Casualties of Cost Consciousness
Seeing Customer Service as a Profit Generator Rather Than a Cost Center
A few years ago, I switched my home phone and Internet service to the local cable company because it promised faster web browsing and a lower price. The cable company’s installer came to my house and got everything up and running in two hours.
However, a few days later I noticed that my house alarm wasn’t working properly. Apparently, the cable company’s installer hadn’t reconnected the alarm to the new phone system, so my alarm couldn’t connect to the alarm monitoring company. A second technician had to come spend another two hours finishing the installation.
Everything worked well for the next six months until a power outage knocked out my phone service. Even after power was restored I still couldn’t get a dial tone, so I called the cable company’s technical support hotline and spent thirty minutes on the phone working through the various remedies suggested by the phone representative. None of these attempts worked, so we scheduled a service call for a technician to come to my house.
The technician arrived within the promised four-hour window and went to work diagnosing the problem. He spent an hour and a half checking the phone system and even made several calls to his supervisor and other technicians to ask for help. The technician finally concluded that my loss of phone service was caused by a problem with my house alarm. He told me I’d need to call my alarm company to have someone from that company come out and fix it.
It took another series of phone calls and waiting through another four-hour service window for an alarm company technician to arrive. He spent two hours trying to find the problem until he decided the phone system was the culprit. The technician told me there was nothing he could do and the cable company needed to fix it. By now I’d been without home phone service for several days and was starting to wonder if it would ever be restored.
After another aggravating runaround with the cable company’s technical support hotline and scheduling myself to be home for yet another four-hour window, a third cable technician arrived at my house. I could immediately tell this guy was different from the other technicians. He was a contractor rather than a cable company employee, and he seemed to have a lot more knowledge. It took him only a few minutes to figure out that my phone system had been configured incorrectly when it was originally installed, making it susceptible to failures like the one I was experiencing. He had everything corrected and my phone service restored inside of thirty minutes.
Counting the initial installation, it had taken four phone calls and four service appointments to install my home phone service. The cable company had tried to save money by assigning less experienced technicians to do the installation and initial repair, but this strategy backfired and cost the company substantially more than it should have. The company would have realized substantial cost savings and avoided a huge customer service issue if it had sent out a capable technician to install the system right the first time.
In this chapter, we’ll see that executives, just like their employees, face obstacles to delivering outstanding service. We’ll explore how customer service leaders often use incomplete data when deciding how to deliver the most cost-effective service. We’ll also examine common blunders executives make that lead to higher costs and lower revenue over the long term.
My experience with the cable company isn’t unusual. A 2011 survey by ClickFox found that cable providers are the companies that customers find most frustrating to interact with.1 There are famous examples of poor service from cable technicians, such as the viral video of a Comcast employee who fell asleep on a customer’s couch after spending an hour on hold with his own office.2
Part of the reason customers receive such poor service is that many cable companies focus on cost control when designing their service delivery systems. To them, the cost of providing customer service and technical support is a necessary evil, not an opportunity to create a long-term relationship with their customers. In my case, I was victimized by a tiered support structure that assigns the least-expensive person possible to try to fix a problem before escalating the issue to a more skilled, and therefore more costly, technician.
In theory, this tiered approach saves money, but that idea is based on incomplete financial data. Cable company executives know how much they pay their telephone technical support reps, installers, repair technicians, and experienced contractors. What they don’t always understand is how much they actually pay to make a complete installation.
Here’s an estimate of the cost to install my phone system, using data from www.salary.com for reasonable estimates of average salaries for each position. For the sake of simplicity, this estimate doesn’t include equipment, overhead, travel time, vehicle costs, or many other expenses that would substantially increase the actual final number.
