Customer Service as a Profit Center
Introduction
Organizations have been in existence for thousands of years—some successful and long lasting, others short lived. Through the years there has been no clear-cut criterion or formula for success. Many business organizations have been successful through such intangible attributes as dumb luck, falling into a niche marketplace, being the first, consumer acceptance, and so on. Other companies using the best available business acumen and customer-service methods have failed miserably. Identifying, implementing, and maintaining the secret of success is an elusive target. Banking on what has worked in the past and your own internal Ouija board are ineffective substitutes for objective internal appraisal and external comparison and analysis—what we call establishing customer service as a profit center and striving for excellence and competitive advantage.
Striving for competitive advantage in customer service can be defined as a process for analyzing internal operations and activities to identify areas for positive improvement in a program of continuous improvement. The process begins with an analysis of existing customer-service operations and activities, identifies areas for positive improvement, and then establishes a performance standard upon which the activity can be measured. The goal is to improve each identified customer-service activity so that it can be the best possible—and stay that way. The best customer-service practice is not always measured in terms of least costs, but may be more what customers’ value and expected levels of performance. This chapter discusses the following:
• The businesses that the company should be in and not in
• Pricing strategies for competitive advantage
• The purpose of the sales function
• Some basic business principles
• The concept of serving the company’s stakeholders.
The Elements of Customer Service
Most of us think of customer service as the manner in which a company and its representatives deal with us as customers. All of us have customer service horror stories where we believe that we were not treated fairly. Some of us after being rebuked by a so-called “customer care specialist” have taken the time to phone, email, or write letters to someone who we believe is in a position of authority—all to no avail other than an insincere apology. When we stop doing business with that company they don’t seem to care. They don’t realize that they are not just losing us as a customer but all of our future business and possible good customer referrals. Each customer is worth not just the current sale, but also the accumulation of all future sales. And leaving a bad taste in the customer’s mouth leads to spreading a bad word to all of those we come in contact with.
A good word may leave quickly,
but a bad word may last forever
While most customers probably consider price the most important element of customer service, there are really three components of excellent customer service:
1. Quality: of product or service (at least 98%), pre-sale service, during sale service, after sale service, company representatives, customer-service contacts, and overall customer treatment and respect. To achieve the desired level of quality requires all company functions and personnel to work together in a unified atmosphere of excellence.
2. Timeliness: of response to customer’s needs, submission of customer order, completion or acquisition of product or service, on-time delivery, after sale follow-up, response to customer complaints or concerns, customer returns, hotline or help line ability to address issues in a timely fashion.
3. Price: a competitive price within the marketplace. Some customers will shop price only; that is the customer will buy at the lowest price regardless of any other considerations. Other customers will consider quality and the possible costs of inferior quality—and are willing to pay extra for such quality guarantees. And other customers consider timeliness paramount in their purchase considerations. The company must define a “quality customer” of which they seek.
The best quality,
at the right time,
at a competitive price
A Word About Quality, Timeliness, and Price
Customer service is really a three-legged stool, with each leg necessary to maintain proper balance—that is quality, timeliness, and price. They all go hand in hand if you desire to provide excellence in customer service. You can sacrifice one of them in the name of cost containment but only at the sacrifice of real customer service. And you can fool the consumer in the short term but in the long term it will hit you in your profitability.
Quality
Many times the concept of quality is based on the individual or collective consciousness of the consumer. Too many companies spend more resources on perpetuating the myth of quality than on actually providing real quality. But, you ask, what really is quality. To me the concept of quality pervades every aspect of the product or service—from the quality of the product as to doing the right job and lasting longer than the next version to the quality of the customer service encompassing pre-sale, during sale, and after sale transactions. It used to be not that long ago that quality was a perceived commodity. You purchased a product and you believed that the product should perform its function as intended (and advertised) and that it would last for a lengthy period of time—hopefully longer than when you were ready to replace it. And if by chance the product needed to be repaired, the cost of the repair was negligible compared with the original or present purchase price. Something seems strange to me today when you feel obligated to protect yourself by purchasing an extended warranty to protect yourself against expensive repair costs. And when something goes wrong with the product, invariably the faulty unit is replaced rather than being repaired where the cost of the component is less than the labor charges of repairing. With the cost saving rush to outsource most of our manufacturing where product quality could be safeguarded it seems to me that we have left the reality of quality in its wake.
WHATEVER HAPPENED TO
QUALITY IS OUR MOST IMPORTANT PRODUCT,
QUALITY IS OUR SUCCESS,
AND WHERE IS THAT MAYTAG REPAIRMAN NOW?
Here is a story that possibly depicts the demise of quality as we once knew it.
The Cell Phone Shuffle
In the early days of widespread cell phone use, before you had to purchase one merely to stay in the loop of smart and not miss those really important calls from your hair stylist and manicurist, you expected the cell phone to last an acceptable period of time—is two years too long an expectation? And when the phone had problems you took it back to the cell phone store and they actually repaired it. Such was the case when I purchased my first cell phone (at no cost) without a contract but with minutes of usage limitations and irritating roaming charges. Each month I gasped when I received my cell phone bill as the extras were costing more than the basic monthly charge. And I still had the cost of a landline.
When I encountered my first problem with my cell phone, I took it back and it was repaired fairly quickly on the spot—at no charge if it was still under warranty or I had gone for the you gotta have it extended warranty. Fortunately, the phone worked well with minimal need for service. Eventually, as cell phones continually improved as to available features, the cost of the phone and services increased and the cell phone provider insisted on locking you into a two-year contract that included either a free phone or a greatly reduced price for the cell phone du juor. And now if there was a problem you either sent the phone back to the so-called manufacturer or you were told to dump the phone and the provider merely gave you a new one. Goodbye repair department.
