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The True Cost of Poor Customer Service to Your Business

Jan 06, 2022

Executive Overview

Estimates of the cost of poor customer service range from $75 billion to $1.6 trillion per year. This astounding figure is the result of a myriad of problems including not understanding what the customer desires, cost-cutting strategies, sacrificing customer satisfaction for growth, the dehumanizing (computerization) of customer service, and multiple other reasons.

Organizations can create a significant competitive advantage by investing in offering customers superior customer service. This can be achieved through:

  • enhanced understanding of the voice of the customer
  • designing processes
  • products and services that take into account the voice of the customer and customer service
  • ensuring processes that are customer-facing are robust and repeatable
  • note focusing exclusively on metrics that drive poor customer service (e.g., cost)
  • focusing on the most profitable customers and turning them into advocates for your organization
  • investing in customer service personnel and infrastructure
  • plus other possible solutions

Providing high-quality customer service can provide organizations a significant competitive advantage. What is required is that leaders recognize the potential to differentiate their organizations and make the investments necessary to leverage this competitive advantage and make their organizations more profitable and more valuable.

If you would like to discuss how Midlands Technical College (MTC) Business Solutions can help you reduce the cost of poor customer service, please contact us at corporatetraining@midlandstech.edu or 803-691-3907.

Introduction

Most organizations grossly underestimate the cost of poor customer service. The true cost is $75 billion annually, according to a 2018 report by NewVoiceMedia, a 20% increase since 2016. Accenture, the prominent consulting firm, estimated in its 11th annual Global Consumer Pulse Research report that the cost of poor customer service due to customer switching to other providers could be as high as $1.6 trillion! Furthermore, research shows that acquiring a new customer costs at least five times as much as retaining a current customer. Given these figures, it is shocking that more is not being done to improve customer satisfaction and loyalty.

Indicative of the problem is the disconnect between organizational leadership and customers. Bain Consulting reports that their survey on customer service showed “that 80% of firms believed they delivered a superior experience to their customers.” However, when customers were asked, only 8% agreed that they were receiving a superior experience. There is clearly a huge disconnect between organizational and customer perception as it related to customer satisfaction.

Why is customer service so poor?

There are several reasons that customer service in the United States is so poor. It is more than just the disconnect between customers and the executive offices noted above.

  • Companies don’t understand what the customer wants. In other words, they don’t understand the voice of the customer (customer needs and wants). In some large organizations, such as consumer products firms, much effort and cost is expended to understand market segments, the voice of the customer and their value propositions. Even then, they often rely on surveys and focus on aggregated numbers rather than directly talking to customers or observing them. They lose touch with the customer. Smaller organizations don’t have such resources and often struggle with how to segment the market and obtain robust and updated current voice of the customer knowledge.

  • Organizations sometimes sacrifice customer service for growth. For-profit organizations face a challenging dilemma of having high customer satisfaction and loyalty and growing revenue and profits. For example, to support revenue growth, businesses often increase fees (for example, baggage fees with many airlines, ATM transaction fees) which simultaneously decrease customer satisfaction and loyalty.

  • Organizations often sacrifice customer service for cost savings. When was the last time you called customer service and did not have to fight through a computer system to get to a human being? Yes, this results in lower costs, but it also dramatically increases customer frustration and decreases satisfaction. Over 80% of consumers prefer to talk to a person rather than deal with a computer and they report a reduction in customer satisfaction when forced to use a computerized system. Another example is self-checkouts in grocery stores. Yes, staffing levels and costs are reduced, but a significant proportion of customers report a decline in customer satisfaction when using them.

  • Customer-facing processes are not repeatable and robust. For firms to be able to consistently offer high levels of customer service, they must have processes that are designed to do so in a repeatable fashion. All too often, organizations do not value or invest in the customer-facing processes. For example, call center employees are often viewed as a necessary evil (cost) and are given minimal training, and even viewed as disposable. Likewise supporting infrastructure such as IT systems may be inadequate due to underfunding.

Why is the cost of poor customer service so high?

As was noted earlier, the cost of poor customer service is estimated at least $75 billion per year and is increasing rapidly. What are some of the elements that are causing the cost to increase far more rapidly than the rate of growth in the economy?

  • Today as always, customers remember and communicate bad experiences far more than they communicate good. It is bad enough that approximately 50% of customers will never do business with a company again based on a single bad experience. However, the research shows that roughly 95% of unhappy customers will tell at least one person about their experience.

