The Economics of Customer Service

June 29, 2012 in Essays

I once “fired” a client – let’s call him Jerry – who had paid me more than a million dollars and wanted to keep on paying me more than 20 grand a month. In every aspect but one our relationship was terrific. He was fun to work with. He was a natural-born salesman. And he was a quick study.

The only trouble: He didn’t believe in “customer service.”

Jerry’s business grew because of his management and marketing skills. He kept the overhead low and created compelling advertising campaigns that sold his products at deeply discounted prices.

But he had no interest in getting to know his customers or in helping them in any meaningful way. To him they were an objective means to a profitable end. In fact, he had a sort of disdain for them – as if he felt they were fools for responding to his offers.

Another thing that bothered me was that his products were inexpensively produced (they had to be because of his discounted pricing) and, thus, relatively inferior in quality.

I tried to convince him that this may have been a valid approach when he was breaking into the market – but he had to gradually improve his products if he wanted to be successful over time.

“Consumers are very aware of price,” I told him. “But most customers are looking for long-term relationships with the people they buy from. They may give your product a try because of its low price, but they won’t stay with you unless they are happy with its quality.”

He didn’t get that.

So I said, “Think about all the purchases you’ve made in your life. I’m sure you shopped price when, for example, you went looking for a new car. But I’ll bet a year or two later, though you may have remembered what you paid for the car… what really mattered to you was how well it held up. And how well the dealer treated you.”

He laughed at that. “Maybe. But I’m still always concerned about price.”

Then I reminded him of Joey, the kid he’d hired to work on his phone system. He hired Joey because he was willing to work for $20 an hour, while more experienced techies were charging three times that much. “You were happy with Joey when he started. But when it looked like it would take forever for him to get the job done, you fired him and hired someone more expensive.”

He gave me that. But I couldn’t get him to budge on the customer service issue. Meanwhile, the market he was in was getting more competitive. Product and service quality overall was improving. But not his.

I could see the writing on the wall. And that’s when I “fired” him.

Thirty years ago, I worked for a brilliant businessman who had, more or less, the same way of thinking as Jerry.

This man taught me tons about how to bring in new customers with cheap pricing and strong promises. He also, inadvertently, taught me the problems with running a business that way. We were able to launch one successful product after another – and make good money from those launches. But we never developed a community of really happy and loyal customers (the way Apple has, for example), so we always had to keep selling our products to new prospects.
Excellence in marketing will generate vital cash flow. And having the ability to spot and seize consumer trends will help your business grow. Being a good negotiator will keep your costs low, and excellence in management will limit costly mistakes.

You should acquire all of those skills if you want to build a profitable business. But to develop a business that will grow more easily as the years go by, by you must devote yourself unrestrictedly to providing your customers not only with quality products but also excellent customer service.

By “excellent customer service,” I don’t mean just requiring your reps to pick up the phone on the second ring. I mean having a genuine commitment to developing a long-term relationship with your customers, one that optimizes your profits by optimizing their experiences with you.

The Challenge for Start-Up Entrepreneurs

Most businesspeople believe in excellent customer service – at least in theory. The problem is that it is expensive. And when you are starting a business, you may feel you can’t afford that extra cost.

But my experience has taught me that you can’t afford not to provide excellent service.

Think about the service you generally get from the airlines. The way they herd you through the airport and into a plane. The way they delay or change flights. The way the flight attendants treat you – like a traveling prisoner. Customer service in the airline industry is so bad it can’t be called customer service at all.

This brings me to an important point. If you are going to commit your business to excellence, you will sooner or later have to charge more money to compensate for the additional costs. And when you do raise your prices, you will get complaints from some of your customers. Many of them will, nevertheless, stay with you because they value the quality they get for their money. Others will leave in search of the cheapest option.

Don’t worry about the customers who leave. They are not the ones you want to keep. To build a big, profitable, long-term business, you have to keep upgrading your customers along with your products and service.

What you are aiming for is not the most customers you can possibly have but a good number of customers who appreciate and are willing to pay for the excellence you will continue to give them. And you will do that by following a rule that I call “incremental augmentation.

The Rule of Incremental Augmentation

The rule of incremental augmentation states that you must consistently improve your products and services in every way. You don’t have to begin with the best overall product/service in the marketplace. (If it’s a competitive market and you are a beginner, it is doubtful that you can.) But you do have to find one aspect of your product/service that you can excel at. Market that. And after it catches on, go on to something else that your customers will appreciate. Never allow yourself to think that your product/service is as good as it needs to be.

Zappos, for example, got a great foothold in their market by selling brand-name shoes at good prices. But they also excelled at one aspect of customer service: delivery. For Zappos’ customers, standard shipping is free in the United States. (Returns ship free, as well.) Not only that, CEO Tony Hsieh made it company policy to regularly give good customers free shipping upgrades.

Zappos has been so successful that Hsieh became a cultural hero. And he wrote a bestselling book – Delivering Happiness – which explained how his ongoing commitment to excellence was so critical to the company’s success.

If Hsieh ever decides that the standard of excellence he has established is “enough,” Zappos will be in trouble. His competitors are very much aware of how high he’s raised the bar. They will one day meet it. And when they do, if Hsieh is smart (and he is), Zappos will have already set the bar higher.

Implementing Excellence

So… how do you put incremental augmentation to work for your business?I encourage my clients to do it by spending a few days outside the office each year in order to take an objective look at their businesses – sometimes with the help of consultants or even customers. They identify the aspects of product quality and customer service that they do well and those that they don’t do well. Then they brainstorm to “imagine” how they could improve both the things they do best and the things they do badly.

Think about your business. What is your greatest strength in terms of product quality and customer service? What is your greatest weakness?
How could you make one substantial improvement in each of those categories by the end of the year?
One significant improvement in your greatest strength and one significant improvement in your greatest weakness – that’s plenty to accomplish in one year.

Make the improvement and advertise it. Sell it to your customers and sell it to your prospects. Make the added value clear. And charge more for it. But explain why you’re doing it.

Yes, some customers will balk at the slightly higher pricing. But your best customers – the ones who will make your business soar – will be happy to pay.

Post Script

I learned about the importance of customer service because I wanted to believe in it. I never liked the way I felt when I was in the business of selling cheaply made products. I wanted to think I could apply my skills to something better, and so I was able to make the commitment.

Jerry – the client I told you about at the beginning of this essay – wasn’t willing to make that commitment.

Consumers can be divided into two camps: people who are happy to pay a fair price and the inveterate bargain hunters.

The former group looks for long-term, trusting relationships with the businesses they deal with. The latter group just looks for a bargain.

Because Jerry was a bargain hunter himself, he couldn’t believe that anyone would be any different. So all my arguments about upgrading the quality of his products and services rang false.

As I said, you can get a business started by discounting. But if you stay in that market, you will have a hard time getting any traction with your business. By sticking exclusively to bargain basement prices you will attract primarily bargain hunters. And they will quit you as quickly as they came to you.

A discounted offer is like a tightly knotted fishnet. Cast it into the ocean and it will bring up lots of fish. But most of those fish will be too small to eat. Throw away the little guys while you weave yourself a better net. Then the really good fishing will be easy.

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