Timeliness
In the relatively quick pace of our present society that demands instant gratification, timeliness has become an even more important component of customer service—from web sites that operate quickly and efficiently to the expectation that the product is available or that the servicer arrives on time and completes the job on time. It is wonderful that the company offers that desired product at that knockout price but it is costly to make that trip to the store (or spend that time on their web site) to find out that they are out of stock—but here’s a rain check to put in your wallet and hopefully forget. For me timeliness is an extremely important component of excellent customer service. Just like the big companies I don’t want to put out my money and inventory my office supplies unless I have to, or to take advantage of that knockout price. Timeliness erodes almost every aspect of customer service from receiving the raw materials just in time to be placed into production for a real customer order, to having the finished product on hand to service the customer, to timely arrival and completion of those providing a service. As someone wiser than us once said, “time is money” but in today’s world the lack of timeliness is also costly in terms of delaying gratification and having to make excuses for other deficiencies.
Timeliness may be invisible when it works,
but is quite costly when it doesn’t
Here’s a story that looks at timeliness from the customer standpoint.
What Time Was That?
We held out as long as we could in acquiescing to pay for television access to all of those cable channels. Where we live there is no cable access so we would have to install a satellite dish. If you can believe it, we still used an antenna on the roof and lived with primary network programming. However, lo and behold came the regulation for all digital reception that required us to purchase and install a converter box. From the onset our reception varied in quality based on weather conditions. If it was windy so was the reception. Ultimately, if we wanted a television for other than playing DVD movies (which was our mainstay), we were forced to install that dreaded satellite dish. Part of our resistance was due to the incessant drumming of the dish companies to purchase their product and why theirs was better than the competition and cable companies. So I succumbed and phoned the two prevalent satellite companies that service our area. The first one I called was so troublesome to get someone on the phone who knew their product and what was involved in the installation that I gave up in ultimate potential customer frustration—another example of poor pre-sale customer service. The next satellite company I called (and my last resort) turned out to be very knowledgeable about the product and what was involved with the installation. And it was the first person I contacted and who actually answered the phone without the dance of the answering computer voice. Where the first company had no openings until the end of the following week, this company could install within two days—good points for timeliness. We made an appointment for ten o’clock. As the day arrived I waited for the installer as ten o’clock passed as did eleven o’clock. When I finally called the company and accessed a rep immediately I was told that they couldn’t guarantee an exact time but their installer would be there by the end of the day, which he was. What the company didn’t understand was that the customer’s time is important and that it is not good customer-service practice to start the customer relationship with a problematic situation—and that timeliness encroaches on all aspects of customer service. The points earned for timely response were lost on untimely service delivery and internal inconsistency.
How many times have you waited
and waited for that sorely needed service—
and it’s not ten o’clock but eight to one
Price
Everyone has his or her price as the saying goes. However, when it comes to the customer the tables get turned. That is, it is not how high a number it takes to get you on the team but how low the number to get you to buy. Traditionally, most companies think of price as the all-inclusive deciding factor in purchasing and selling decisions. The company has a purchasing function that normally sees their mission as pressuring (negotiating?) the vendors to accept the lowest price possible for their products or services with minimal regard to quality and timeliness expectations. And many times the purchasing department takes credit for all the dollars they believe they saved for the company by squeezing their vendors. When we realize that keeping our vendors in business helps to keep us in business, we develop a more mutual working-together relationship based upon give-and-take negotiations that includes quality, timeliness, and price. And such vendor negotiations need not be done with every purchase but more periodically.
Critical vendors
are critical to our business
When dealing with the direct customer, yes it is true that the customer looks at price as part of their decision-making—and us as the ultimate customer may even drive for miles to save some dollars—even when the cost of driving may exceed the savings. Large companies many times believe that price is everything to the customer and may develop their competitive advantage by achieving the lowest market price—hopefully not surrendering desired profit margins. The wise customer may negotiate with vendor as to quality and timeliness aspects but it still seems like price is the strongest consideration. Once the customer realizes that quality and timeliness considerations can reduce their internal costs to a greater extent than price concessions they are on their way to effective vendor negotiations.
For the individual consumer it is extremely difficult to pay more for an item than necessary—whether it be purchased directly from the store or via the Internet. It is incumbent upon the seller to entice the customer through various customer-service techniques that by making it easier on the customer win them over as loyal and repetitive customers. For those consumers for whom price is everything, they may never become your customer except for special give away sales. Target your customer-service practices to those that you can identify as ongoing quality customers and who see dealing with you as a WOW experience. Remember it is the little extras that wow the customer and the little annoyances that lose the customer.
Little things mean a lot
on the road to excellent customer service
On the other side of the coin, we must consider pricing policies for our customers. Granted that the higher the price, with our costs staying stable, there accrues more money onto our bottom line. However, if we want to build our business through fair customer negotiations with quality customers who order repetitively from us and refer us encouragingly to other potential customers, we must be willing to provide excellent customer service (including price) that is perceived by the customer. This means providing the best price possible that allows us to still achieve our profit goals. Rather than raising our prices to cover cost increases, it is incumbent upon our company to increase our efficiency and lower costs at all times so as to be able to maintain our prices at a minimum.
