Department of Business Administration2024-11-1020041523-461410.1287/msom.1040.00482-s2.0-25144481872http://dx.doi.org/10.1287/msom.1040.0048https://hdl.handle.net/20.500.14288/17682This paper studies service-delivery design in settings where firms engage in value-creation activities that have the objective of generating additional revenue from customer interactions. The paper provides a general modelling framework to analyze the ties between market segmentation decisions, incentives, and process performance in such service-delivery systems. The firm is modelled as a single-server queue, in a principal-agent framework. Customers have different value-generation potentials whose realizations are observed by the server but not by the manager of the firm. The manager determines a market segmentation scheme given an overall customer value-generation profile, which divides customers into two groups (high and low), and also determines a service level for each segment. The server decides which of the two available service levels (high and low) to provide for each customer, given a compensation scheme offered by the manager. The optimal market segmentation decision, optimal service-level choice, and a set of optimal linear incentive contracts that enable their implementation are characterized. The robustness of these strategies is explored with respect to model parameters and assumptions. It is shown that a market segmentation scheme that combines revenue generation concerns with their process implications is essential for success. Characteristics of appropriate incentive schemes are identified.Business administrationJournal Articlehttps://www.scopus.com/inward/record.uri?eid=2-s2.0-25144481872anddoi=10.1287%2fmsom.1040.0048andpartnerID=40andmd5=b81dde5aababeba096d2ff733cc171feN/A4276