(Originally by: Don P., Founding Partner, Peppers & Rogers Group at TeleTech)
Let’s face it: Good customer service is not always beneficial to a company’s bottom line. Sometimes it costs more than it’s really worth.
Better service encourages customers to show more loyalty, come back more often, spend more, and refer their friends, all of which will benefit future sales. But these future benefits must be weighed against the costs of providing that better service to begin with. Good service isn’t free, so the question is how much are you willing to spend, to secure how much increase in future sales?
The difficulty most companies come up against when trying to assess the business case for better customer service comes from the fact that while the increased cost of better service can easily be measured, the benefits it will generate occur in the future, and can only be guessed at.
If you’ve sometimes struggled with this issue, here are some ideas for assessing the business case for better service:
Run an A/B Test
Before undertaking a costly improvement in service across your whole customer base, test it on some statistically representative sample of customers. Then measure their future transactions, compared to those who weren’t given the better service. Easy peasy.
Running a test is straightforward, but you’d be surprised how few managers actually employ A/B testing to make better business decisions.
Testing a service improvement against a baseline of normal service requires you to run the test for a long enough period to be able to estimate the actual future behavior of the customers exposed to it. For instance, a few years ago when a book club decided that making “welcome calls” to new customers tended to increase first-year sales by 8% and annual renewals by 6%, they had to track customer behaviors for at least a year following the calls to find this out.
In some situations, it won’t be practical to run an A/B test, because you can’t set up a statistically valid control population. To run a test your customers have to be individually addressable. That’s why you can’t really test a broadcast radio or television ad, for instance.
Use “Return on Customer” as a Metric
If you calculate, track, and fully analyze your customer lifetime values over time, you should eventually be able to measure your actual Return on Customer for various service initiatives. Return on Customer (ROC) differs from return on investment (ROI) because it uses customer lifetime values in the denominator of the fraction, rather than total dollars invested. And at the enterprise level, ROC is mathematically equivalent to Total Shareholder Return.
Companies that engage in continuous predictive modeling of customer behaviors (as some of the more sophisticated telecom and financial services firms do) will be able, over time, to identify and quantify the “leading indicators” of lifetime value change. For instance, you may find that when NPS (Net Promoter Score) or some other survey-based gauge of customer attitude increases by X points, it predicts an increase of $Y in customer lifetime values. This kind of insight – which can only be developed over years of tracking individual customer behaviors – would allow you to estimate the future financial benefit of a service improvement by measuring the current improvement in surveyed customer attitudes. (For more about the benefits and limitations of this metric, see Martha Rogers’ and my book on the subject.)
Use Non-Financial Metrics
Obviously, you can’t make a “business case” without using financial metrics, but if your company is forward-thinking enough to realize that the financial metrics produced by most businesses today are woefully inadequate for capturing all the value-creating and value-destroying actions that any business engages in, then you might already be tracking a number of non-financial metrics, and using them to assess the performance of various departments or initiatives.
Your customer service center, for instance, might be evaluated not just on the average cost or time required to handle an incoming call, but on the percentage of inquiries completely answered on a single call, or perhaps on the level of customer satisfaction measured. These would be non-financial metrics.
One of the services our parent company, TeleTech, offers is handling inbound customer service calls for large enterprise clients. And one of our largest customer service clients is a financial services company with an excellent reputation for customer satisfaction and loyalty. Our contract with this client provides a financial benefit to us when the measured NPS for the calls we handle stays above a certain level. This client is explicitly attaching a financial value to a non-financial metric. (If I told you the client’s name I’d have to shoot you!)
Another client, a very well-known IT company with an excellent customer reputation, asks us to handle a portion of their sales calls. But the “bonus” we earn in our contract with this client isn’t based on the value of the sales we make. Instead, they do a post-call satisfaction survey of their customers, and our contract bonus is based solely on the level of customer satisfaction generated!
Do either of these clients actually know how much financial benefit is involved in a high NPS or high customer satisfaction score? No. But they are each forward-thinking enough to know that just because you can’t measure something doesn’t mean it’s not important.
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