The best possible quality—and timeliness,
at the lowest possible prices
Should your company be lucky to develop that product or service with an exclusive niche upon the marketplace that allows you to price your product as high as the traffic can bear (and maybe then some), you must be careful how you handle this golden cash-cow opportunity. You can overcharge and miss the market that you believe exists or undercharge and lose the possible additional profits that can be squeezed from the opportunity. Assuming you can establish the right price point, you can be successful in creating and maximizing sales to that potential market. However, if you are exceedingly successful producing unheard of profit margins, the competition will beat a path to your marketplace and obtain a piece of your marketplace. Or you may have to reduce your original price to maintain your market share or even increase it. Should the product be an innovative electronic device you may be forced to continually upgrade the product to maintain your market position and profit margins.
The right price point
makes the right point
There are various ways and philosophies on how to operate a successful business. For instance by setting prices that maximize your profits but disregard customer service factors such as quality and timeliness resulting in losing the customer. Or to continually prospect for new customers resulting in giving away too much to the customer resulting in a loss that ultimately results in giving away the entire business The following case situation looks at an old established company that believes that they are an effective answer to customer service that works for them—and they have successful longevity to back that up—and they are still in business—doing very well thank you.
Baron’s Barn
Joe Baroni started his custom furniture business in his garage barn when he lost his job as a woodworker in the 1930s as a result of depressive economic times. The company he worked for had to close their doors resulting in 150 or so employees losing their jobs. Joe had little choice but to start his own business. He bought equipment and inventory at less than bargain prices from his previous employer and hired three of the best woodworkers on a best efforts basis—what did Joe and the others have to lose? It is always easier to take a risk when you have little other choices. Joe took over those customer orders that his employer was unable to fulfill. Joe’s work credos had always been “quality comes first,” “always deliver on time,” “at the best possible price.” Joe wasn’t in business to become as rich as he could but he believed if he served the customer as well as he could he would always make money. Joe called his little company Baron’s Barn after its humble beginnings.
Through the exercise of Joe’s credos his business grew so that he and the other employees were able to make a good living in the worst of economic times. As the economy improved (a little war always helps) so did Joe’s business. Joe was able to hire more employees and provide economic relief to the poor community that his little rural New England village had become. Baron’s Barn became the poster child for handcrafted quality furniture delivered on time at fair prices. As other furniture company’s left the area or outsourced their production, Joe stuck to his guns—quality product, quality service, timely production and delivery to meet the customer’s needs. Baron’s Barn is still in business while many other furniture companies have disappeared. Yes, Baron’s Barn has a unique niche but it works for them and its employees—with over three generations of employees loyally working for the company. And Joe always lived in the same modest home where his heirs still live and always owned a domestic automobile on the inexpensive side for at least ten years. What more do you need than a good community and a good and honest work ethic?
Doing the right thing,
the right way,
at the right time
Let’s take a look at how Baron’s Barn dealt with the three legs of excellent customer service.
Quality
From the beginning Joe used only the finest woods in his furniture. Luckily, he was able to contract with a number of local vendors to be his suppliers. To ensure consistency he stuck with only three woods—oak, cherry, and walnut—that were prevalent and somewhat plentiful in his geographic area. Rather than squabble over price with each order, Joe established the precedent of fair negotiations with each of his critical vendors. For the guarantee of close to 100% quality of the lumber and timely deliveries, he was willing to pay a fair price above market. He understood that quality of materials eliminated the internal costs of quality control inspection, material rejects, reworks, and scrap and the timeliness of delivery allowed him to greatly reduce his inventory on hand and provide the ability to load the raw material directly into production—eliminating storeroom and material handling costs.
Baron’s Barn guaranteed quality acceptance by the customer or product return with no questions asked. The company is proud to say that they have never had a merchandise return based on the quality of the product. The company offers a limited number of product choices in the areas of dining room, living room, and bedroom suites. Through word of mouth and satisfied customers, Baron’ Barn has never been in the situation of idle plant capacity. The company only accepts enough orders that can be handled within their limited capacity—basically Joe’s old barn expanded on a one-time basis. While other furniture companies promise something like a sketchy six-month delivery time (would you believe eight months to a year?), Baron’s Barn provides a finite delivery date that they have never missed. Based on the customer’s desired delivery date, the company starts the order into production to meet the commitment. The customer is able to follow-up their order from the start of production to completion and shipment electronically. The customer pays half at the start of the order and the remainder upon shipment—all electronically. There is no billing department, or accounts receivable, or collections.
For each separate order, the customer specifies the desired finish—transparent, polished, or stained—with a sample provided with the wood selected prior to finishing. With each separate shipment, Baron’s Barn encloses enough finish for the customer to maintain the furniture for a lifetime. Where other furniture makers get by with laminates and screws and nails, Baron’s Barn uses only the finest high quality woods handcrafted with hardwood dowels. The company has built a customer base over three generations that expects the highest quality (and they get it), eliminating the need for a customer-care department to handle product complaints. All employees, knowledgeable and competent, are empowered to deal with a customer around their order. The customer stays in the loop from the time of the order to merchandise receipt. And Joe has always placed a gift into the shipment to let the customer know how much he appreciates their business—not a key chain or a pen with the company name on it but something elegant such as a vase or a serving dish produced locally. The finished product has never needed refinishing at the site or return to the company. Joe has built a super company based on customer satisfaction—what could be better?
Timeliness
Every customer order is entered into the Baron’s Barn production system at the time of receipt. The company does not accept an order that cannot be fit into their production schedule that ensures delivery at the time requested by the customers. Baron’s Barn uses their finite plant capacity to maximize the amount of customer orders that they can accept but no more than that. Baron’s Barn maintains a 100% on time customer delivery record—many times ahead of schedule per customer requests. Joe has always understood that when a customer orders furniture they have a legitimate reason for their requested delivery time—wedding plans, new house, remodeling project, and so on. Accordingly, the company believes that they have a customer-service commitment to honor that agreed upon delivery date. From the timeliness of their vendors to the timeliness of their production operations and to the timeliness of their customer deliveries, Baron’s Barn excels at this aspect of customer service.
