities). We also show that the service provider can incentivize optimal customer behavior through appropriate pricing. Managerial implications: Our results suggest that proactive service may offer substantial operational benefits, but caution that it may fail to fulfill its potential due to customer self-interested behavior.