Read an Excerpt
CHAPTER 1
SEEING CUSTOMER SERVICE STRATEGICALLY
My wife met a friend for dinner at a high-end Italian restaurant in Washington, DC, on the Georgetown waterfront. She ordered the Dover sole, which is expensive but my wife's favorite, based on previous visits. After an inordinate wait for the entrées, the server announced that the kitchen had prepared branzino rather than the sole. With little apology, the server basically asked if she would accept the wrong dish now or wait for the correct dish to be prepared.
My wife did not accept the wrong dish but felt bad that her friend's meal may have sat around, waiting to be served while the sole was prepared. A free dessert was provided (despite my wife and her friend declining any dessert), but this attempt at a positive fix was negated when the restaurant mistakenly charged for the more expensive branzino entrée. The error and poor customer service were compounded by the added insult of the higher bill and lack of an empathetic apology for the whole mix-up.
Compare this to an experience at another Washington, DC, restaurant. When we arrived at Rasika for our reservation and a table was not ready, Santosh Bodke, the manager, seamlessly seated us in the bar area and provided complimentary drinks, appetizers, and a sincere apology. At both restaurants, the food was very good and quite pricey. In the first case, the memorably bad service guaranteed a poor rating and negative word-of-mouth (WOM). The second experience cemented loyalty and a positive recommendation.
As an executive, you cannot personally deliver excellent service to all customers. You must depend on the staff and the overall culture created by the entire service team. In some companies a customer-experience advocate looks across the whole company, but in most companies, this concern still resides with the service executive, who should view delivering consistently great service as a career opportunity. The strategic view of customer service is not to look at the function as a cost to be minimized, but as a competitive differentiator that generates revenue and positive WOM and justifies premium margins.
This view begins when you see the true role that service plays in your business and the broad impact of customer service on the company's financial performance. Furthermore, customer expectations created via technology — such as proactive communication and personalization — in companies such as Amazon, Lyft, and Intuit now make such technology critical to enabling a competitive service level. Therefore, the chief information officer (CIO) should be your new best friend.
This chapter will help you see the customer service function in strategic terms and grasp its true potential. First, we examine ways in which customer service and customer responses to service can affect an organization for better or worse. Next is a discussion of how financial decisions about customer service can be made strategically better to enhance the bottom line. After defining several key terms that arise in most customer service discussions, the chapter presents a model for a customer service function that can play a strategic role in any organization. Finally, initial steps are suggested to establish strategic customer service in your organization. At the end of each chapter, key takeaway points are summarized.
HOW CUSTOMER SERVICE AFFECTS A BUSINESS
The idea that poor customer service harms a business is intuitively correct, but the concept cannot be incorporated into decision making unless it can be quantified. Here are some of the basic, quantifiable findings from our research over the past four decades. First, the bad news, and then the good news.
The Bad News
Most customers do not complain, and noncomplaining customers hurt your business. With consumer-packaged goods and other small-ticket items, only 5 to 15 percent of dissatisfied customers complain, and usually only to the retailer. For serious problems with big-ticket items, the complaint rate rises to 20 to 50 percent of customers who report the problem to a frontline representative, but only one out of ten of these customers (2 to 5 percent of all complainants) escalate the issue to the local manager or the corporate office. This means that at the manufacturer or headquarters level, for each complaint received, about twenty to fifty other customers have problems you don't hear about. Finally, for business-to-business (B2B) customers, at least 25 percent do not complain, and often this figure can be as high as 75 percent.
Why do customers not complain, including business customers who are paying you thousands, or tens of thousands, of dollars per month?
Customers don't complain for four main reasons:
* Customers think it will do no good. Either they have complained in the past and nothing was done, or they believe standard industry practice causes the problem.
* Fear of damaging a long-term relationship. Customers are often dependent on a particular employee, or they fear conflict/retribution from the person they are complaining about. To put this in context, think of your trepidation about complaining to a restaurant manager about your server before he or she brings your entrée to the table, which raises the stakes considerably.
* The problem is aggravating but not critical. Customers therefore feel the problem is not worth the hassle of complaining. Think of discovering a mile after you left the drive-through that the French fries are missing from your takeout order. You will likely feel it isn't worth driving back to complain or rectify the situation.