Price
Joe Baroni has always believed that Baron’s Barn should produce the best, quality furniture products at the best possible price. There is no philosophy at Baron’s Barn to pass along material and labor price increases (plus a standard mark-up) to the customer. To maintain their more than competitive prices for the quality, Joe’s philosophy has always been to use operating efficiencies to control costs and prices. Baron’s Barn is always fully employed with local residents doing productive jobs. Every job is flexible allowing each employee to feel that they are part of the company. And no one owns a customer except the company. With price point ceilings and cost control the company is able to grant periodic bonuses and profit sharing that encourage increased productivity and company loyalty. Very rarely does an employee leave the company or retire early. Generation after generation of families has been employed at Baron’s Barn. When the local economy sinks a little (rarely with Baron’s Barn present) the company finds a way to increase employment. The company’s price goal is not to maximize profits but to provide a comfortable living for the Baroni’s and all employees. What a deal for all!
Excellent customer service can
help a company stay in business,
but poor customer service can
help a company out of business.
Looking at Baron’s Barn as a success story is of course very encouraging as to becoming a proponent of excellent customer service. For Joe Baroni it has paid off handsomely making him a successful entrepreneur loved locally, if not the richest man loved in the country or maybe not even the richest in town. While this is a great success story, there are numerous businesses that have followed the pursuit of delivering excellent customer service that have failed miserably. On the other hand, there are numerous businesses that have held their customers in disdain as mortal enemies denying any level of customer service to save what they consider unnecessary spending while being quite successful financially—and the envy of many other businesses. The path you decide to take is ultimately up to you. I believe the right path is paved with excellent customer service.
Success for service
works for everyone
Why the Organization Is in Existence
Before one even thinks about expanding customer service, it is necessary to determine why the organization is in existence. When business managers are asked this question, invariably the answer is to make money. Although this is certainly true, there are really only two reasons for an organizational entity to exist.
The Customer Service Business
To provide goods and services to satisfy desired customers, clients, patients, and so on so that they will continue to use the organization’s goods and services and refer it favorably to others.
An organizational philosophy that correlates with this goal that has been found to be successful is as follows:
To provide the highest quality products and service at the least possible cost at the right time to the right customer.
The Cash Conversion Business
To create desired goods and services so that the investment in the organization is as quickly converted to cash as possible, with the resultant cash-in exceeding the cash-out (net profits or positive return on investment).
The correlating philosophy to this goal can be stated as follows:
To achieve desired organization results using the most efficient methods so that the organization can optimize the use of limited resources.
And the delivery of excellent customer service is the key to closing the “cash gap” and maximizing the cash conversion process.
This means that you are in business to stay for the long term—to serve your customers and grow and prosper. A starting point for establishing organizational customer-service criteria is to decide which businesses the organization is really in (such as the two above) so that operational efficiencies and effectiveness can be compared with such overall goals. And remember when excellent customer service dovetails with cash conversion concepts you are doing the right thing toward business growth and longevity.
Businesses an Organization Is Not In
Once short-term thinking is eliminated, managers realize they are not in the following businesses and customer-service decision-making becomes simpler.
Sales Business
Making sales that cannot be collected profitably (sales are not profits until the cash is received and all the costs of the sale are less than the amount collected) creates only numerical growth. True customer service dictates that the company provides what the customer wants and not what the company wants to sell. Unless management understands this concept, they may continue to believe that increased sales create positive growth for their business. The focus is to make quality sales to quality customers. Proper operating controls over each sale as to its real profitability looking at sales price less related costs such as direct product, functional (such as purchasing, billing, and collections), customer related costs, and the cost of money should enable the business to recognize such opportunities. True customer service dictates that the company provides what the customer wants and not what the company wants to sell.
Customer Order Backlog Business
Logging customer orders is a paperwork process to impress internal management and outside stakeholders and shareholders. Unless this backlog can be converted into a timely sale and collection, there is only a future promise, which may never materialize. The business cannot really afford the luxury of customer backlog where every customer and every order must be handled as the only one. Once a customer order is received, the business must process and fill it (and collect) in the shortest time possible. Controls need to be implemented that ensure each customer order is entered into the production system upon receipt and handled in the desired times until completion. Working with the customer to provide products and services that the customer wants as to quality, timeliness, and price is the key to customer satisfaction and long-term satisfied relations.
Accounts Receivable Business
Get the cash as quickly as possible, not the promise to pay. But remember, your customers are the company’s business; keeping them in business is keeping the company in business. And, normally, the company has already put out its cash to vendors and possibly into inventory. As many businesses, such as retailers, are already in the cash business, accounts receivables are not their problem, effective customer service may be the problem. For those businesses that offer billing terms, consideration should be given to establish a cash-only policy over small sales where the amount of the sale is less than the cost of billing and collections and for sales under a certain amount, say $500.
For large sales, effective customer-service negotiations should be put in place to determine if the large customer would be willing to pay in advance for receiving quality and timeliness concessions as well as favorable prices. For instance, the business may establish controls to ensure cash collectiblity either in advance or at the time of delivery. All sales resulting in accounts receivable would be reported as exceptions for follow-up. Working together with the customer and providing excellent customer service not only helps to reduce or eliminate accounts receivable but also to increase ongoing business.