Estimated Cost to Install My Internet System
$3.12 for the Inbound Sales representative, assuming 15 minutes |
@ $12.50 per hour |
$13.75 for the Technical Support representative, for 50 minutes |
@ 16.50 per hour |
$125.12 for the Installation and Repair technician (junior level), for 5.5 hours |
@ $22.75 per hour |
$16.00 for the Repair contractor (senior level), for 30 minutes |
@ $32.00 per hour |
$75.00 for the Billing credit issued for phone service outage |
|
$232.99 = Total estimated cost |
What would have happened if the cable company had simply sent a qualified installer to do the job right the first time? Let’s assume that the senior-level contractor would need two hours to conduct the initial installation. At a rate of $32 per hour, plus the $3.12 paid to the inbound sales rep, the total cost of doing the installation right the first time would be $67.12. In other words, by cutting corners and assigning less expensive but unqualified employees to do the job, the cable company inflated its total installation cost by $165.87—or 247 percent.
Executives often find it hard to quantify the cost of poor service experiences like mine because the numbers are hidden in the financial reports they use to run their businesses. They can easily see how much revenue their company produced and how much their service technicians cost, but understanding the true cost of service is more elusive. It takes careful analysis to understand whether customer service processes are helping or hurting a company’s profitability.
The chief financial officer of a now-defunct retailer once told me that he couldn’t see the importance of fixing a glitch that mispriced items on the retailer’s website and led to inaccurate inventory counts. To him, the expense of investing in new technology far outweighed the cost of a few errors. What he didn’t understand was how those errors led to lost revenue and increased customer service costs, and ultimately caused customers to flee to the company’s competitors. In the end, his company was doomed because he and his fellow executives didn’t have a deeper understanding of their profit and loss statement and didn’t see the financial value in identifying and fixing systemic customer service failures.
Some companies try to manage customer service by tracking various metrics, but these efforts will fail if the metrics aren’t correlated to customer satisfaction. For instance, many call centers measure talk time—the average amount of time it takes to complete each phone call. The theory is that shorter phone calls are more economical since an employee can handle more calls per hour. More calls per hour means the company can hire fewer employees, lowering its effective cost per call.
Talk time is automatically tracked in most call centers, and supervisors can easily access this information and take action on it. Employees whose talk time is deemed too high can expect to hear from their supervisor and may even face disciplinary action. The inevitable result of emphasizing talk time is that employees focus on meeting a standard designed to control costs rather than solving customers’ problems. This tends to increase call volume rather than reduce it. Total time on the phone, not the average time per call, is what really drives the cost of running a call center.
According to the call center research firm SQM Group, the average call center solves just 68 percent of customers’ problems on the first call. That means that 32 percent of calls handled by the typical call center are wasteful. There’s a far greater savings potential in reducing wasteful calls instead of just making each call shorter, but executives need to understand the causes of continued dissatisfaction and repeat calls before they can take action.3
Customer satisfaction, however, is a blind spot for many executives. A 2011 study published by the International Customer Management Institute found that only 67.8 percent of call centers surveyed capture any sort of customer satisfaction data.4 I conducted my own informal study in January 2012 and found similar results across all industries. Executives look at financial statements and budgets to make business decisions, but they can’t understand the impact of their decisions on customer service if the data isn’t available.
There are many reasons executives don’t insist on capturing and analyzing customer feedback. One CEO I know doesn’t like the consumer ratings site Yelp because he believes people only write reviews to air grievances. Another CEO told me that he didn’t feel a need to measure customer satisfaction because a few of his friends were saying good things, so he didn’t think there were any problems. A third CEO told me that he wanted to track customer service, but a closer examination revealed he was only interested in converting more inquiries into sales and didn’t truly believe that customer satisfaction had an impact on his business.
Companies that want to use outstanding service to drive profits must have a commitment from top executives. Because executive leaders rely on data to make decisions, that commitment must include capturing and analyzing customer satisfaction data. This data can take many forms, including customer satisfaction surveys, tracking repeat businesses, or monitoring what customers are saying about your company via social media and online ratings sites.
