Why Customer Service Matters – The Service-Profit Chain

A few years ago, I was reading an article by the motoring journalist Jeremy Clarkson about why he changed the format of the television programme Top Gear from one of journalism to one of entertainment.  One of the reasons he gave was that aerodynamics and mass manufactured components meant that many mass market cars were all but identical. To review these cars often meant focusing in minor details whilst over all performance was all but identical across the market.

So if products across a market are increasingly a homogenous mass, how do you differentiate your offer from that of your competitors. Increasingly service has become the prominent source of differentiation in developed economies.

Customer service, before and after purchase is an increasingly important part of a differentiation strategy.  When Kotler defined the marketing mix for goods, he included only 4 ‘Ps’.  Other marketing academics extended Kotler’s model by adding three more ‘Ps’: People, Process and Physical Evidence; but only in relation to services.

Today, all firms, both those who produce and supply goods, and those in service industries, need to develop a marketing mix which includes the service elements of the extended 7P marketing mix.

There is logic in making customer service matter in your organisation:

  1. Satisfied employees provide better customer service quality.  Satisfied employees stay longer in your organisation and they are more productive. they become more knowledgeable and are more committed to the goals of the organisation.
  2. Service quality is noted by customers and customer satisfaction is increased.
  3. Customers become more loyal and are ‘stickier’, they stay longer with your offer and its is harder for your competitors to prise them away.
  4. Loyal customers are more profitable.  The longer you keep a customer, the more you earn from them. Loyal customers spend more.  They cost less to serve and to promote to.  They are less likely to leave on the basis of price.
  5. There is a positive feedback loop: As employees become further satisfied, this reinforces customer satisfaction.

Developing strong customer service which is closely linked to your brand and corporate identity doesn’t just differentiate your company from your competitors, it is a source of improved revenues at reduced risk.

Kaplan and Norton, when they developed the Balanced Scorecard were thinking along these lines.  Remember, they directly linked:

  1. Better company learning and innovation; to
  2. Better systems and internal processes; to
  3. Better customer results: to
  4. Better financial returns, and those returns could be invested back to:
  5. Better company learning and innovation.

This leads us to the five dimensions of Servqual, the quality assurance system focused on reducing cognitive dissonance in the processes of interaction between an organisation and its stakeholders:

  1.  Reliability:  Your ability to provide services dependably and reliably.
  2.  Responsiveness:  Your willingness to help customers and other stakeholders.  Your willingness to act promptly.
  3.  Assurance:  Customers know you have knowledgeable and courteous staff who inspire trust and confidence.
  4.  Empathy:  You provide caring, individualised attention to stakeholders
  5. Tangibility:  Your service standards are reflected in the physical attributes of your facilities, equipment, and the appearance of your staff.

Running a successful business today is more than maximising profit margins or increasing manufacturing output.  You need a holistic view of your market and your organisation.  You need to improve service in a way which individualises your organisation and which differentiates your business from that of your competitors.  Bad customer service is far more likely to lead to loss of business and company failure that other factors.

 

 

Relationship Marketing Myopia

In the early days of marketing size, the focus of businesses was very much on successful transactions.  The aim of marketing departments was to grow sales.

Today, that focus has changed.  The market is mature. New customers can be hard to come by and expensive to obtain. So the focus of marketers has shifted to creating and maintaining relationships between a business and its customer base.  This is obviously based on the tenet: The longer you keep a customer, the more you earn from them.

This relationship focus has seen the rise of social media as a marketing tool.  Social media in marketing is an unproven and likely poor sales channel. Businesses should not see it as an aid to successful transactions. Social media is about developing relationships, creating brand communities and moving target consumers from prospects to close business partners.  Social media is also about weaponizing your current customer based as part of your marketing team; through the development of E-WOM (electronic word of mouth).

So much of marketing today is about relationship building.

Piercy (1999) warned that businesses need to avoid relationship marketing myopia; the naïve belief that every consumer wants a deep relationship with their suppliers.  This is why I often laugh when necessary but embarrassing products have social media accounts. For example, who wants to become part of the John Smith haemorrhoid cream community?

Piercy goes further and states that different consumers want different forms of relationship with their suppliers.  Piercy states that to ignore this as a reality is an “expensive indulgence”.

In Piercy’s model, there are four types of relationship that consumers have with a business:

  1.  Relationship seekers:  These consumers want long and close relationships with a supplier.  So a local authority will likely want a close relationship with an ICT supplier.
  2. Relationship Exploiters:  These consumers will grab at all free services and offers provided.  They are also fickle and will move their custom when they feel like it.  They may well be ‘zombie customers’; customers who will cost more to service than you will earn from them.
  3. Loyal Buyers:  These consumers are happy with a long-term relationship but they do not want a close relationship with their suppliers.
  4. Arms-length Transactional Buyers:  These consumers actively avoid long-term relationships with suppliers.  This may well be transactions based on price, technical specification or innovation.