Inventory Business
Inventory does not equal sales. Keep inventories to a minimum—zero if possible. Procure raw materials from your vendors only as needed, produce for real customer orders based on agreed upon delivery dates, maximize work-in-process throughput, and ship directly from production when the customer needs the product. To accomplish these inventory goals, it is necessary to develop an effective organizational life stream that includes the company’s vendors, employees, and customers—as well as take an organizational-wide approach to customer service.
If inventory is the business such as a wholesaler, retailer, or distributor, then once again the business wants to ensure that inventories are kept to a minimum within the constraints of fully serving customers. However, management must be in touch with costs and selling prices and knowing what items are in demand by the customer base. Making buying mistakes, which result in selling off inventory at markdown prices, is not the course to take for making the business successful. Such markdown practices usually only result in absorbing losses, setting bad precedent for customer expectations, and ignoring the root of your problems—lack of knowledge of the business and its customers.
Integrating the customer service function with the sales function allows the company to determine their inventory needs based on real customer orders rather than anticipated customer demand so that the company can do the following:
1. Plan its inventory needs based on real sales and not hoped for sales forecast numbers imagined by the sales force.
2. Minimize finished goods inventory levels by shipping directly from production or planned for finished goods stores.
3. Ship directly to the customer at the time the product is needed.
4. Reduce accounts receivable and its attendant processing costs by using effective customer negotiating techniques whereby the customer may be willing to pay at the time of shipment or receipt (or in advance) or in a more timely fashion—possibly reducing or eliminating the need for billing, posting of accounts receivable, and resultant collection and cash receipt procedures.
5. Revamp the sales function from one of order takers and selling those products that maximize their commissions to integration with the company goals as to which products to sell, in what quantities, at what time, and to which customers at what price.
The pessimistic business
is the one who winds up
in the mark-down business
hoping to recover through volume
Property, Plant, and Equipment Business
Maintain property, plant, and equipment at a minimum, but be efficient in its use. Idle plant and equipment causes internal operational anxiety and may result in inefficient use—that is using what’s there rather than let it sit idle. If it is there, it will be used. A good suggestion is to plan for the normal (or small valleys) not for the maximum (or large peaks); network to out-source for additional capacity and in-source for times of excess capacity. Working directly with your quality customers helps to define their present and future needs and correlates to the use and need for property, plant, and equipment.
Employment Business
The trick here is to get by with the least number of employees as possible. Never hire an additional employee unless absolutely necessary; relying on cross-training and transferring good employees. Not only do people cost ongoing salaries and fringe benefits, but they also need to be paid attention—which results in organization building. This is extremely important to any business, as the smaller business cannot afford to solve their problems (as large corporations do) by hiring or downsizing. The business must solve similar problems with fewer employees, but more flexible. Controls over the area of personnel include hiring statistics, effective use of personnel, productivity reporting, and results produced by employee. Delegating the delivery of excellent customer service to employees at all levels usually results in the need for less employees.
It is not always top management
that delivers poor customer service,
but the entry level or staff employee
that loses the customer
Management and Administration Business
The more an organization has, the more difficult it becomes to manage its business. It is easier to work with less and be able to control operations than to spend time managing the managers. So much of management becomes getting in the way of those it is supposed to manage and meeting with other managers to discuss how to do this. Management becomes the promotion for doing. Delegating authority over customer service dictates the need for fewer managers.
If an organization does both of these successfully—that is pay attention to its business and stay out of the businesses it should not be in, it will more than likely (outside economic factors notwithstanding) grow and prosper through well-satisfied customers and keep itself in the positive cash-conversion business in spite of itself. Management must decide which of the above factors it wishes to embrace as its business criteria, which ones it decides not to include as criteria, and which additional criteria to include. These criteria become the overriding conditions upon which the business conducts its operations, plans, and budgets, and against which it is measured. It is these agreed upon criteria based on the above factors that define the operating practices that need to be established.
Of course, an organization also has to stay out of the numbers business that is looking at short-term reporting criteria such as the amount of sales, backlog, locations, employees, and the big devil “the bottom line” that others judge as success. Effective customer-service procedures implemented throughout the company ensures greater long-term growth through building rapport with quality customers (those that repetitively purchase from your company) and extracting bona fide referrals to other quality customers. This may not always be a short-term process with quick results but it is an ongoing methodology for survival and steady long-term growth.
Embracing the correct criteria is one thing,
applying the criteria is another issue
Basic Operating Formula
Many business owners, CEO’s, and members of top management have some measure of success or survival through their knowledge and skills in a technical area (such as sales, retailing, engineering, and auto mechanics) but may possess minimal knowledge relative to basic good operating practices—especially in the area of customer service. In working with certain members of management, especially those not in the accounting field, it is helpful to share some accounting basics that may have been learned by accountants back in Accounting 101 but these non-accounting managers may have never learned or comprehended. The formula shown below exemplifies the basic relationship between sales or revenues, costs or expenditures, and the resultant profit (or loss).
Business Success Formula R – E = I
R = Revenues (or sales)
E = Expenditures (or costs)
I = Income
By adding an additional dollar of sales to the business, the top line increases (gross sales) but unless expenditures are less than the amount of the sale, the contribution to the profit line will be a zero or less (i.e., a negative or loss). However, by reducing expenditures by a dollar (all other things being equal), the reduction will fall directly to the bottom line and increase profits on a dollar-by-dollar basis. Accordingly, business success is dependent upon business management acquiring only quality sales from quality customers (i.e., those sales that contribute a desired profit to the bottom line) and the maintaining of costs at a minimum. Of course management must be aware of their costs and related pricing structure for each of its products and services and customers.
