Author: Peter Gurney
In Depth: Corporate Investment & Finance
Reprinted from the Puget Sound Business Journal
October 5, 2001
Return On Investment
Quantify the return when forming a service strategy
Is good service a good thing?
Most business people would say it is. It keeps customers coming back, they will claim. And it could lead to more frequent purchases, fewer complaints, positive word-of-mouth and other activities that affect profitability. But if you ask how much they should invest in good service and how much return they can expect from their investment, the answers start to get fuzzy.
Most business people don't know what their return on investment, or ROI, in customer service is, even what it should be. Nevertheless, they spend money - sometimes an astonishing amount - on employee training, customer satisfaction research, mystery shopping and manager incentives with the belief that it will pay off in the end.
This is a good time to evaluate customer service expenditures and determine how to maximize investments.
So often business professionals give little scrutiny to customer service expenditures, which tend to be based not on calculated benefit, but on blind faith.
This approach begins with the unchallenged belief that good service always leads to higher profits. Companies launch service crusades, making grand promises to their customers as they whip their staff into a frenzy of friendly service activity. They intone ritual phrases, like, "We're dedicated to excellence," and "The customer is No. 1." They proclaim they will become the Nordstrom of their industry. And they contribute a substantial amount of money to the effort, confident it is going to a good cause.
In the end, the miracle they had hoped for seldom appears. Customers may be more satisfied, but the desired rise in profitability rarely occurs. There may be profit changes, up or down, but it is devilishly difficult to figure out how much effect service quality had on the change.
At this point many companies experience a crisis in faith and revert to their old practices: cost cutting, reductions in staff and new ad campaigns. Poorer but wiser, they look back at their crusade and wonder how they could have been so na´ve.
Despite efforts of so many companies to improve service, customer satisfaction levels have been dropping nationwide for years. In fact, the American Customer Satisfaction Index, a cross-industry national economic indicator of customer satisfaction, reports that 38 industries polled show a steady decline since 1994.
Perhaps it is time to take a different approach, beginning by redefining what makes service good or bad.
Here is a suggestion. Good service should begin and end with profit. If there is no predictable, measurable ROI, it isn't good for anybody in the long run. Investors get a suboptimal return, employees suffer through service crusades doomed to failure, and customers are set up with unrealistic expectations that companies cannot meet.
The newest approach to customer service is a holistic one - Customer Experience Management - better known as CEM. It's a profit-based approach to service beginning with companies asking the question, "What do we want our customers to do more of or less of?"
Do we want them to spend more with each purchase? To complain less frequently? To recruit new customers through word-of-mouth? In making this list, attitudes (such as satisfaction) and feelings (such as delight) are not included - only measurable, observable customer behaviors that can plausibly be influenced through service interactions.
The next step in this exercise is to calculate the financial effect of an incremental change in each customer behavior. What would be the effect on revenue of increasing the average customer purchase by one dollar, or reducing the volume of complaints to call centers by five percentage points? It quickly becomes clear even a small change in some customer behaviors can have a substantial financial impact.
This process next moves to the subject of employee training. What specific knowledge and skills are needed to influence desired customer behaviors? Then, you need to ask what rewards will be most effective at reinforcing the use of those skills? What metrics need to be gathered to trigger rewards?
With this process, there is always a clear path to making money. All of those fuzzy, feel-good terms that so many businesses base their service initiatives on, like "customer loyalty" and "customer delight," are left to the public relations companies. This doesn't mean there is no benefit to customers. On the contrary, the types of behaviors desired of customers will only come about if they are satisfied, loyal and occasionally delighted. But companies cannot make the world a better place for customers unless they show a profit. By defining good service in terms of its effect on the bottom line, everybody wins.
Peter Gurney is the Managing Director of Kinesis. Peter Gurney can be reached by calling 206-285-2900.
Copyright © 2001 by American City Business Journals Inc.