What these four categories highlight is that relationship strategies for marketing MUST be based on market segmentation.

Investing in relationships with profitable relationship seekers is a good thing. Relationship development with exploiters and transactional customers is a waste. You need to develop different marketing strategies to suit different relationship needs.

Some argue that there is a link between customer loyalty and customer satisfaction.  surprisingly there is little evidence to support this. As I have often written customers are fickle and so is their loyalty. What is much more likely is that there is a link between customer dissatisfaction and customer disloyalty.

In many markets, such as utility provision and retail banking, there is significant customer inertia.  Who reading this article has been a customer of their bank since childhood?

Today businesses spend billions on customer relationship management. But is a radical rethink needed?  Should we be looking at managing customer relationships with our business or should we be giving customers options as to the type of relationship on offer? Is it time for the customer management of relationships?

Customer management of relationships  represents a new power balance where customers choose the relationship they want based on:

  • What they are interested in,
  • what information they want,
  • what levels of service they want,
  • what way they want to communicate.

In this process you need to recognise the real value of relationship development tactics and target consumers who are interested in those relationships.  For example, what is the point of a loyalty card scheme if everybody can have one regardless of their level of loyalty?

Customer Service is Driving Modern Marketing

In previous posts I have discussed the work of Treacy and Wiersema and their three areas of marketing focus, management efficiency, product and customer focus. The model suggests that a business prioritises one of these three areas and achieves excellence in it. As long as the other two areas match industry average standards, the consumers will ignore them and focus on where the business achieves excellence.

In recent years, particularly in mature economies, a customer focus has become the primary marketing strategy of many businesses. The reasons for this are complex.

In many mature economies, a far greater element of GDP is reliant on services rather than manufacturing.

Some academics argue goods sectors are becoming commoditised. I don’t agree with this assessment. In fact the opposite is true.  Many manufacturers, through the use of mass personalisation, Just in Time supply chains and high tech production facilites, have enabled consumers to have almost limitless choice in the goods they buy. If a consumer can choose almost bespoke products from any manufacturer, those manufacturing businesses have to find other areas of differentiation. This has led to greater emphasis on the product halo and improved customer service. Increasingly consumers are aware of the levels of service offered by all businesses whether they are a manufacturer or a service provider.

Customer service is now an important point of differentiation for businesses who are keen to exploit the logic of the service/profit chain.

  1. Satisfied employees provide better service quality.  Satisfaction amongst employees improves employee retention.  They stay in your business and gain better knowledge of your products and systems. Satisfied employees present themselves better and are more productive.  They are more committed to the goals and values of a firm.
  2. The improved levels of service provided by satisfied employees is noticed by customers. Customers feed on employee satisfaction and you retain customers longer.
  3. Retained customers exhibit loyalty and they buy more.
  4. Loyal customers improve profitability.  They cost less to serve than new customers. They need lower marketing budgets. The costs of retaining loyal customers are lower than the costs of new customer acquisition. Loyal customers are more likely to recommend your firm to others. Retained customers reduce costs, reduce risk and improve revenues.
  5. A positive feedback loop develops.  Satisfied customers treat your staff better.  Employee and customer satisfaction levels reinforce each other. Both measures of satisfaction improve.

This chain mirrors the balanced scorecard approach where improved organisational learning impacts internal process measures, which then impact customer satisfaction measures, which in turn improves financial measures.

There are five key aspects to improved customer service:

  1.  Empathy – a caring individualised level of service.
  2. Tangibility – good standards of equipment and facilities, High standards of personal appearance amongst staff.
  3. Reliability – Staff are dependable and service provision is accurate.
  4. Responsiveness – Staff show willingness to help. Service is prompt.
  5. Assurance – Staff have the ability to inspire trust and confidence amongst consumers.

These are the five pillars of SERVQUAL. You should look to optimise these aspects and measure them through both staff and consumer satisfaction surveys.

Increasingly businesses are looking to move beyond traditional customer service and develop deeper relationships with consumers. This has led to the development of relationship marketing strategies and the development of key account profiles.

Increasingly service provision is through the careful development of customer experiences.

  1.  The process of using a company’s products is seen as part of an overall customer experience and as impacting how a customer thinks about an organisation.
  2. Peer to peer interactions are important to the overall customer experience.  A holistic experience is required where the interactions between individual customers are important.
  3. Relationships are developed across multiple transactions. In business to business markets, the aim is for clients to see your business not as a supplier but as a partner or colleague
  4. Your brand image is developed in the minds of consumers to such a level that it forms part of who they are.  It becomes a statement of how consumers express their personalities and identities.
  5. Customer purchases are not seen as purely rational.  Buying your products becomes an emotional experience.