An increase in sales may create a loss,
a decrease in costs creates a gain in income
Accordingly, the company’s customer-service efforts must be geared to increasing real profitable sales to quality customers. In addition, excellent customer service also allows for appropriate cost reductions in sales efforts, reduction of customer backlog, processing and extending credit for accounts receivable, reduction in inventory costs and levels; minimum property, plant and equipment; and minimal levels of personnel and management.
It’s not making the sale,
but making the profitable sale
The typical business is driven by sales, sales, and more sales. Management’s major focus on planning, if any, is to concentrate on increasing sales—at any cost. The prevalent theory (or myth) being that if only the business can increase its sales then sufficient profits will follow. Minimal thought may be given to what products to sell, in what quantities, at what price (considering all costs) to produce a real profit, and to whom (i.e., which are our quality customers). If sales and costs are included in the business planning process, sales forecasts (usually developed by optimistic sales personnel) tend to be over-estimated while cost estimates (even if developed by accounting personnel or the CPA) tend to be under-estimated. Such quick planning procedures quickly produce an operating scenario where forecasted sales may not materialize but real costs exceed estimated expectations. Such a situation places the business in a crisis situation to generate sales and cash flow resulting in a business atmosphere that pressures management to make quick sales at any cost—making sales and selling off inventory at markdown prices that may not cover the cost of the sale. With such pressures on making sales, sales personnel may wind up trying to sell whatever they can at whatever price they can get. Through the proper control of the sales function, the business should be able to control effective sales flow that result in profitability to the business—and results in proper customer service.
Don’t overestimate forecasted sales, or
underestimate expected costs
Pricing Strategies
What to sell, how much, and to whom are important planning decisions. Equally, if not more, important is the pricing strategy or decision—that is what price is to be asked for each item and what pricing flexibility can be tolerated and still cover costs and contribute to profits. Whether we want to recognize it or not, pricing is extremely important and is a significant factor in providing effective customer service. The right pricing strategy should enable the business to meet its customer’s needs. Pricing strategies developed in this manner then become the yardsticks upon which to measure against. There are various methods or strategies for developing a customer-oriented pricing structure, which include the following.
Percentage markup
Using a desired percentage of costs (e.g., 40%) usually thought of as a gross profit markup to calculate the selling price. For instance, an item with a calculated cost of $100, with a 40% markup, would have a selling price of $140. Although this method is a quick way to calculate selling prices and maintain consistent profit margins, it has the built-in disadvantage of penalizing customers for the business’s cost inefficiencies. For example, if the cost of the same $100 item increased to $150, the new selling price would be $210 (a markup of $60: 40% × $150). The customer is now expected to reimburse the business for its cost inefficiencies and pay an additional 40% markup for these additional costs. In many cases, such pricing policies can put the business in a difficult market position and cause the sales function to work harder for each sale and possibly lose customers.
Dollars per item
Using a consistent dollar markup per item over costs. In the above example, if the business desires to earn $30 per item, the selling price at $100 cost would be $130; and at $150 cost, it would be $180; and at $80 cost, a $110 selling price. This process tends to stabilize profit margins, rewards customers for the business’s cost efficiencies (without penalizing them extra for the cost inefficiencies), and clearly identifies the dollar amount of gross profit per item.
Market pricing
Using the marketplace as the starting point for setting your prices. For example, if the standard price for the business’s goods or services is $200 in the marketplace, this becomes its basis for pricing. Theoretically, if a business lowers its prices from the market price, its sales should increase; and raising prices should decrease sales. This approach typically stresses sales and may tend to disregard setting selling prices to recover costs and contribute to profits.
Competitive pricing
This is the setting of prices to beat competitors, regardless of whether the additional business is profitable or desirable. Businesses sometimes get caught up in the “beating the competition” game, losing sight of their real reasons for being in business. If a business finds itself in a competitive selling position—either in total or in part of its business—many times the best approach is to provide the highest quality product at the least possible cost. This should allow the business to stay competitive, serve its customers, and make money.
Unique niche
Having a product or service that is unique or different from others being offered by your competitors—for example, a unique process (i.e., automatic camera), unique features (i.e., higher speeds), and unique uses (i.e., fax and copier). If a business can develop such a unique niche, it usually provides a marketing and sales advantage, particularly where there is a high customer demand. A business can decide to take full advantage of this unique advantage by setting higher selling prices and possibly maximizing its return in the short term. However, such a policy (with high profit margins) usually results in other competitors entering the field and possibly driving prices below acceptable levels (or you, out of the business—e.g., the microcomputer business). A better approach may be to continually control costs and to keep prices as low as possible and quality as high as possible. This approach may not maximize short-term profits, but it should maximize returns in the longer term and tend to keep competitors from entering the field (e.g., condensed soup).
Quality strategy
Establishing an image in the marketplace for quality of product and/or service (e.g., hotel chains, car rental agencies, auto makers, and appliance). Typically, customers will be willing to pay more for such perceived quality, and this can give you a competitive advantage. However, it may cost the business considerably to establish and maintain the quality image—and it must continuously deliver such quality. If your quality should suffer appreciably, the downward sales cycle may respond faster than the original upward sales flow.
Price sensitive strategy
Competing based on being able to sell at the lowest price (e.g., WalMart, low end manufacturers, auto makers, and small appliances). Using this approach to set selling prices requires a business to be closely in touch with its costs, profit margins, and break-even points. Should it have to raise prices (and customer service, or the lack thereof, remains at the same low level), the resultant loss of sales may grossly exceed the safety level of the business’s existing volumes.
