The financial and economic impact of service
Virtually all companies hunger evidence and tools to ascertain and monitor the payoff and payback of new investment in service. Many managers still see service and service quality as costs rather than as contributors to profit, partly because of the difficulty involved in tracing the link between service and financial returns. Determining the financial impact of service parallels the age-old search for the connection between advertising and sales.
Service quality’s result’s — like advertising’s results — are cumulative, and therefore evidence of the link may not come immediately or even quickly after investments. And like advertising, service quality is one of many variables — among them pricing, advertising, efficiency, and image — that simultaneously influence profits.
Table Of Content
- Service and profitability
- Defensive marketing effects of service
- The key drivers of service quality, customer retention, and profits
- Company performs measurement
- Summary
1. Service and profitability
Sales have traditionally been a numbers game. A better profit margin was just a matter of selling as many units as possible. However, modern customers want to have a deeper relationship with businesses. This is especially true of younger customers such as millennial’s.
Every customer knows how frustrating calling a company can be. This is especially true if they must be transferred to multiple departments and workers. Dedicated customer service can provide consistency for the customer. This means fewer transfers and quicker resolution of problems. Customer service can also use different remote access applications to provide seamless technical support. This establishes your business as one that cares about customer satisfaction. Satisfied customers are much likelier to return to do more business. This helps build your brand and grow your profits. Even for small and medium-sized businesses in Canada (SMBs), customer service probably feels expensive at times. There’s equipment and applications you need to acquire, people you have to train, and other resources that are all relegated to dealing with unexpected but desperately urgent needs from your customers.
2. Defensive marketing effects of service
Defensive marketing strategies refer to the actions of a market leader to protect its market share, profitability, product positioning, and mind share against an emerging competitor. If not undertaken, some amount of customers will leave the established business in favor of the competitor.
New customers are often unprofitable for a period of time after acquisition. In the insurance industry, for example, the insurer does not typically recover selling costs until the third or fourth year of the relationship. Capturing customer from other companies also an expensive proposition.
The money company makes from retention comes from four sources:
- Costs
- Volume of purchases
- Price premium
- Word-of-mouth communication
The defender may own the perception of “heritage” in the customer’s mind — but may also be stuck with that label despite massive advertising outlays aimed at changing it.
Lower Cost: The market leader may have to reduce its own prices (and profits) in order to prevent customers from defecting to the competition. This is particularly important when the threat comes from a lower-priced product. However, this strategy can also be used against a similarly priced product advertising some other feature, as long as the savings in price are perceived by customers to be of more value than that feature or quality.
Volume of purchase: Customer who are satisfied with a company’s service are likely in increase the amount of money they spend with that company or the types of service offered. A customer satisfied with broker’s services, for example, will likely invest more money when it becomes available.
Price premium: Most of the service quality leader in industry command higher prices than their competitors: FedEx collects more for overnight delivery than the U.S Postal Service, Hertz rental car cost more than Avis cars, and staying at the Ritz-Carlton is a more expensive undertaking than staying at the Hyatt. Therefore, offering high service quality often pays for itself in price increase.
Word-of-mouth Communication: Because word-o-mouth communication is considered more credible than other source of information, the best type of promotion for a service may come from other customers who advocated the service provided by the company
3. The key drivers of service quality, customer retention, and profits
Understanding the relationship between overall service quality and profitability is important, but it is perhaps more useful to managers to identify specific drivers of service quality that most relate to profitability. Doing so will help firms understand what aspects of service quality to change to influence the relationship and, therefore, where to invest resource.
Most evidence for this issue has come from examining the effect of specific aspects of service on overall service quality, customer satisfaction, and purchase intentions rather than on financial outcome such are retention or profitability.
4. Company performs measurement
Traditionally, organization have measured their performance almost completely on the basis of financial indicators such as profit, sales, and return on investment. This sort-term approach leads companies to emphasize financials to the exclusion of other performance indicators. Today’s corporate strategists recognition came when many companies strong financial records deteriorate because of unnoticed decline in operational processes, quality, or customer satisfaction.
- Changes to financial measurement: One way that service leaders are changing financial measurement is to calibrate the defensive effect of retaining and losing customers. The monetary value of retaining customer can be projected through the use of average revenues over the lifetime
- Customer perceptual measures: Customer perceptual measures are leading indicators of financial performance. Customers who are not happy with the company will defect and will tell others about their dissatisfaction. Perceptual measures reflect customer beliefs and feelings about the company and its product and services and can predict how the customer can behave in future.
- Operational measures: Operational measures involve the translation of customer perceptual measures into the standard or actions that must be set internally to meet customer’s expectation. Although virtually all companies count or calculate operational measures in some form, the balanced scorecard requires that these measures stem from the business process that have the greatest effect on customer satisfaction.
- Innovation and learning: The final area of measures involve the translation of customer perceptual measures into the standards or actions that must be set internally to meet customer’s expectation. Although virtually all companies count or calculate operational measures in some form, the balanced scorecard requires that these measures stem from the business processes that have the greatest effect on customer satisfaction.
- Effective non-financial performance measurement: According to field research conducted in 60 companies and survey responses from 297 senior executives, many companies do not identify and act on the correct non-financial measures. One example involves a bank that all customers, including those who banked by phone or ATM, a policy that caused some branch managers to offer free food and drinks in order to increase their score. According to the authors of the study, companies make four major mistakes:
- Not linking measures to strategy
- Not validating the links
- Not setting the right performance strategy
- Measuring incorrectly
“In business, the idea of measuring what you are doing, picking the measurements that count like customer satisfaction and performance… you thrive on that.” — Bill Gates
4. Summary
This chapter is divided into five sections, each of which assesses the evidence and identifies what is currently know about the relationship between service and profitability. The chapter used a conceptual framework to link all the variable in these topics
- The direct relationship between service and profits
- Offensive effect of service quality, the ability to obtain new customers
- Defensive effect of service quality, the ability to retain existing customers
- The relationship between service quality and purchase intentions
- Key drivers of service quality, customer retention, and profits
Considerable progress has been made in the investigation of service, quality, profitability, and the economics worth of customer, but managers are still lacking many of the answers that would help them make information decisions above the service quality investment.