The development of relationship marketing, the importance of consumer expectations for customer service and the need to create customer experiences should all play an important part in the development of you marketing plan.

 

What is Business About?

What is the aim of your business?

I would hazard a guess that the response to that question will be dominated by the growth of turnover and profits. That the primary goal will be a financial metric.

This is very much the culture in the United Kingdom.  Company boards are dominated by finance executives with backgrounds in banking and accountancy.  When business journalists report on annual reports, when press releases are drafted, the headline is often about profit growth or an explanation as to why losses were incurred.

However, such a reliance on financial statistics can be misleading and it can mask the true health of a business.  Carillion, the failed construction and public procurement firm posted profits year after year.  When the firm collapsed, it was found that those profits were being generated by dodgy accounting practices, using subcontractors as a line of credit and by bullying subcontractors to accept payments far below the actual value of the contract.  Carillion may have been profitable but its strategy of growth by always being the cheapest option backfired spectacularly.  Contracts were drawn up in such a way that even the shortest delay in the completion of the work made contracts unviable.

Marketers view business differently and although we respect the need for financial prudence and the need for income generation, we also look to other metrics to define the health of a business.

Theodore Levitt, the long-time Professor of Marketing at Harvard University, said:

“The purpose of a business is to create and keep a customer”.

To many business leaders, that sentence ends at the word create: little or no attention is paid to the ‘keep a customer’ bit.

It is true that for a business to survive in the long-term it needs a constant stream of new customers but the business shouldn’t focus solely on new customer acquisition. Supporting and serving your existing customer base is as important.

The United Kingdom is a mature market.  That means that for most businesses to gain new customers, the primary strategy is to take those new customers from your competitors. Market share is gained at the expense of your competitors.

Of course there are exemptions to this rule, particularly if you are dealing with new technology but most major market sectors, from automobiles to food, there will be an existing option available and your task is to take business from that option.

In his book, The Loyalty Effect, Frederick Reichfield looked at the results obtained when businesses lost fewer customers each year.

The book attracted a lot of interest amongst business leaders, until many of them discovered how difficult and costly customer retention can be.  Many of these business leaders thought they could achieve the customer retention targets promoted by Levitt by tweaking existing tactics.  They failed to recognise that increasing customer retention was a strategic issue which involved major changes in the way their companies operated.

Many of these businesses thought they could improve customer retention levels by automating their customer relationship management.  They thought the focus was on reducing the cost of customer retention. They were wrong. Costs were reduced, the return on investment improved, but retention levels remained static.

However, businesses which treated customer retention as a strategic, not a tactical issue, and who gave customer retention priority, showed some startling results.

Where businesses set a target to increase customer retention by 5%:

  •  Credit card businesses increased profits by 120%
  •  Credit insurance, the lowest benefitting sector, showed a profit increase of 20%
  •  Other sectors examined showed a profit increase, on average, of 40%

This clearly showed that in a mature, sophisticated market, customer retention is critical to the generation of increased profits possibly more important than new customer acquisition.

As stated in previous blog entries, customers are fickle.  They will only stay loyal to a business as long as a better offer is unavailable (or what they perceive to be a better offer).  Customers will only stay with a business as long as they believe they are getting better value from that business than from its competitors.  They must get their needs and wants satisfied in a way which answers the question; What’s in it for me?”

For example, when FairTrade promoted their offer as: Protecting the Environment; Trader Rights; and Animal Welfare: returns fell.  But when the promoted their brand as: Healthier Food; Quality Food; and Child Friendly: results improved and the brand improved its customer retention.

So what are the steps involved in developing customer retention:

  1. Constantly add customer value. Products and services cannot be static in a dynamic market.  There needs to be new reasons for customers to buy your product over that of your competitors. that is why washing powders and toothpastes are constantly being reformulated.
  2. You need to know what your customer base wants.  Too many businesses assume they know what customers want and do not ask them.
  3. Satisfy customer needs and wants.  Give customers what they actually need and want not what you think they need or want.
  4. Make sure that customer get more of what they need and want from your businees than from your competitor’s offer.
  5. Make sure customers Know that they will get more of what they need and want from your business than from those of your competitors.

And beware customer value migration.  Consumer needs and wants will drift over time.  Things that were highly valued five years ago, and seen as factors which differentiated your product from that of your competitors, may now be seen as generic and of lower worth.

Developing Customer Retention Strategies

Most senior managers in a business talk of developing customer or brand loyalty.  The principle is that the longer you keep a customer, the more you earn from them.   To survive in the long-term, you need to develop high lifetime value.

However, loyalty is fickle.  Successive academic studies have shown that even the most loyal of customers will switch to a competitor if the believe there is better value on offer.

In this blog we have also discussed that there is no longer a product which is purely defined by the definition goods.  All products have a service element and often the opportunity to differentiate goods from those of competitors and to add distinctive value.

