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.



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.


Customer Service – Why it Matters

I have spent the vast majority of my career working in the field of consumer protection and trading standards.  As a result I have dealt with literally thousands of consumer complaints relating to poor customer service.

Marketing is about developing a customer-focused organisation.  Therefore developing strong customer service capabilities is crucial to commercial success.

Customer service is critical to the development of successful strategic marketing processes.  The development of strong customer service policies and procedures are critical to the development of a strong brand image.

We live in a world where the core of a product offering is becoming increasingly commoditised.  If you are seeking to add value to your core products and you wish to differentiate your products from those of your competitors, product halo elements such as the development of differentiated and strong service elements is a prominent option.

Previously in this blog I have discussed the work of Treacy and Wiersema.  In particular, the three potential strategies for excellence, Product focus, Managerial Excellence and Customer Intimacy.  Managerial excellence is an inward looking strategy and developing excellence in product focus can be expensive and risky.  Therefore for many firms, particularly SMEs, the development of customer intimacy through the development of excellent customer service provision is critical to success and growth.  Developing excellence in customer service is critical to the creation of customer intimacy.

In his book, Marketing Plans, Professor Malcolm Macdonald describes the service profits chain; how the development of strong customer service strategies can be central to the growth of a firm’s profitability:

  1.  Employee Satisfaction:  Satisfied employees provide better service quality. If you have satisfied employees, you have less staff turnover.  This means your staff are better trained and more knowledgeable about your products and services.  Satisfied employees are more productive.  Satisfied employees have a greater commitment to the company and they present themselves better.
  2. Improved Service Quality:  Satisfied employees provide better quality service which leads to greater customer loyalty.
  3. Service Quality:  If you have satisfied employees you have better service quality.  Customers exhibit greater satisfaction with your brand.  They buy more.  They buy more often.  They are retained for longer.  The exhibit greater loyalty.
  4. Customer Retention:  Increased customer loyalty leads to greater customer retention.  This creates an opportunity to increase profitability.  Loyal customers are less likely to switch to your competitors simply because of a change in price.  They are willing to spend more as they have familiarity with your products and processes.  Loyal customers cost less to serve.  They can offer opportunities to lower marketing costs through lower promotional budgets than those required to gain new customers.  The longer a customer stays with your firm, the greater their lifetime value.  Customer retention also creates greater shareholder value through improved revenues and reduction in risk.
  5. Positive Feedback Loop:  Satisfied customers treat staff better.  They develop a positive relationship with your employees and with your brand.  There is a positive correlation between customer satisfaction and employee satisfaction.

I see a parallel between the positive feedback loop of the service profit chain and the feedback loop of the balanced scorecard developed by Kaplan and Norton. The theory of the balanced scorecard is that improved organisational learning leads to better internal processes; better internal processes leads to better customer service; better customer service leads to improved financial performance and in turn, better financial performance means that you can invest more in improving your organisational learning and development.

Macdonald outlines five dimensions of service quality:

  1. Tangibility:  This is closely linked to the physical evidence elements of your marketing mix.  Good service quality is linked to the physical equipment used by customers and to the appearance of your staff.
  2. Reliability:  Quality service provision must be performed dependably and accurately.  It must be accurately repeated.
  3. Responsiveness:  You must show willingness to help your customers and you must serve their service needs promptly.
  4. Assurance:  Your staff must be knowledgeable and courteous.  They must have the ability to inspire confidence amongst your customers.
  5. Empathy:  Your employees must care about customers concerns and offer them individual attention.  They must show that customers concerns are important to them.

These five dimensions of service quality are critical if you are following the principles of SERVQUAL.

Today, it is often said that consumers, in particular the incorrectly defined market segment ‘millennials’, buy experiences not goods or services.  Consumers now want products which are engaging, robust, compelling and memorable.  Customer experience goes beyond the development of service.  To develop quality experiences, you need to go beyond exceptional service quality.  You need to recognise:

  1.  Usage Processes:  This is how customers access  and use your goods and services. Usage processes influence how your customers think about your firm.  Their concept of product value develops through their use of your goods and services not at the factory gate.
  2. Peer to Peer Interactions:  The interactions between your customers are important.  They are an important part of developing robust experiences.
  3. Relationships:  Too many satisfaction/service quality services erroneously focus on individual customer transactions and encounters.  they do not examine longer term relationships over time and across multiple transactions.
  4. Brand Image/Communication:  People don’t own an iPhone or a BMW because of their functionality.  They own them because those products make a statement about the owner.
  5. Emotions:  Customers are not entirely rational.  Emotions have a big effect on their relationship with a firm and their rating of the experience you offer.

When developing a marketing plan, you need to be cognisant of customer service needs and concerns in each of the above areas.