Return on Service

Is good service a good thing? Many businesspeople would say that it is. If you ask them what is so good about it, they will tell you that it keeps customers coming back. They might also say that it can lead to more frequent purchases, fewer complaints, positive word-of-mouth and other activities that affect profitability. But if you ask them how much they should invest in good service and how much return they expect from their investment, the answers start to get fuzzy.

Most businesses really do not know what their ROI in customer service is, or even what it should be. Nevertheless, they will spend money – sometimes a significant amount of money – on employee training, customer satisfaction research, mystery shopping and manager incentives with the belief that it will all pay off in the end. There is probably no other major investment routinely made by companies for which they have so little idea of return.

Why is it that otherwise hard-nosed business professionals give so little scrutiny to service improvement expenditures? Seldom do they approach the subject as they would other proposed investments. Service initiatives tend to be based not on calculated benefit, but on blind faith.
This approach begins with the unchallenged belief that good service always leads to higher profits. Companies launch service crusades, making grand promises to their customers as they whip their staff into a frenzy of friendly service activity. They chant slogans like, “We’re dedicated to excellence,” and “The customer is number one.” They proclaim that they will become the Nordstrom of their industry. And they contribute a substantial amount of money to the effort, confident that it is all going to a good cause.
In the end, the miracle they had hoped for seldom appears. Customers may be more satisfied, but the desired rise in profitability rarely occurs. There may be profit changes, up or down, but it is difficult to figure out how much effect service quality had on the change.
At this point many companies experience a crisis in faith and revert to their old practices: cost-cutting, reductions in staff, new ad campaigns. Poorer but wiser, they look back at their crusade and wonder how they could have been so naïve.
Perhaps it is time to take a different approach, beginning by redefining what makes service good or bad. Here is a suggestion: Good service should begin and end with profit. If there is no predictable, measurable ROI, it isn’t good for anybody in the long run. Investors get a sub-optimal return, employees suffer through service crusades that are doomed to failure, and customers are set up with unrealistic expectations that companies cannot meet.
A profit-based approach to service begins with companies asking the question, “What do we want our customers to do more of or less of?” Do we want them to spend more with each purchase? To complain less frequently? To recruit new customers through word-of-mouth? In making this list, attitudes (such as satisfaction) and feelings (such as delight) are not included — only measurable, observable customer behaviors that can plausibly be influenced through service interactions.
The next step is to calculate the financial effect of an incremental change in each customer behavior. What would be the effect on revenue of increasing the average customer purchase by one dollar, or reducing the volume of complaints to call centers by five percentage points? It quickly becomes clear that even a small change in some customer behaviors can have a substantial financial impact. It also becomes clear which service changes will have the biggest effect.
This process next moves to the subject of employee training: What specific knowledge and skills are needed to influence desired customer behaviors? Then, incentives and measurement: What rewards will be most effective at reinforcing the use of those skills? What metrics need to be gathered to trigger rewards?
With this process, there is always a clear path to making money. All of those fuzzy terms that so many businesses base their service initiatives on, like “customer loyalty” and “customer delight”, become secondary. This doesn’t mean there is no benefit to customers. On the contrary, the types of behaviors desired of customers will only come about if they are satisfied, loyal and occasionally delighted. But companies cannot make the world a better place for customers unless they show a profit. By defining good service in terms of its effect on the bottom line, everybody wins.

By Peter Gurney

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