Effective pricing strategies
can enable the business to meet
its customer service needs
There may be pricing strategies other than those described that a business wishes to use. The important factor to consider is that the pricing strategy fits into the business and sales plan (and meets the customer’s needs) and allows it the flexibility to ensure success. Typically, this means using a combination of the aforementioned techniques, either in total or by individual product line or item or by customer. What is most important is that the business develops effective pricing strategies that enable it to service its customers and maximize the amount of profitable sales.
The lower the cost
the greater the price flexibility
Purpose of the Sales Function
Management must define and communicate its strategic plans for the business, including areas of expansion, retrenchment, and status quo. At the same time, management should identify the businesses they want to be in, the businesses they do not want to be in, their basic business principles and belief systems, and their desires for each function within the organization. For instance, management may define a desire for the sales function, which has historically sold whatever it could to customers, to become a more integral part of the organization wide customer-service process—pre-sale, during sale, and after sale. Traditionally, it is the sales function that has the most customer contact. Turn selling into service.
In defining their desires, management may identify attributes to the sales function that more closely relate to the customer-service purposes of the sales function such as the following:
1. Sales forecasts more realistically related to actual customers and products to be sold.
2. A larger percentage of the sales forecast (at least 80%) matched by real customer orders that can be acted upon.
3. Sales efforts driven by management’s identification in the planning process of what to sell, to whom, and at what quantity—and sometimes at what time.
4. A sales forecast with a high percentage of real customer orders that allows the business’s providing of goods and services to be based on customer orders and expected delivery times, at a specified quality level.
5. A sales function that is geared more toward providing the right customer service, before, during, and after the sale, and than toward making sales that maximize sales personnel’s compensation.
6. A sales function that works within the business’s customer-service plans together with the other functions of the business, such as manufacturing, engineering, purchasing, accounting, and marketing.
7. In this regard, there are other operational questions that need to be addressed, relative to the sales of products or services such as following:
• Are sales made to quality customers with the right products at the right time?
• Does each sale make a contribution to profits?
• Are all costs compared with the sale such as product costs (direct material and labor), assignment of product related activity costs (e.g., manufacturing processes, quality control, shipping, and receiving), functional costs (e.g., purchasing, accounts payable, billing, and accounts receivable), and customer costs (e.g., marketing, selling, support services, and customer service)?
• Do sales relate to an agreed upon sales forecast? Is the company selling the right products to the right customers?
• Do sales integrate with an effective production scheduling and control system?
• The sales function is established to work as an integrated function that supports the business, not as an independent function set-up for its own existence and survival.
In this manner, the sales function may be seen as the starting point for real customer service—that is making sales that maximize the needs of its customers.
The sales function
supports the business
and not vice versa
The purpose of the sales function is to service, not to sell, the customer—that is to keep the customer in business so that we stay in business. The goal is to provide the highest quality goods and services to customers at the lowest possible price, while still providing an adequate return for the company. If you can do this successfully, both your company and your customers will grow and prosper. If you can also become an integral and unique part of your customer’s business, you will enlarge your sales to these customers as well as minimize the effect of your competitors. The sales function, then, is the communication link between the company and its customer base.
The starting point for any business is to decide why it is in business. As noted previously, all businesses are in existence to make money—in the right way—through quality customer service. If a business desires to stay in business for the long term (i.e., to survive and grow) it must expand its short-term thinking and recognize its present customers (and potential customers) as an integral part of its life cycle. It can no longer use its customers as a dumping ground for excess inventory, a source of quick orders, a place for salespeople to visit, and so on. Customer requirements and the company’s ability to please the customers keep it in business. The sales function is the conduit between the company and its customers. True customer service starts and ends with the sales function.
The sales function
links the customer to the business
Case Situation: Business by Non-Response
The following situation discusses the tie-in between the customer and sales and building the business with satisfied customers. It also points out the need to identify when your customer base and market base starts to erode and the immediacy to take proper action.
Bright Light Company is a major lamp and lighting fixture manufacturer. Management is concerned that its customer base and market share is eroding resulting in a large decrease in total sales and net income. As a result, the company has cut costs drastically in all areas. While this has created a short-term increase in net income, it has resulted in longer-term deterioration of the customer base and total sales.
Management realizes that their problem is with their customers, ordering less or not ordering, so they decided to ask present and past major customers their perceptions of Bright Light’s problems. They surveyed by mail, telephone, and personal visit their top 20% of present and past customers (37 out of a total of 182 customers) that accounted for over 80% of total sales. The overwhelming response was that Bright Light had become non-responsive to their needs.
For instance, if a customer had a firm delivery date, it would be passed without a word from the company. This happened even when the customer called to confirm the date and was assured it was on time. Other customer complaints such as wrong product, bad product, and partial shipments would be made to the company but would go unanswered. Customers still ordering from Bright Light said they limited orders to those items they couldn’t get elsewhere or where prices were lower. Most customers said they would go back or increase orders if such customer-service problems were eliminated.
Management decided to offer these customers a money back guarantee, backed up by an adequately staffed customer-service department. Management realized that this would cost them more money to put into effect. As they didn’t want to invest this kind of money, they decided to change the name of customer-service department to customer-care department and put up signs such as “the customer is our business,” “we work for the customer,” “the customer pays your salary,” “the customer is your boss,” and so on. While the signs were done well and looked cute, there was little improvement after the first three months. In fact, basically nothing had changed except that customer-care personnel had the signs to write customer phone numbers on for calls that weren’t returned.
Customer service is our business,
or we won’t have a business
The sooner you fall behind—
the more time you have to catch up.