This makes it odd that in some sectors little is done to retain customers and customer service is, quite frankly appalling.  For example how many of us have been stuck on the telephone line for what seems like an age to a bank or utility firms call centre with no ‘call back’ option.

Then there are industries where customer retention seems to be an alien concept and customer lifetime value appears to be the last thought of company directors.  The car insurance industry is one such sector.  The aim appears to be to get consumers to switch every year by only offering discount to new customers.

In business to business markets, where there are often fewer customers, higher purchase costs and complicated contracts, there is often a constant battle to adapt and improve service capabilities and product functionality.  In such markets, customer retention is the key to business growth and survival.

Senior managers shouldn’t confuse customer or brand loyalty with customer retention.  You don’t develop brand loyalty strategies, you develop customer retention strategies.

So how do you develop customer retention:

  1.  Target Customers:  Not all customers are worth building a relationship with over the longer-term.  Some customers are habitual brand switchers.  Some will not generate significant lifetime value; they will not provide sufficient income or their service demands incur excessive costs.  Some customers; disruptive ‘zombies’; may actually disrupt service provision and affect a firm’s relationship with other more profitable customers.  This is a classic marketing segmentation and targeting approach.  You should aim to retain, high value, frequent use, loyalty-prone customer groups who recognise your product as having high service values and utility.  You need to identify those customers  in that group who are most likely to defect to competitors and ask whether they are worth retaining.  You then need to build a value-added strategy to meet those customers demands.  For loyalty-prone customers, it is important to maintain communication bonds.  It is worth remembering the Pareto principle that 80% of turnover comes from 20% of your customer base.
  2. Bonding:  You need various levels of strategy to bond customers and service providers together.  You need to select the  level of strategy most appropriate for the bond with each customer:
    1. Level One:  You bond through financial incentives.  You provide discounts for bulk purchase or you provide a loyalty scheme for repeat purchase.  However, such financial incentives are easily copied by competitors.
    2. Level Two:  You develop more than just price incentives; you build sustainable competitive advantages through the creation of social as well as financial bonds.  Customer service encounters are often also social encounters.  To build social bonds, you require frequent communication.  You need to provide community of service through and entertainment activities.  for some customers you need to make them feel that they are being treated as an individual.  For example, Harley Davidson runs events for their owner’s club; Las Vegas casinos offer ‘High Rollers’ the use of luxury suites and special tables.
    3. Level Three:  You need to develop financial, social and structural bonds.  The relationship should feel more like a partnership than that of a supplier and a customer.  This often involves the creation of bonds which tie the customer to your company.  For example some logistics firms provide customers with packing equipment which only works with the logistics firm’s systems..  Such structural bonds often create formidable barriers against customer switching and new competitors entering the market.
  3. Internal Marketing:  To build high quality service delivery, you need high quality performance from employees.  Recruitment and employee selection is often key to bonding as is employee retention. Retained employees often develop expert knowledge about your products and services.  You need to provide high quality staff training.  You need effective communication channels with your staff and they need to be appropriately motivated.  Staff need to have technical competence but they also must be able to relate to customers.  All your staff, from your receptionist to your engineers, are part-time marketers.
  4. Promise Fulfilment:  You must make credible realistic promises, keep those promises and give your staff the knowledge and equipment to deliver upon them.  this is the keystone of maintaining customer relationships.  They are the cues to match customer expectations and to avoid customer disappointment, dissatisfaction and defection to competitors.  The mantra should be ‘under-promise; over-deliver’.  First impressions count so your first contact with customers is critical. For example, Marriot Hotels have a ‘first ten minutes strategy’ to ensure the relationship with hotel guests gets off on the right foot.
  5. Building Trust:  Customer retention relies on building trust.  Services are intangible.  To ensure retention you need to keep in touch with customers and modify services to respect their views.  This means providing guarantees which inspire confidence and which reduce perceived purchase risk.  Your policies need to be considered fair by consumers.  Staff must recognise required high levels of conduct with consumers.
  6. Service Recovery:  Solving problems can restore customer trust.  Ideally, potential problems should be eliminated before they actually happen; but that isn’t always possible.  If incidents occur, systems should be capable of modification so those incidents cannot be repeated.  This means having a quality assurance system capable of adaptation such as Kaizen or Six Sigma.  Systems should be tracked to identify service failures. Customers should be encouraged to report problems.  Monitor complaints and their resolution.  Follow up on service provision.  Most importantly, train and empower your staff to deal with problems and complaints before they escalate.  Successful resolution of a complaint can actually increase a customer’s positivity about a service provider.  This is called the recovery paradox.  But if the complaint recurs, the increased positivity can dissolve into dissatisfaction and recrimination.  Service recovery can encourage organisational learning and service staff should be motivated to report problems.  Effective service recovery systems can increase customer retention.