Product Customization and Customer Service Costs: An Empirical Analysis

Abstract

We conduct a field study with a US health insurance firm to examine how product customization affects firm’s cost to serve the customers through its call center. In our setting, the product is a complex health insurance plan. Firm incurs substantial cost in serving the customers through its call center, and adjudicating the claims using its information systems. Firm sells either standard plans, or in some instances allows customer groups to customize their plan by including, modifying certain aspects of the plan with active collaboration with firm – product co-creation. We show that the process of co-creation is such that it increases users’ familiarity with their coverage and improves the fit with their 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 plan call 20% less frequently than users with standard plan. Our results account for any possible self selection of customers to customized plan. We also show that there is no difference in claim adjudication cost between a standard vs. customized plan. Overall, our results suggest that, customized products may be operationally cheaper to serve than standard products. Thus our paper provides a link between a growing business concern (customer support cost via call center) and a prevalent business strategy (product customization via co-creation).

Keywords: product customization, product co-creation, health insurance product, field study, customer service, product familiarity