* Customers do not know where to complain. Many customers are at a loss to determine how to escalate a complaint beyond the staff member with whom they are dealing. Often, general requests for a manager result in an interminable wait and/or someone not empowered to fix the situation.
When dissatisfied customers do not tell the company about a problem, the problem cannot be resolved. We see the same behaviors and even worse problem-complaint ratios in nonprofit organizations (museums, health clinics, etc.) and government agencies (where expectations are lower). For example, at a major New York City museum, only 13 percent of dissatisfied major donors complained about the problems encountered. In a leading health-care system, only 15 percent of dissatisfied patients and family members complained.
Problems result in lost customers and revenue. In more than 1,000 studies of many industries in a score of countries in the Americas, Europe, Asia, and the Middle East, we found that when a customer encounters a problem, on average, loyalty drops 20 percent compared with customers who had no problem. In other words, for every five customers with problems, one will switch brands the next time he or she buys a specific product or service in your marketplace.
This does not even include the effects of negative WOM, which, as you will see later, can be significant. Do the math. How many customers have some type of problem, and what does that imply about revenue left on the table?
Bad news travels far. Our landmark 1978 study for Coca-Cola revealed that, through WOM, an average of five people hear about a person's good experience, but ten hear about a bad experience. Consider the impact of WOM in today's social media environment. The Customer Care Measurement & Consulting 2017 National Customer Rage Study showed that three times as many people hear about a bad experience compared to a good experience, and the average consumer has a median of seventy friends who view the consumer's online posts. In one study of consumers playing an electronic game, two of every six people who were told of a positive experience by another customer bought the product. Positive WOM can indeed be a powerful marketing tool. The Cheesecake Factory's marketing costs were reported to be only 25 percent of their direct competitors' costs, because the company "lets the customers do the marketing for them," according to David Gordon, former president of The Cheesecake Factory.
Problems increase sensitivity to price. Encountering a problem causes sensitivity to price to double. If you want to charge a premium for a product, customers should not encounter problems. On the other hand, if customers have a great experience with no unpleasant surprises, you can charge a huge premium. Think of Starbucks, where customers are happy to pay more than four dollars for a specialty cup of coffee, because of the attention and experience that accompanies their purchase.
The Good News
Now, as promised, here's the good news.
Employees are not the cause of most customer dissatisfaction. Contrary to conventional wisdom, employee attitudes and errors are responsible for only about 20 percent of overall customer dissatisfaction. Our research reveals that, in most industries, employees come to work wanting to do a good job. Rather, what employees are told to do and say to customers are leading causes of dissatisfaction. About 50 to 60 percent of overall customer dissatisfaction is caused by products, broken processes, and marketing messages delivered as intended but that result in unpleasant surprises. This is good news, because redesigning your products and processes can eliminate problems. Another 20 to 30 percent of problems are caused by customers' errors, erroneous expectations, or product misuse. For example, when we ask audiences if they have read their homeowner's insurance policies, only one or two people raise a hand indicating that they have read their policy. Every homeowner's insurance policy contains significant unpleasant surprises, such as exclusions and valuables limitations, but few people read any document more than one page in length. Regardless of the cause, when customers blame the organization, it benefits the organization to prevent or fix the problem. In a later example (see Chapter 2), we highlight the three most prevalent unpleasant surprises customers may encounter.
Keeping customers is cheaper than winning new ones. We originated this widely accepted rule of thumb decades ago during an analysis of marketing costs versus customer service costs for a U.S. automaker. In the original study, we compared the expense of dealer advertising (only one part of the cost of acquiring new customers) with the average amount spent to retain a customer via effective complaint handling. The ads cost five times as much as the cost of effective complaint resolution. In a similar and more recent analysis for a construction company, we found that the cost of fixing a problem to maintain loyalty (thus leading to future projects) was one-eighth the cost of selling to and signing up a new customer. In more than two dozen other industries, depending on the specific industry and organization, the cost of winning a new customer can be two to twenty times that of retaining an unhappy customer by resolving a problem and restoring the relationship. In a B2B environment, a company can easily spend $10,000 to $100,000 to win a new client, but then undermine the relationship and future sales by skimping on installation, training, documentation, parts, or service.