In 2004, the brokerage firm Charles Schwab was struggling, in large part because of poor client service. The company’s founder and namesake took over the company after the board ousted David Pottruck as CEO, and Schwab made improving service a priority in his new role. One of his key actions was implementing a Net Promoter Score metric, which is created by surveying customers and asking them how likely they’d be to recommend the company to others. The survey categorizes customers as promoters, neutral, or detractors, and the Net Promoter Score is derived by subtracting the detractors from the promoters. This metric soon became as integral to decision making as the company’s financial figures, and the Net Promoter Score was reviewed in executive committee meetings, shared on calls with stock analysts, and discussed in employee meetings.5
Focusing on both customer service and financial success helped Charles Schwab make a series of moves that might not have been made had the company focused on financials alone. The company cut prices and reduced or eliminated many fees so that it could offer its clients greater value. The company focused on building relationships with its clients rather than profiting solely from short-term transactions. In just two years, this strategy paid off and Charles Schwab’s net profit rose from $286 million in 2004 to $1.2 billion in 2006.6
It can be tempting for a business to try to increase profitability by reducing expenses. But businesses that focus on cutting costs without regard to customer satisfaction may inadvertently trigger a decline in revenue that far exceeds the benefits achieved by any cost savings.
I noticed an interesting sign one day while waiting for my sandwich at a convenience store deli. The large, handwritten sign was hanging above the self-serve coffee station:
NO FREE REFILLS!
(for any coffee)
NO EXCEPTIONS
(charged regular price for refills)
This unfriendly message was an attempt to control costs on two fronts. First, the store had installed a self-serve coffee station so that the busy cashier didn’t have to take extra time to pour coffee for customers. Second, the store didn’t want to give away coffee, because then the cashier would have to refill the coffee dispensers more often, which would take up the cashier’s time and ultimately increase the store’s costs.
The sign may have saved a few dollars on the store’s annual coffee bill, but it also drove customers away. The sign told customers, “We’re too busy to help you, and we don’t think you deserve any extra coffee.” Perhaps the store manager didn’t realize customers could get a free cup of coffee at the local hardware store, the bank, the auto shop, or any number of other places that understood how the goodwill generated by offering free coffee far outweighs the small expense. Here at the convenience store, customers have already bought the first cup, so why begrudge them a free refill? Needless to say, I haven’t been back.
Many retail department stores have cut back on labor expenses by reducing the number of associates on the sales floor. This move has undoubtedly yielded some savings, but the downside is that there are fewer employees helping customers make a selection or find the right size or suggesting additional items. In some cases, customers even have to hunt for a cashier just to ring up a purchase.
Restaurants suffer from the same challenge. Each fall, my Saturdays are typically spent at college football watch parties organized by local alumni clubs and held at various sports bars. A good server can keep a crowd happy—and add to the restaurant’s bottom line—over the course of the four-hour game by periodically checking in to refill sodas and take another food or drink order. However, when restaurants cut back on staff, it’s harder and harder for servers to provide prompt, personal attention for all their tables at these football watch parties. There have been many times when people in our group have decided against ordering an extra plate of nachos or one more beer because it took too long for our busy server to check on us.
Some companies have tried to reduce their reliance on costly employees by investing in self-service technology, but this strategy backfires if the technology isn’t easy to use or becomes the source of customer frustration. Virtually all call centers rely on an automated phone menu as a way of routing customer calls and providing self-service options. This technology saves companies a few dollars by reducing the number of call center representatives needed, but it’s also a near-universal source of customer aggravation.
Customers are frustrated with the endless arrays of options and automated voice-driven menus that never seem to work properly. When they finally do get someone on the phone, they’re often asked to provide the same account number they were just required to punch in on the phone system. There are even websites such as GetHuman (www.gethuman.com) that offer tips and shortcuts for getting a live person on the phone.
Self-service kiosks have become increasingly prevalent in places such as grocery stores, airports, and parking facilities. In some instances, the speed and convenience offered by these self-service options have been a real benefit to customers. In other instances, they’re an annoyance. An increasing number of grocers are now reducing or eliminating self-checkout stations as customer usage has declined. In 2011, supermarket chain Big Y announced it was completely phasing out self-checkout stations in its sixty-one stores after an internal study found the machines lengthened checkout times and decreased service quality as customers struggled to use the technology.7
Organizations committed to outstanding service avoid cutting costs for the sake of reducing expense alone. They understand the impact that cost-cutting measures will have on customer service, including the potential implications for lost revenue and efficiency. In some cases, the return on investment will be so difficult to calculate that leaders simply have to trust that doing the right thing for their customers will pay off in the long run.
