Catch the Customer Completely Off Guard with Good Service
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Does Good Customer Service Pay?
Eric Larse is co-founder of Seattle-based Kinesis, which helps companies plan and execute their customer experience strategies. He has written an interesting article titled A Guide to ROI in Customer Service. This post summarizes Eric’s compelling thoughts on the subject.
Here’s the conundrum companies are facing:
Pros of Good Service:
- Good service is an important value differentiator.
- An abundance of literature finds that service can affect retention, spending, word-of-mouth endorsements and other customer activities that make a company more profitable.
- Many companies with excellent service still suffer from poor financial performance.
- Good service is expensive -requiring research, training, measurement and incentives to managers and employees.
So is good customer service worth the expense? What if we weigh the investment opportunities against the costs, comparing expected risks and returns? Unfortunately, many companies have not done a thorough job of calculating the ROI of customer service, and may not really be able to determine whether their money has been well spent, or, conversely, whether the money they save on using call centers overseas is really retaining enough business to even break even with well managed U.S. call centers.
The Larse Principle of Calculating ROI
According to Eric Larse, approaches to calculating service ROI appear to fall into two major types:
- “Blind Faith” approach
- “Rube Goldberg” approach
“Blind Faith” Approach
The Blind Faith approach proceeds on an unexamined premise that good service always leads to higher profits. According to Larse:Companies launch service crusades, making grand promises to their customers as they whip their staff into a frenzy of friendly service activity. They intone ritual phrases, like, “We’re dedicated to excellence,” and “The customer is number one.” 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 expected rise in profitability rarely occurs. There may be profit changes, up or down, but it is devilishly 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 naive.The “Service Machine”
The Rube Goldberg approach is “mechanistic:”
These folks don their white lab coats and attempt to build predictive models that explain the links between service attributes, customer satisfaction and profitability. They use statistical techniques to uncover correlations and coefficients and co-variation, revealing that a twelve-second reduction in average wait times will result in a one-point rise in customer satisfaction, which will turn into a half-cent increase in per-transaction revenue at a cost of a quarter of a penny, etc., etc.
These models can provide insights into
- Understanding the associations among different service and profit factors
- How service attributes interact with each other to influence customer perceptions.
- Too many moving parts to function as a practical, day-to-day business tool.
- Giving the appearance of being far more precise than they actually are: “Many companies have spent considerable effort and money constructing such models, only to find that their applicability is marginal and their useful lifespan limited.”
A third drawback that I have observed is that holding customer service account representatives to strict reporting standards and quality reviews creates misery in the workplace among those who should be the brand ambassadors for the company, which can have unintended ill effects. An argument can be made that more judgement and empowerment is better than more rules, regulations, and criticism at making individual customer service representatives more effective in customer interactions.
The “Third Way” – A Balanced Approach
Larse holds that there is a need for an alternate model that is simple, practical and intuitive. It could be called the middle way between the two approaches: not as precise as the predictive models, but not treating service as sacrosanct. He characterizes it as follows:
The Third Way takes the view that service isn’t profitable because it’s good, it’s good because it’s profitable.
A 3-Step Approach to Doing Customer service right.
1. List customer behaviors that directly affect revenues or costs:
The company asks itself, “What, specifically, do we want customers to do more of or less of?” Attitudes (such as satisfaction) and feelings (such as delight) aren’t included – only measurable, observable behaviors, such as, “use our service more often,” “call our support line less often,” “purchase more items on an average visit to the store,” and “return merchandise less frequently.”
2. Extract the items that can be influenced through service interactions: including service interactions that involve employees. ATMs, web sites, unmanned kiosks, etc.
The company asks itself, “What can employees (or machines or web sites) do more of or less of, or do differently, to influence how customers act?” If it can’t be measured, if it can’t be trained (or programmed) or if it has no likely effect on measurable customer behaviors that effect profit, it is removed it from the list.
3. Determine the specific knowledge and skills needed to provide the service that will affect desired customer behavior:
- Train managers and staff
- Implement incentives and metrics.
The company can then calculate the financial impact of incremental changes to each item:
“What would be the effect on revenue of increasing the average customer purchase by one dollar? What would be effect on costs if the volume of complaints to call centers were reduced 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.”
Implement and Fine Tune
These steps comprise the initial planning process. Ongoing experimentation will lead to a better understanding of the right implementation strategies and tactics for the company.
Through experimentation, the company can identify the most promising service investments and test them on a small scale, using an iterative process that compares service units (stores, call centers, etc.) using test and control groups. The result: a reliable formula for ROI will emerge that enables the company to make informed decisions on which service improvements it should invest in – or whether it should invest in service improvements at all. Important parameters to consider include:
How much change can the company expect to create? Can complaints be reduced by 1%, 5%, 10%? Will average purchase amounts increase by 50 cents? Ten dollars?
- Interaction among different variables: Aggressive up-selling may lead to a 10% increase in the average transaction amount, but it could also lead to a 2% increase in customer turnover, which might counteract the benefit.
In summary, The Third Way Approach enables a company to identify the customer behaviors it is profitable to change and to determine the general effect of each behavior on revenue or cost, and the dollar value of an incremental change in each behavior. This puts the company in a better position to develop a strategy for promoting the customer service activities that are likely to influence changes in customer behaviors by implementing training, measurement and rewards.