It is not just the present sale,
but all future sales that makes the difference.
Case Situation: the Boss Is Always Right
Janet works in the billing department of a closely held mail order office supply company. When customers have a problem or a billing question they come to Janet. She, however, has no authority to alter a billing, even by a penny, for any reason. This is the turf of top management. When the boss is out, such billing concerns wait for him to return. Janet has been with the company from the beginning, 12 years ago; knows everything about the business, and knows all of the major customers.
Recently, one of the old large customers had a billing problem, claiming that they hadn’t received three items on their bill. Janet had the signed bill of lading from the shipper, but knew that if this customer said they didn’t receive their merchandise then they didn’t. Janet would have issued the credit to the customer and re-shipped the missing items, if she had the authority.
When the boss, however, reviewed the situation, he saw the signed bill of lading and told Janet to request full payment. When Janet questioned the decision, the boss told her “look, the boss is always right, the customer comes second, do what I tell you.” The customer paid the bill but never placed another order with the company.
Being right has nothing
to do with job position
The goal of business is to build a community
that is just and fair and empowers
everyone with a productive life.
Some Basic Business Principles
Each organization must determine the basic principles upon which it conducts its operations. These principles then become the foundation upon which the organization bases its desirable practices. Examples of such business principles as related to the development of excellent customer service include the following:
• Produce the best quality product at the least possible cost.
• Set selling prices realistically, so as to sell all the products that can be produced within the constraints of the production facilities.
• Build trusting relationships with critical vendors; keeping them in business is keeping the company in business.
• The company is in the customer service and cash conversion businesses.
• Don’t spend a dollar that doesn’t need to be spent; a dollar not spent is a dollar to the bottom line. Control costs effectively; there is more to be made here than increased sales.
• Manage the company; do not let it manage the managers. Provide guidance and direction, not crises.
• Identify the company’s customers and develop marketing and sales plans with the customers in mind. Produce for the company’s customers, not for inventory. Serve the customers, not sell them.
• Don’t hire employees unless they are absolutely needed; and only when they multiple the company’s effectiveness so that the company makes more from them than if they did it themselves.
• Keep property, plant, and equipment to the minimum necessary to maintain customer demand.
• Plan for the realistic, but develop contingency plans for the positive unexpected.
With sensible customer-service business principles as the hallmark for the company’s growth, the company can be clear as to the direction for positive movement and avoid merely improving poor practices. Clear customer-service business principles that make sense to all levels of the organization allow the company to identify and develop the proper organizational atmosphere. In this manner, everyone in the organization is moving in the same desired direction—and the customer is the king.
The Concept of Stakeholders
Operational analysis is directed toward the continuous pursuit of positive cost reduction and operational improvements, excellence in all activities, and the effective use of best practices. The focal point in achieving these goals is the customer—both internal and external—who establishes performance expectations and is the ultimate judge of resultant quality. A company customer is defined as anyone who has a stake or interest in the ongoing operations of the organization, anyone who is affected by its results (type, quality, and timeliness). Stakeholders include all those who are dependent on the survival of the organization, such as suppliers, owners, management, employees, and customers.
Suppliers/Vendors: External
Keeping the vendor (especially critical vendors) in business so that they maintain acceptable quality, timeliness, and acceptable prices relates directly to keeping your customers in business. The same rules that you apply to your customers must also be honored in your dealings with your vendors. It is not merely extracting the best price but to effectively negotiate with your vendors on a fair basis—as you expect to negotiate with your customers.
Owners/Shareholders: Internal/External
The business owners and shareholders (if any) are usually looking for the greatest return on their investment. Applying excellence in customer service through revenue enhancement and cost reduction provides an effective step in this direction.
Management/Supervision: Internal
Management desires to keep, and increase, their positions and related compensation. They worked hard to climb up the hierarchy and are not going to let go easily. And once someone is promoted to a management position they almost immediately believe they are worthy of such a position and should move up even higher in the organization. So the principle here is to limit the number of management personnel and to hold those that are necessary to a system of compensation based on results.
Employees/Subcontractors: Internal/External
Employees want to get the job and then they want to keep it. And the best way to accomplish this in most organizations is to obey the rules and listen to their managers—that is be an obedient child. Such a system, however, may result in stagnating creativity and innovation and keeping them from the customer. To be most effective, the organization must loosen its controls over employees so that each employee can contribute what is possible—once again compensating based on results.
Customers/End Users: External
The customer is the king! Without quality customers the business won’t last too long. Always searching for new customers while neglecting your present customers is usually a recipe for disaster.
The customer is not always right,
but the customer is always treated right
Conclusion
This chapter has provided us with an overview of the elements of customer service—quality, timeliness, and price—and how these elements interrelate to provide the company a competitive advantage by intertwining these three elements and making customer service an integral part of all company activities. It is also important to understand why the company is in business; not only to make money but also to provide excellent customer service to quality customers so that they order repetitively and provide quality referrals to other potential customers. The company also needs to be aware of those businesses to avoid or not to be in, such as the sales business, customer order backlog business, accounts receivable business, inventory business; property, plant, and equipment business; employment business, and the management and administration business. Management also needs to be aware of the basic operating formula—revenue minus expenditures equals income—so that they can effectively manage their business through fair pricing by economical, efficient, and effective practices that minimize costs and result in competitive pricing using appropriate pricing strategies. Lastly, the company needs to adopt basic business principles that incorporate the concept of stakeholders and their divergent needs resulting in customer -service practices that enable the company to grow and prosper in the right direction—with all personnel moving in the same direction—that is singing from the same songbook.
Customer service is your business,
without customers you are out of business