Customer Service as Part of Strategy.
By Kevin Dwyer
Wednesday, 10th October 2012
I groan whenever I hear the tell-tale signs of voice recognition response system 'handling' my service request.

My latest experience was with a taxi company which, prior to last week, used the phone tones to activate a service request e.g. "Press 1 if you are ready to be picked up now."  I'm told, "I'm sorry, I did not get that" as I try to alert the company to my desired pick up time. Apparently, my diction is not precise enough. If this continues, the frustration level will be enough for me to find another taxi company - one that doesn't use voice recognition.

The cost of poor customer service

It appears as though I am not alone in wanting to take my service elsewhere when customer service does not live up to my expectations. According to an international survey of consumers in 2009*, poor customer service in 16 major industrialised economies** caused businesses to lose US$338.5 billion per year, when customers defected or abandoned their purchases as a direct result of poor customer experiences.

The hardest hit industries across all countries surveyed were financial services, cable and satellite TV providers, and a variety of telecommunications companies. The average value of each lost relationship across all countries surveyed was $243 per year. The split of losses were:
  • Transactions taken to a competitor (63% of the total) and
  • Transactions abandoned entirely (37% of the total).
Reasons Consumers Leave

Consumers across all countries cited key reasons that they left. The top four reasons for leaving included:
  • Being trapped in automated self-service
  • Being forced to wait too long for service
  • Having to repeat themselves
  • Encounters with representatives that lacked the skills to answer their inquiry
Greatest Sources of Customer Satisfaction

Consumers also identified the factors that made the biggest difference in improving satisfaction levels. Consumer satisfaction increased when companies met four key needs:
  • Competency
  • Convenience
  • Proactive engagement
  • Personalisation
Despite data like this being available in surveys published almost yearly, the death of customer service in Australia shows no signs of abatement. I rarely expect to get service as a customer anymore, particularly in industries where customer loyalty is of great benefit to profitability, with customer retention being a key driver of profit margins. Examples include telecommunications and banking. Insurance companies seem to have their act together, in the main, although floods in the recent past have revealed some distinctly poor service with some insurers.

Customer service should be part of strategy. Even if the strategy is to not care about retention and word-of-mouth reputation because of the unlikely situation that the cost of acquisition is very low and the impact of reputation on future sales is also negligible. For all organisations, a decision needs to be made about how much the organisation's financial well-being is impacted on by the perceptions of service held by customers.

For government organisations without a profit measure, the impact of poor customer service perceptions often materialises as impact on budget and the likelihood of a restructure in the future. The public eventually hold Governments and their departments to account, and that motivates governments to change what the public perceive is not working.

The cost of customer dissatisfaction

According to research conducted by CTMA***, there are five key economic truths that quantify financial return on investments made to customer service. Organisations wishing to improve their corporate bottom-line must factor these into investment decisions and growth strategies:
  • As satisfaction levels drop, loyalty drops faster
  • Problems drive customers away
  • Many more customers experience problems than you think
  • Unhappy customers spread the word
  • Effective customer service and response pays
 Figure 1: Loyalty versus customer satisfaction

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As satisfaction levels drop, loyalty drops faster

There is a significant drop in loyalty between "very satisfied" and "somewhat satisfied" customers - sometimes as much as 50%. Many organisations ignore this fact and simply add together the percentage of "very satisfied" and "somewhat satisfied" customers to get a "better satisfaction score". The result is an unseen consequence of what looks like acceptable customer service data.

Problems drive customers away

There is typically a 25% drop in loyalty among customers who experience a problem. You can lose some, or all, of the revenue from one in every four customers who have experienced a problem.

More customers have problems than you think

Research shows that as many as 50% of your customers may actually be experiencing problems, even though only 5% of those may complain. Up to 95% of customers who experience a problem say nothing to you at all.

Unhappy customers spread the word

Customers tell twice as many people about a bad experience with customer service than they do about a good one. The danger of negative word-of-mouth has been greatly amplified by the rating sites on the internet and the power of social networks.

Effective customer service and response pays

Research over the years has also confirmed the importance of effectively responding to customers when they do complain. Customers can be very demanding but, with an effective response, it is still possible to obtain a more loyal customer afterwards than you had before they experienced the problem.

The financial cost of poor customer service

Organisations often have bad costs as a result of poor customer service. Bad costs are those that do not result in any return to the business and should be eliminated.

For example, any organisation with a call centre is likely to have hidden costs of call-back caused directly by poor customer service. A figure of 1.4 call-backs per original call is not unusual. Assuming 1.4 call-backs per call, if the cost of the call is $12 and the number of calls experienced is 100 per week, the cost of call-backs is $25,000 per annum escalating to $347,000 per annum at 1500 calls per week. (Fig 2)

Figure 2: Cost of customer call-backs 1.4 call-back ratio, $12 per call

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Often, however, the number of call-backs per call is higher. If the average cost per call is $12 and the number of calls is 1000 per week, the costs of call backs escalates from $250,000 per annum to $686,000 per annum as the ratio of call backs increases from 1.4 to 2.1.

Figure 3: Cost of customer call-backs, 500 calls per week, $12 per call

4Hoteliers Image Library

It is not only the direct financial cost of the results of poor customer service, such as low retention rates and increased call backs, that should be considered when considering your strategy. Poor customer service impacts staff morale and community standing.

People frustrated by the lack of service often subject staff in organisations with a poor customer service perception to harsh and personal treatment. Whole communities form perceptions about large organisations based on their customer service, making it difficult to implement community based strategic initiatives without the difficulty and expense of overcoming community scepticism.

Customer service, if not considered part of your strategy is undoubtedly costing you money and reputation.

Sources and notes:

* "The Cost of Poor Customer Service: The Economic Impact of the Customer Experience and Engagement" Sponsored by Genesys from Alcatel Lucent and Ovum
** Australia, Brazil, Canada, China, Czech Republic, France, Germany, India, Italy, Mexico, Netherlands, New Zealand, Poland, Russia, U.K., U.S.
*** www.ctmaworld.com/EconomicTruths.htm viewed 07/10/2012

We welcome your comments.
Contact Kevin by email at kevin.dwyer@changefactory.com.au or via phone on +61 (0)408 508 490
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