Proper handling of complaints retains customers. In almost all business sectors, a customer who complains and is satisfied by the complaint's resolution is 30 percent more loyal than a noncomplainer and 50 percent more loyal than a complainer who remains dissatisfied. This means that convincing three noncomplaining customers to voice their complaints, and then resolving their complaints, produces the same revenue as winning one new customer. Clearly, it is imperative to find effective ways to resolve problems and encourage customers to complain. After seeing this data, several of our clients, ranging from motorcycle dealers to a northeastern credit union, find it appropriate to communicate on invoices or post signs with the statement, "We can only solve problems we know about!"
The economic imperative for service improvement is clear. When financial data on the value, attrition rate, and cost to win a new customer is combined with the right data on customer behavior, chief financial officers (CFOs) and chief executive officers (CEOs) can readily recognize the return on investment in customer service. Ironically, useful data (except the noncomplaint rate and WOM data) already exist in most organizations or can be developed with existing resources. Even these data elements can be quantified via a survey that asks customers if there were problems, if they complained, and how many people they told about the negative experience. As stated earlier, a critical and often missing component of the economic analysis is the average consumer's value.
In addition to data on noncomplaint rates and customer value, most companies are missing a logical methodology to model the impact of enhanced service on revenue, WOM, and sensitivity to price in a way that senior executives understand. However, to be motivated to consider such a methodology, management must understand the broad effects noted above in the "The Good News" section, and then consider the business case for customer service improvements.
Making the Business Case for Improvements in Service
An organization can implement full-scale, strategic customer service or simply improve specific aspects of its service. Either way, the organization is improving customer service. Although some low-cost and even no-cost ways to improve service exist (such as trusting known customers, 98 percent of whom are honest and therefore need not be re-vetted each time they cash a check), most improvements will cost money. Thus, you will need to convince your organization's finance function ("Finance") or the CFO that investments in an improved customer experience (CE) will have a tangible payoff.
Unfortunately, investments in customer service improvements are rarely presented to Finance as true investments; instead, they are presented as costs on a budget line. That is why most companies just fix the problems that produce the most frequent, or the loudest, complaints. That is also why companies add service representatives and call stations when sales rise, and lay off representatives and reduce resources when sales sag. This happens when there is no real understanding of the link between service and future revenue. During a previous downturn at Toyota Motor Sales USA, the CEO protected the contact center and field service organization staff from the otherwise across-the-board cuts, saying, "We still have all those owners out there who need customer service."
The usual across-the-board cost reductions during an economic downturn are shortsighted, because the reductions shortchange customers, employees, and the organization itself. Strategic customer service focuses on the long-term business case — that is, on the revenue benefits of service improvements, which are usually ten to twenty times the cost implications. This strategic customer service focus recognizes the links among customer service, customer behavior, and financial results.
These links will be a theme throughout this book because we have found that investments in customer service provide several times the return of other investments. Customer service also provides the fastest returns. When you implement a change that improves your customer service, the benefits of increased loyalty, positive WOM, and reduced risk begin accruing on that next phone call.
To bring the business case into sharper focus, let's look more closely at the revenue impact of problem prevention and resolution. In the previous section, we noted that when a customer encounters a problem, on average, loyalty drops 20 percent. Thus, for every five customers with problems, probability says you will lose one customer (5 customers × 0.2 loyalty loss = 1 customer lost, see Figure 1.1).
To make a strong business case — that is, a financial case — you must quantify the impact on revenue of preventing or fixing problems. If a customer is worth $1,000, then for every five customers with problems, the company will lose one customer worth $1,000 in revenue. You can then reverse the analysis and say that if you prevent or fix five problems, you will retain one customer who otherwise would be lost, and thus retain $1,000 in revenue that would otherwise be lost. Moreover, that $1,000 in revenue can be attributed directly to the customer service process, because that process involves identifying, preventing, and resolving the problems (discussed later when we present the model for maximizing satisfaction and loyalty). Figure 1.1 makes the basic case for this type of investment in customer service. Another financial dimension beyond revenue retention, where improved customer service contributes, is profit margin. As previously mentioned, the average problem doubles a customer's sensitivity to price. If you want to charge a premium, you must prevent problems. For example, Figure 1.2 illustrates the impact on satisfaction with prices and fees at a financial services company.
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Excerpted from "Strategic Customer Service"
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Copyright © 2019 John A. Goodman.
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