Product Customization and Customer Service Costs: An Empirical Analysis

We conduct a field study in a U.S. health insurance firm to examine how product customization affects the firm's cost to serve customers through its call center. In our setting, the product is a complex health insurance plan. The firm incurs substantial costs in serving the customers through its call center and in adjudicating the claims using its information systems. The firm sells either standard plans or in some instances allows customer groups to customize their plans by adding and modifying certain aspects in active collaboration with the firm. Such a collaboration process is akin to the firm cocreating products with its customers. This cocreation process should increase customers' familiarity with their coverage and improve the fit with their medical needs. Better fit and familiarity in turn, reduces customers' incentives to contact the call center for clarifications regarding the firm's product coverage. In particular, we show that customers with a customized plan call 21% less frequently than customers with a standard plan. Our results account for possible self-selection of customers to customized plans. We also show no difference in the claims adjudication cost between a standard and a customized plan exists. Overall, our results suggest customized plans may be operationally cheaper to serve than standard plans. Thus, our paper provides a link between a growing business concern (customer support cost via call centers) and a prevalent business strategy (product customization via cocreation).