I once delivered a customer service training class in a movie theater at a shopping mall. The participants were employees of the mall’s parking garage, and the theater manager let us use the room at no cost. The manager even provided free popcorn and soft drinks for everyone to enjoy. The class, which included a training video shown on the big screen, was a memorable experience for everyone.
At first glance, it might not seem like the theater manager had much to gain by waiving the theater rental fee, giving us free concessions, and paying employees to come in early to serve us. Sure, a better parking experience for theatergoers might generate a little extra revenue, but we were going to train our employees anyway. Yet this move paid off in the fantastic experience enjoyed by the fifty employees who attended the class. Those fifty employees were potential customers, along with their friends and family members who heard about the wonderful time they had at customer service training. The class was more than ten years ago, and I still frequent that theater even though it lacks modern stadium seating and is farther from home than other options.
Some investments do have a clear impact. When I shop at Bath and Body Works to buy a gift for my wife, I always feel out of my element until I’m inevitably approached by a helpful sales associate. The cheerful salespeople help me make selections that always end up pleasing my wife, and their expert suggestions frequently entice me to purchase more than I’d originally intended to buy. Bath and Body Works views its associates as people who generate revenue and promote repeat business, not as expenses to be minimized.
Self-service technology can also pay off if companies understand that the human element is still extremely important. I’m a huge fan of Mimeo. com, an on-demand printing company that lets you upload documents to a website, select the binding and finishing options you want, and then have a fantastically high-quality finished product delivered as early as the next morning. The website is easy to use, and there’s always a customer service rep available if I need assistance.
Things have gone perfectly every time I’ve used Mimeo.com with just two exceptions. On one occasion, I uploaded a file in a format that didn’t print very well, and the document was unusable. Thankfully, a helpful customer service rep walked me through the process of creating a better file and didn’t charge me for the replacement order, even though it was my own error.
The second time something went wrong was when the delivery driver for a third-party shipping company accidentally delivered my order to the wrong address. It took some detective work to find out what happened since the delivery company’s records indicated the order had been delivered to the correct address, but a Mimeo customer service rep eventually sent out a replacement order at no charge. In both instances, it was human error that caused the problem. It was also a human who quickly solved each problem I experienced with Mimeo, which is why I remain a loyal customer.
Problems can and will happen, but anything short of a swift resolution will infuriate customers and cause them to take their business elsewhere. In many cases, a friendly, well-trained person must be available to quickly assist a customer in need. A 2011 study commissioned by American Express found that 90 percent of U.S. customers wanted to speak to a real person over the phone to resolve their problems, while only 20 percent of customers found an automated phone menu acceptable.8 It might be cheaper for Mimeo if it provided layers of phone menus and self-serve options to encourage me to resolve my problem without assistance from an expensive employee, but spending a little more on customer service allows Mimeo to earn my continued business even when I do encounter an occasional challenge.
Short-Term Gains That Spread Customer Ill Will
A number of years ago, I had to get the water pump replaced on my trusty Honda Accord. When I picked up the car from the repair shop, I noticed the final bill was several hundred dollars higher than the estimate. A closer look at the bill revealed that the mechanic had replaced my timing belt even though I didn’t request it and it wasn’t included in the estimate.
I asked to speak to the manager and showed him both my estimate and the repair bill. His initial response was to nonchalantly explain that they always replaced the timing belt when they replaced a water pump. He didn’t know why this service wasn’t included in the original estimate or why nobody from the shop had gotten my permission before adding such an expensive item, but he didn’t seem to understand that it was a problem. The manager just shrugged and insisted that was normal procedure.
