A hybrid multi-criteria decision model for supporting customer-focused profitability analysis
| DOI | https://doi.org/10.1108/IMDS-10-2015-0410 |
| Published date | 11 July 2016 |
| Date | 11 July 2016 |
| Pages | 1105-1130 |
| Author | Henry Lau,Dilupa Nakandala,Premaratne Samaranayake,Paul Shum |
| Subject Matter | Information & knowledge management,Information systems,Data management systems |
A hybrid multi-criteria decision
model for supporting customer-
focused profitability analysis
Henry Lau, Dilupa Nakandala, Premaratne Samaranayake and
Paul Shum
School of Business, The University of Western Sydney, Penrith, Australia
Abstract
Purpose –Strategic analysis of customer profitability for assessing market segmentation and
reconfiguring customer relationship management (CRM) activities remains the key factor for achieving
high return on CRM investment. The purpose of this paper is to map the profit-based ranking of
corporate customers into the current market segments, with a view of determining the relative
profitability of each market segment.
Design/methodology/approach –This study develops a novel model that combines activity-based
costing (ABC), CRM, fuzzy analytic hierarchy process (AHP), and technique for order preference by
similarity to ideal solution (TOPSIS) methods to evaluate strategically customer profitability and
prioritizing corporate accounts. This case study airline company has invested heavily in CRM over the
past seven years on integrating multi-functional departments that touch customers. The airline
operations management and marketing functions provide key inputs. Results of the hybrid model
validate feasibility of the proposed model.
Findings –The airline management makes use of the ranking results to optimize
customer profitability by reconfiguring marketing programs, integrated schedule design,
fleet assignment, maintenance routing, crew scheduling, and real-time optimization of
schedule recovery in the aftermath of disruptions or irregularities. The proposed model also
directs the marketing function to customize service offerings and introduce appropriate service
levels to engage customers of different segments for the purpose of maximizing corporate
profitability.
Research limitations/implications –Significant amount of investment is necessary to design and
implement the extensive CRM database and systems to assure customer data quality and availability
so as to bear fruits in the proposed hybrid model. These data requirements can especially be a critical
barrier for small to medium-sized companies.
Practical implications –This hybrid model is able to capitalize on the benefits of the ABC, CRM,
fuzzy AHP, and TOPSIS methods and offset their deficiencies. Most importantly, it can be applied to
various industries without complex modification.
Originality/value –This study represents the first move to adopt the fuzzy AHP and TOPSIS
methods to analyze the ABC and CRM data inputs of an airline company. In mapping the profit-based
ranking of corporate customers into the current market segments, the relative profitability of each
market segment can be determined.
Keywords CRM, AHP, TOPSIS, MCDM, ABC
Paper type Research paper
1. Introduction
Airline industry is one of the global industries that struggle for survival and growth.
During the last four decades to 2010, the ratio of cumulative net post-tax profits to
revenue of the airline industry was only 0.1 percent, which was among the least
profitable of all industries (Bisignani, 2011; Ramsay, 2013). The unique characteristics
of perishable seat availability, high aircraft sunk costs, and low marginal costs for
adding passengers within the capacity constraints combined to intensify competitive
Industrial Management & Data
Systems
Vol. 116 No. 6, 2016
pp. 1105-1130
©Emerald Group Publis hing Limited
0263-5577
DOI 10.1108/IMDS-10-2015-0410
Received 1 October 2015
Revised 14 December 2015
Accepted 3 February 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0263-5577.htm
1105
A hybrid
multi-criteria
decision model
rivalry to limit price and profits. From an industry perspective, there is almost no
airline company earning attractive return on investment, mainly due to the intens e
competitive forces influencing the airline industry (Porter, 2008). Each airline is in a
constant search for ways to improve profit.
Though most companies are familiar with formulating good strategies, they
might overlook critical building blocks and thus could result in unsatisfactory
profitability. For example, Bradley et al. (2013) report that a technology company
that prided itself on analytical rigor but never accurately diagnosed how to identify a
targeted customer segment to generate reasonable returns has a strategic issue.
This study aims to develop a hybrid model to analyze an integrated data for
identifying airline customers with varying profit potential for market segmentation.
By selecting the most profitable customers for developing retention strategy, and
converting the unprofitable into profitable customers, higher profit outcome can
be achieved.
To achieve this objective, activity-based costing and management (ABC&M)
method, as reviewed in the following section, will be used for customer profitability
analysis (CPA). However, though the quantitative results are more precise than
the traditional cost accounting method, management cannot draw inference for the
longer term future customer profit potential. To compensate for this backward
looking quantitative approach, a relationship marketing (RM) model is developed to
extract relevant data from the customer relationship management (CRM)
system, corporate survey database, and other external databases to assess the
longer term prospect of customer profitability. The customer profiles generated
are then analyzed and prioritized with the fuzzy analytic hierarchy process (FAHP)
and the technique for order preference by similarity to ideal solution (TOPSIS)
to rank the corporate accounts. The next section presents a literature review, followed
by the research methodology. Thereafter, a case study including numerical results
and research finding are presented. Finally, conclusion and future direction
are drawn.
2. Literature review and problem description
Added to the unprecedented competitive pressure, the internet technology has reduced
intermediaries and distribution costs substantially, thus making airlines even more
price competitive. However, results of the survey piloted by this airline company
indicate that its corporate customers are still attracted by service quality. Airlin es have
traditionally segmented its customers into classes (first, business, and economy) for
designing service quality levels. However, this simple segmentation logic no longer
matches the ever more complex and heterogeneous choices of trading off flexibility and
price with other product offerings in the current airline business environment.
New airline market segmentation has been proposed, for example Teichert et al. (2008)
segment the airline market on the basis of seven attributes, namely total fare and
frequent flyer program (sales and marketing), flight schedule, flexibility, punctuality,
catering, and ground services (operations and supply chain). Similarly, a few other
studies have deliberated various combinations of clustering attributes and/or methods
in airline market segmentation such as cross-national consumer preferences and
demographics factors (Bruning et al., 2009), fare class (Cizaire and Belobaba, 2013),
passengers’value-driven needs and service requirements (Holloway, 2008; Prokesch,
1995), and price, product and schedule sensitivity (Drabas and Wu, 2013). Though
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