Club  Med  (A)  

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Abhishek  Padhye  (B13125)  

Ajay  Khaitan  (B13126)  

Akanksha  Singh  (B13127)  

Prithwish  Datta  (B13161)  

Q1. How successful is Club Med – both financial and non-financial measures?
Club  Med  is  stagnating  financially  as  is  evident  from  the  data  available  in  Exhibits  2  &  7.  This  
stagnation  becomes  more  significant  when  considering  the  very  high  fixed  costs  (79.5%  -­‐-­‐  
exhibit  4)  of  running  this  business.    

Measure   1984   1985   1986   Comments  

Net  income/Sales   5.1%   5.6%   5.3%   Stagnating  
Net  income/Guest   50   55   54   Stagnating  
   
  Club  Med   Industry    
COGS   48%   40%   Higher  than  average  
Labour  Cost   27%   36%   Low  labour  cost  can  
adversely  affect  service  
quality  
Others  expenses  (ads,   14%   8%   Higher  than  average  
general,  
administrative)  
 

Guest  satisfaction  ratings  (Exhibit  11)  are  a  non-­‐financial  measure  that  reflects  inconsistent  
performance  across  Ixtapa,  Cancun  and  Bahamas.  There  are  significant  differences  in  the  guest  
satisfaction  ratings  for  various  parameters  across  the  three  hotels.  This  is  also  apparent  from  
the  qualitative  comments  from  questionnaires  (Exhibit  12).    

Q2. How has the service operating system contributed to this performance i.e. has Club
Med developed a competitive advantage through its service operating system? Is this
sustainable?

Club Med used its service operations to stay in the aforementioned position. It enjoys a
near monopoly and in the present circumstances, it needs to focus on customer
satisfaction.

Club Med have followed an uncompromised reduction. They used the 7Ps, to push forward
their reduction strategy.

Club Med (A) 1

 Product   The  service  was  offered  in  the  form  of  a  package.  This  helped  them  shape  
their  reduction  strategy  [they  were  constraining  the  customer’s  choice]  

Price   Reduction  helped  them  keep  a  lower  price  as  compared  to  their  
competitors    

Place   Extensive  distribution  strategy,  with  reward  programmes  for  the  travel  
agents  

Promotion   Promotion  was  targeted  at  the  people  looking  for  a  refined  experience  

People   Their  labor  cost  was  less  than  the  industry  

Process   The  process  was  such  that  they  provided  a  menu  to  the  customers  not  
only  for  the  food  but  also,  for  some  activities.  

Physical   The  physical  evidence  strategy  was  directed  towards  reduction  too.  The  
evidence   standardization  of  rooms  (Spartan)  etc.  made  sure  variability  is  less  

High Cost Low Cost

Low Discretion
Club Med

High Discretion

Club  Med  used  its  service  operations  to  stay  in  the  aforementioned  position  

Club Med (A) 2

Resources:  Capital  accumulated  over   Value  Proposition:  European  style  refines  
years.  Brand  Image.   vacation  

Economies  of  Scale   Getaway  

Employees  at  low  wages   Convenience  in  the  form  of  packages  

Distribution  Network  of  Travel  Agents  

Processes:  A  selection/menu  provided   Delivery:  Extensive  channel  of  travel  

for  all  activities     agents  

Well  trained  village  chiefs  given  

discretionary  powers  

Reduced  variability  by  offering  selections  

for  all  activities  

Q3. What is the expected value of a new customer?

Assumptions:  

1.  Satisfaction  rate  in  1985  =  80%  

2.  Time  Value  of  Money  has  been  ignored  for  the  calculations.  Assuming  all  WOM  effects  in  
year  0  happen  in  year  1.    
 
 
 
Given  information:  
 
1. 60%  of  all  customers  in  one  year  are  new  
2. 65%  of  new  customers  come  through  WOM  of  satisfied  cutomers  from  previous  year.  
3. 25%  of  satisfied  customers  go  for  repeat  visits  (4  additional)  
4. Contribution  Margin  is  60%  
 
 
 
 

Club Med (A) 3

Approach:  
 
Calculate average revenue  
  Calculate  weighted  average  value  
per guest (Exhibit 2)
  of  a  customer  (3  possibilities):  
 
  1. Repeat  and  WoM  
Calculate  percentage  of  new  
2. Only  WoM  
customers  (1986)  through     3. Dissatisfied  customer  
WOM  of  satisfied  customers  
from  1985  

Average  revenue  per  guest  ($)   1022.5   Exhibit  2  (average  of  all  
years)  
Average  satisfaction  rate   0.8   Assumed  
     
Total  number  of  guests  (1986)   332000   Exhibit  1  
Number  of  new  customers  (1986)   199200   Exhibit  1  
Number  of  new  customers  that  came  through   129480   65%  of  new  guests  
WOM   (1986)  
Total  number  of  guests  (1985)   282000   Exhibit  1  
Number  of  satisfied  customers  (1985)   225600   80%  of  all  guests  (1985)  
Percentage  of  new  customers  (1986)  through   57.4%   129480/225600  
WOM  of  satisfied  customers  from  1985  

Value  of  word  of  mouth  per  guest   586.92   0.574  x  1022.5  
Expected  value  of  a  satisfied  guest      
If  he/she  is  a  repeat  customer  (25%  of  all  satisfied)   7000    
Non-­‐repeat  guests  (Only  WoM)  (75%  of  all   586.92    
satisfied)  
Dissatisfied  guest  (20%  of  total  guests)   -­‐586.92   Assuming  negative  WoM  
for  dissatisfied  guests  

Club Med (A) 4

 Total  value  of  a  guest  ($)   1634.77      
 
 

Q4. What are the economics of Service Quality in terms of impact of increasing service
quality on sales, costs and opportunities to increase service quality?
The  impact  of  increasing  service  quality  (in  terms  of  satisfaction  and  WoM)  on  sales  is  tabulated  
below  for  1986.  The  calculations  have  been  carried  out  in  the  same  manner  as  in  Q3:  

Satisfaction  (%)   Repeat  (%)   Value  per   Contribution   Contribution   Increment  

guest   rate  (%)   (million  $)   (million  $)  
80   25   1634.77   60%   325.64      
90   25   1835.74   60%   365.68   39.94  
90   30   2129.88   60%   424.27   98.63  
 

 However,  the  costs  associated  with  improving  the  service  quality  might  offset  the  increase  in  
revenues.  One  of  the  major  areas  for  improvement  is  flights  and  transfers.  Club  Med  will  have  
to  ensure  that  they  are  able  to  recover  the  cost  of  better  quality  from  the  guests,  who  might  be  
unwilling  to  pay  for  better  services  such  as  flights.    

Q4. So what is the way forward for Giraud?

Club Med should begin by identifying the promoters and detractors from among it customer
base since, 65% of their new customers are from WOM.

The way forward for Club Med is to invest in building in their core capabilities. The
competition is catching up to them by offering different product attributes like sportiness etc.
whereas they stand for a refined vacation. The only way to compete is to enhance the
experience of their target customers. Here, we can use the theory of promoters and
detractors. The core customers of Club Med are called the promoters, who have high
retention and great for their word of mouth advertising. Theories suggest that investing
capital on the promoters is more valuable than trying to convert detractors.

The next step could by trying to convert the profitable detractors into promoters by talking
to them at an individual or at least, use representative sample sizes to find out the reasons
for their dissatisfactions. Then offer incentives so as to keep them from moving. A survey
might not work here as has been reflected in Exhibit 12, where a lot of customers did not
respond.

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