Replacing a timing belt is an expensive repair, and I had just had it done a few months earlier. If there was a problem with the belt, then the replacement should have been covered under warranty. If there wasn’t anything wrong with the belt, then the manager was hoping I wouldn’t put up too much of a fight when he tried to gouge me for a few hundred dollars.
I calmly asked the manager if there had been anything wrong with the timing belt the mechanic had replaced. He couldn’t answer that question, so I gave him two options. He could either reinstall my old timing belt or give me the new one for free. He reluctantly decided to take the timing belt replacement off the bill.
This unethical attempt to pad their revenue cost the owners of this repair shop more than the price of the part and the mechanic’s labor. My wife and I had both been taking our cars to this shop, but after this incident we vowed never to return. I imagine this type of business practice eventually caught up with them, because they are no longer in business.
The pursuit of revenue without regard to customer satisfaction led the video rental company Netflix to make not just one, but two colossal service blunders in 2011. It started when the company announced a 60 percent price increase on July 12, in an e-mail sent to subscribers and a post on the company blog. The backlash from surprised and outraged customers generated a wave of negative press for the company and prompted many people to cancel their service.9
Customers were still fuming about the price hike when Netflix made its second blunder. On September 18, Netflix CEO Reed Hastings announced on the Netflix blog that the company was separating its online video streaming and DVD rental services into two separate businesses. This move would require customers to maintain two separate accounts to manage and pay for their online and DVD video rentals separately. Hastings explained the move was necessary because the two services had different cost structures and marketing challenges. He also offered an apology for the way Netflix communicated the price increase it announced earlier in the year but defended the move as a necessary business decision.10
This time, consumer outrage was so deafening that Netflix reversed its plans to separate video streaming and DVD rentals into separate businesses. However, the damage had already been done. Netflix lost 800,000 subscribers and its stock declined 75 percent in the third quarter of 2011. The company also suffered a 14 percent decrease in customer satisfaction on the 2011 American Customer Satisfaction Index, one of the most dramatic one-year declines ever recorded.11
I was one of those Netflix subscribers affected by the 60 percent price increase. Like many customers, I considered canceling my service and tried to find a reasonable alternative. My surprising conclusion was that even after the price increase, Netflix still offered the best deal for the services I used. The rate hike was the product of sound financial and marketplace analysis, but the company unnecessarily alienated customers because it didn’t consider the strong emotional reaction such a large price increase would generate. As a result of my analysis, I remained a Netflix member, but I stopped referring the service or giving gift subscriptions as I had in the past.
Some companies have resorted to new fees as a way of raising revenue without increasing advertised prices. Airlines have been steadily implementing fees for many accommodations that used to be free, such as checked bags, seat assignments, and in-flight snacks. Event ticketing companies charge convenience fees, transaction fees, and ticket delivery fees on top of the ticket prices. Hotels assess Internet fees, resort fees, and charge for bottled water in addition to the room rate. The list goes on and on.
These fees can provide much-needed revenue, especially in industries that consistently struggle to be profitable. However, they can also alienate customers. In December 2011, Verizon Wireless announced it was instituting a $2 fee for customers who made certain payments online or via telephone. The resulting anger from customers already upset at fees from other companies was so overpowering that Verizon quickly backtracked and scrapped the fee one day later.12
While executives face pressure from shareholders to find innovative ways to grow revenue, smart companies recognize that outstanding customer service can lead to better results in the long run. Customer service leaders should evaluate any plan to raise prices or implement new fees against the potential impact on customer retention, revenue per customer, and referrals. Failure to consider the full impact can result in customer defections and lost sales.
Verizon Wireless provides a great case study on the value of customer retention. When the company announced that $2 fee, its basic rate plan was $39.99 per month, which is $959.76 over the life of a standard two-year contract—and that doesn’t include the price of a phone, accessories, data plans for smartphones, or more expensive plans that could drive the revenue from a single customer even higher. In retrospect, it seems pretty silly to risk a customer relationship worth at least $959.76 over a $2 fee.
