Customer Service Drives Financial Performance

How would you define and describe customer service? Not easy is it, although we certainly know it when we see, feel, or experience it. Some describe customer service as the golden rule, treating others as you would like to be treated. Others describe it as the business capability of meeting customer’s wants and needs. Contact between a customer and a company results in either a negative or positive customer perception.

In an economy where consumers scrutinize the value of every product or service, customer service has turned from ‘nice to have’ to ‘must have’ to attract and retain customers, providing a competitive advantage to differentiate services and products.

In Service Economics: Profitable Growth with a Brand Driven Service Strategy, senior partners at Noventum Service Management Consultants convert the intangible aspects of service (i.e., customers, employees, strategy, brand values, processes) into something tangible, like financial information, to yield the value of customer service as a source of profitability.

As consumers expect more value for their money, customer service can be a growth strategy that contributes to and influences the bottom line. According to In Service Economics, research shows that a service-based business with people-driven service will deliver profitable growth. Authors note that it is not unrealistic to expect sales increases of 20% or more of total company revenue by promoting staff as trusted advisors delivering excellence in customer service.

Joseph Michelli, Ph.D., an organizational consultant, notes that successful service initiatives consistently result in productivity improvements which in turn produce annual growth rates of 20-40% and increased profitability on both gross and net margins.

In Service Economics highlights trends in the service industry that include changing generational demographics of the workforce and customer as well as a growing focus on the individual. This drives customization of both services and products, which reach markets at lightning speed. Witness a shift from basic services to the ‘total customer experience’ which defines value for each individual.

“Leaders must be committed to creating different customer experience offerings for different consumer segments and customized service as much as possible for consumers who represent the greatest overall value to their business,” states Michelli. “These service oriented businesses viewed service in the context of an immersive experience, not simply a transaction.”

W. Earl Sasser, a Baker Foundation Professor at Harvard Business School and co-author of The Value Profit Chain, reports that many organizations don’t know the profitability of their existing customers and treat all customers basically the same.

Sasser maintains that a company’s key to survival is to allocate resources to retain the most profitable customers and encourage customer behaviors that lead to greater profitability.

“Typically, 20% of the customers produce 80% of the profits. Many of the other customers are unprofitable on a fully loaded cost basis. If these customers are not contributing to covering the overhead, let them go quietly,” advises Sasser. “The best approach is to raise prices slightly to these customers, who will switch to a lower-priced competitor.”

The American Express Global Customer Service Barometer is a survey conducted in the United States and eleven other countries to explore attitudes and preferences towards customer service. “Customers want and expect superior service,” Said Jim Bush, Executive Vice President, World Service. “Many consumers say companies haven’t done enough to improve their approach to service and yet it’s clear they’re willing to spend more with those that deliver excellent service – suggesting substantial growth opportunities for businesses that get customer service right. It’s important to see customer service as an investment, not a cost.”

So, just how much are consumers willing to pay for customer service? According to the Barometer study, 61% of Americans report that quality customer service is more important to them in today’s economic environment and those same Americans will spend an average of 9% more when they believe a company provides excellent service. Consumers in India are willing to spend 11% more while Canadians are willing to spend 7% more for excellence in customer service.

“The Internet has made service quality more transparent than ever before,” Bush said. “Each and every service interaction a company has with its customers is even more crucial. Developing relationships with customers, listening to them, anticipating their needs and resolving any issues quickly and courteously can help make the difference.”

Good service experiences are more important than bad experiences when making spending decisions. Consumers are 81% more likely to do repeat business after a good service experience than they are to never do business with a company again after a poor experience (52%).

Of course, companies who don’t deliver on customer service have learned that customers expect not only an apology, but some type of monetary reimbursement like a refund or gift card in return for their inconvenience. These costs dig into profits.

Robert Moment, author of Invincible Profits: The Power of Exceptional Customer Service, notes that to attract and retain customers, businesses must create “wow” customer experiences, create loyalty, and establish trust.

“Customer service is about reliability and it’s about relationship. It’s about the quality of your product and service before, during, and long after the sale,” says Moment. “If you anticipate your customer’s expectations they’ll spread the word about what a great business you have. There’s nothing better than good word of mouth marketing.”

Three-quarters of consumers are very likely to speak positively about a company after a good service experience as opposed to 59% who are very likely to speak negatively about a company after poor service. Can’t beat that ‘word of mouth marketing’ to enhance revenues and profits!

In The Starbucks Experience, Michelli describes relationships as one strategy used in the Starbucks business model to move from one Seattle coffee shop into a multi-national corporation with over 11,000 locations. Michelli notes that employees are empowered to take the customer’s experience to a high level by permitting employees to make decisions that benefit the customer and by encouraging employees to approach unusual requests with a “how” instead of a “yes” or “no.” Customer service relationships enhance profits.

Many companies are starting to understand the payoff of investing in customer service.

Susan Reilly Salgado, managing director of Hospitality Quotient makes the distinction between service, the technical delivery of the product, and hospitality, how guests feel during the transaction. She notes that what people refer to as ‘great service’ she calls ‘hospitality’ although it’s important to have both.

“We know that luxurious touches don’t matter to guests unless the service surpasses the setting,” said Simon Cooper, President, The Ritz-Carlton Hotel Company LLC. “Trends may change, but a focus on service excellence is timeless.”

Wal-Mart founder Sam Walton hit it right on the money when he stated, “There is only one boss. The customer. And, he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

If you would like to learn more about how NBRI can help you identify how your customer service practices can better drive financial outcomes, contact us now at 800-756-6168.

Terrie Nolinske, Ph.D.
Research Associate
National Business Research Institute