The Financial Impact of Customer Service

Customer service is what drives the success of the any business. Some would surely say, “No Errol, a great product or service concept drives the success of any business.” While that statement is somewhat true, a great product or service concept without great customer service is like expecting your beautiful garden flowers to flourish without your giving attention to them. I have often found that you don’t get upper management’s or the owner’s full attention regarding customer service unless you provide the financial impact to the company. Customer service has a dual role as it both creates and preserves revenue. Let me explain why I believe this to be true.

Customer service creates revenue via the word of mouth avenue. When a great product or service is coupled with great customer service, your customers become your ambassadors. Their willingness to speak positively about your business leads to additional customers, thereby creating additional revenue. Recent research by the Technical Assistance Research Program (TARP) indicates that for every 10 people hearing either positive or negative “word of mouth” information, 1 person takes action. That one new customer, should they receive the level of service expected, will in turn keep the positive “word of mouth” cycle in motion. Another form of revenue creation as a result of great customer service are price increases. TARP has also studied the impact of price increases on the customer’s willingness to continue to do business with companies. In a study of the banking industry, only 10 percent of survey respondents who had not experienced a customer service related problem expressed dissatisfaction with an increase in fees and charges. This means that 90 percent of survey respondents were okay with the price increases due to the level of customer service provided by their particular bank.

In regards to customer service acting as a revenue preserver, there is one question that must be answered before we continue. That question is – How much is your customer worth to your business? Whether your company is small or large, the need to determine what your customer is worth to your business is critical when calculating the amount of revenue being preserved by addressing customer service related issues. For example, if your business has 1,000 customers and the average annual revenue generated by each customer is $400.00. If 10 percent of those customers experience customer service related problems, that’s 100 customers. Bear with me as we start the calculations! Now let’s assume that 50% of those customers don’t even bother to complain, they just simply go away. Their decision to leave without complaining represents $20,000.00 in lost revenue.

What about the other 50% that do complain? Let’s say that you’re able to satisfy 40% (20), 40% (20) become frustrated with your attempts to satisfy and 20% (10) remain dissatisfied. So now let’s consider the repurchase behavior of those complaining customers. Should 10% (2) of the customers that you’re able to satisfy after they complain decide to not repurchase, that represents $800.00 in lost revenue. In the frustrated with your attempts to satisfy group, 25 % (5) discontinue purchases with your company, which represents $2000.00 in revenue. On to the customers that remain dissatisfied after complaining – 60% (6) of this group decide not to repurchase from your company, which means an additional $2400.00 in lost revenue. The total potential annual revenue lost in this scenario is $25,200.00! Wait, there’s more. Remember the “word of mouth” factor discussed earlier. These dissatisfied customers will tell others about their experience with your company. In this scenario, when you consider the 50 customers that left without complaining, add the 13 customers that complained yet decided not to repurchase, that’s 63 customers who have the potential to utilize negative “word of mouth” marketing. If these dissatisfied customers tell 10 additional people about their experiences (630 people) and 1 in 10 acts on the information (63 people), there’s potential revenue missed due to dissatisfied customers. Even if the new customers average annual purchases equals $300.00, you’re still possibly facing $18900.00 in lost potential revenue. Don’t forget about the cost side of poor customer service – the employee costs to resolve customer complaints and the material costs when rework is required to satisfy the customer. Take this example and apply your real numbers to determine the financial impact to your business. Whew! Lots of calculations, but it’s definitely worth it when it comes to determining the financial impact of customer service.

The key to preserving revenue is to: 1. Be consistent in your service delivery and 2. Encourage your customers to complain. Consistency in your service delivery leads to loyalty, less complaints and even more important, fewer reasons for the silent defections of the non-complainers. Encourage your customers to complain as this gives you an opportunity to retain their business. The example above illustrates the financial impact of non-complaining customers. Offer multiple ways to complain – at the point of purchase, on your website, via chat, 1-800 #s. Don’t forget to monitor social media for comments regarding your com

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Create a Better Customer Service Experience

Today, our customers have many ways to reach us to request service or buy our products and services. The increase in social media usage and number of sites available to reach us has made it much easier for our customers to give us feedback. What this has done is raise the bar, raise our customers’ expectations as they relate to response time, how quickly we respond to their needs, questions, issues and concerns. We can manage the customer experience, no matter how we communicate with them, by creating and implementing a customer service plan aligned with our business management and growth plans.

In their seminal article on the link between service and profit, “Putting the Service-Profit Chain to Work”, the Harvard Business Review authors found that a five percent increase in customer loyalty has the potential to deliver a profit increase of anywhere between twenty-five and eighty-five percent. This is significant. Why wouldn’t every organization seek to build a customer service plan and process that increased their profit? The companies cited by these authors were able to increase their profits, not just by improving the level of customer service they provided, but by improving the number of loyal customers they serve. They do this by carefully selecting their customers, understanding and meeting these customers’ individual needs and interests, and; often engaging these customers in delivery of the product or service. And they organize themselves into cross-functional teams where team members understand the purpose of the organization, practice behaviours and implement actions necessary to keep customers loyal. This ‘ownership mentality’ encourages team members to build relationships with the selected customers and treat them as their own customers.

Bain and Company, in their work with Fred Reichheld’s concepts in his book “The Ultimate Question 2.0”, developed and implemented The Net Promoter System to measure customer satisfaction. The results of their case studies show traditional customer satisfaction measurement tools don’t deliver because the results may not make it back to the front line employees in a timely fashion. These studies also identified that companies will not be able to… “achieve or sustain high customer loyalty without a cadre of engaged employees.”

So how do we, as business leaders and managers, create a better customer service experience? What can we take from the research shared by the Harvard Business Review authors and Bain and Company researchers that will help us to improve our customer relationships and build customer loyalty?

We can do this by building a customer service plan, a customer service plan that is an integral part of our business plan where we identify the customer market we need to develop to increase loyalty and drive up profits.

We have conducted our own research on customer service excellence with thirty Canadian organizations and, as a result of this research, we created the ‘Customer Satisfaction Practices Continuum’ – a model for evaluating the customer service level of the organization (or any unit within an organization). This continuum outlines five stages for evaluation, each stage has three components – customer focus, measurement and environment. By completing the assessment, an organization is able to quickly assess their position on the continuum and decide whether or not, they want to implement the required actions to move to the next, more effective stage. This allows business leaders and managers to balance customer service with profitability and build a customer service plan aligned with their business direction and goals with the level of customer service they feel is appropriate. Building customer loyalty can be expensive if investment in methods and action plans outstrips anticipated revenue. Customer service excellence is not about meeting every customer need but rather identifying those customers with whom we can build a relationship and providing our employees with the data, tools, processes and systems they need to continue to nurture these relationships. This will result in customer referrals, the best and least expensive method of all.

In the end, it is all about growing the business and driving up profits. One of the best ways to do this is to grow relationships between your employees and your customers as the research clearly shows that customer loyalty is indeed one of the most effective ways to drive up revenues and increase profit.

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