Resisting the temptation to raise prices or increase fees can also lead to more revenue. One of my favorite restaurants in San Diego, Terra American Bistro, lowered its prices when the establishment moved to a new location. The restaurant had terrific food and service to begin with, so the new prices caused my wife and me to go there more often. The lower prices meant we spent a little less money per visit, but we went there twice as often in the first year at the new location than we had during the previous year. Many other customers obviously felt the same way, because the new location has consistently been much busier than the old one.
Referrals are free advertising for your business. Companies that provide great value by keeping prices reasonable and delivering outstanding service are much more likely to have their customers refer new customers. On the other hand, negative publicity, such as Netflix experienced in reaction to its price increase, can drive potential customers away.
In 2004, I was elected to serve a two-year term as membership director for the San Diego chapter of the American Society for Training and Development (ASTD), a professional association for corporate trainers. During my two-year term we increased chapter membership by 67 percent without any advertising or special promotions. Instead, our leadership team relied on referrals to help the organization grow. We worked diligently to engage members on a personal level, find out their interests, and provide valuable services in return for their membership dues, so members would encourage their colleagues to join the chapter, too.
Solution Summary: Positioning Customer Service as a Profit Generator
It can be difficult for executives to consider the impact on customer service when making strategic decisions about their companies. They often lack direct contact with customers, and the limited customer service data they have is not as comprehensive, easy to understand, or reliable as the financial reports they’re so comfortable using. However, leaders must understand that outstanding customer service isn’t a cost to be minimized; it’s an investment in future profitability.
Here is a summary of the solutions discussed in this chapter:
• Executives must capture and analyze customer satisfaction data to ensure strategic decisions are not based solely on financial metrics.
• Customer service leaders should dig deeper into their financial statements to understand the true cost of poor customer service.
• The long-term benefit of customer service investments should be carefully understood before implementing cost-cutting measures that might drive customers away.
• Investing in the right number of qualified, well-trained employees pays off when the employees are able to drive sales and customer satisfaction.
• Self-service technology can be tempting because of the promised cost savings, but the expense of lost customers and lost revenue can be high if the technology doesn’t function properly or customers find it irritating or difficult to use.
• Executives should carefully consider the impact of any price or fee increase on customer retention, revenue per customer, and referrals before making a final decision.
Notes
1. “Customer Tipping Point Survey Results: How Much Is Poor Customer Service Costing Your Business?” ClickFox, Inc., 2011.
2. You can view the hilarious video of a sleeping Comcast repair technician on YouTube: www.youtube.com/watch?v=CvVp7b5gzqU.
3. Mike Desmarais, “First Call Resolution (FCR)—The Metric That Matters Most,” SQM Group, http://www.sqmgroup.com/fcr-metric-that-matters-most.
4. International Customer Management Institute, “2011 Research Report: Balancing Call Center Efficiency and the Customer Experience” (Colorado Springs: ICMI, 2011).
5. Fred Reichheld and Rob Markey, The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World (Boston: Harvard Business School Publishing, 2011).
6. Ilana DeBare, “Interview with CEO of the Year Charles Schwab,” San Francisco Chronicle, April 9, 2007.
7. Heather Malcolm, “Human Touch Trumps Self-Service for Mass. Supermarket Chain,” USA Today, September 16, 2011.
8. Echo Research, “2011 Global Customer Service Barometer: Market Comparison of Findings,” research report commissioned by American Express; available at http://about.americanexpress.com/news/docs/2011x/AXP_2011_csbar_market.pdf.
9. Jessie Becker, “Netflix Introduces New Plans and Announces Price Changes,” Netflix U.S. & Canada Blog, July 12, 2011.
10. Reed Hastings, “An Explanation and Some Reflections,” Netflix U.S. & Canada Blog, September 18, 2011.
11. Claes Fornell, “ACSI Commentary February 2012,” The American Customer Satisfaction Index, February 21, 2012.
12. Ron Lieber, “After Outcry, Verizon Abandons $2 Fee,” New York Times, December 30, 2011.