  • Moreover, the advent of social media has changed the landscape with regard to customer service and an organization’s reputation. Before social media, people threw around statistics such as “customers tell seven times more people about bad experiences than good experiences. Those numbers no longer apply. Even a single bad review can reach hundreds, thousands, or tens of thousands of actual or potential customers. And research shows that even a single bad review seen by a potential customer is sufficient for over 30% of people to consider not using a business’ product or service. And according to a ReviewTracker survey, 94 percent of people say they were convinced to avoid a business by an online review. Ask yourself a simple question “When was the last time you purchased a product online that was not rated at least four out of five stars?” and you will realize the impact of a one-star review.

  • There are an increasing number of options for customers due both to globalization and technology. This makes it increasingly difficult to retain customers for many types of business. The plight of brick-and-mortar retailers exemplifies the increasing challenge in retaining customers. Any small slip in customer service can result in losing a customer overnight.

What can be done to improve customer service?

  • Talk to customers and let them tell you what they want. Don’t assume. There are many mechanisms to do this, but not all are equally effective and getting good voice of the customer data can be challenging in many types of business. Possible avenues include one-on-one interviews, focus groups and surveys. It is also necessary to remember that the customer’s needs and wants are changing at an increasing rate due to social media, the proliferation of options and other causal factors. This means that voice of the customer data must be refreshed on an increasingly rapid basis. Also, it is best when leaders engage with customers on a periodic basis and don’t delegate the “burdensome task” of talking with customers to lower-level employees. Ensure that leaders know what customer’s are thinking so that they can guide the business appropriately.

  • React to the voice of the customer. Keep the customer in mind when designing new process, products, and services. All too often, processes are designed thinking about things like cost reduction, capacity increases or other business rationales. Using design methodologies such as design for six sigma (DFSS) and Agile helps to ensure that the voice of the customer is captured and integrated into process, service, and product design. Capturing the voice of the customer is of no value if it is not put to use and integrated into business processes, products, and services.

  • Treat the most profitable customers with exceptional service. The goal of this is two-fold. First, it is desired to retain these customers. They are the core of the business in terms of profitability. Spend the money in enhancing their experience so you retain their loyalty and their business. Secondly, you want them to function as advocates for your business to those that they come into contact with. An example of this is the airline frequent flyer programs. Those that fly most frequently and spend the most money are treated differently by the airlines. For example, if one spends over $100,000 per year on airfare with a particular airline, one is put into an invitation-only level of service. Services include a special customer service hotline, guaranteed upgrades to first or business class and other unexpected services. For example, if a person has a tight connection, an agent meets the passenger at the door of the aircraft and drives them over the tarmac to the connecting flight in a luxury vehicle and directly onto the plane without having to enter the airport. (As one who has experienced such service thanks to international business travel, I can testify that it certainly enhanced customer loyalty.)

  • Don’t just focus on the core product or service. Most companies focus almost exclusively on the core product (e.g., car, washing machine, clothing) or service (e.g., medical diagnosis, financial transaction, oil change). Certainly, one wants a product or service that is of high quality and will maximize customer satisfaction. However, only a subset, also focus on what could be called non-core processes/services. A key non-core process is customer service, technical service, and other customer-related functions. Such processes are often treated as second-tier processes and not given the time and resources that they deserve and, quite frankly, warrant. Often, high-quality customer service can overcome shortcomings in the core product or service. There are numerous companies that recognize this fact and invest in high-quality customer service. There are many examples of firms that evaluate customer satisfaction before and after a customer experiences a problem. These organizations have data that show after a problem was experienced, customer satisfaction was actually higher. It was because of the way the problem was handled by the non-core process of customer service.

  • Organizations need to operate as a synergistic whole (a value stream) to serve customers. This requires breaking down the barriers that exist between departments in many organizations, particularly large ones. All too often, departmental silos are concerned about their departmental performance, rather than focusing on serving the customer. This requires creating systemic rather than departmental metrics, evolving the organizational culture, etc.

  • Create robust, repeatable customer-facing (touch the customer) processes. Value, train and empower the employees that are customer-facing. Equip them with the tools to provide exemplary customer service and differentiate your organization. Stop treating the customer service function as a second-class function and recognize the value and competitive advantage this function can provide in the marketplace. Such investment may take the form of IT infrastructure or employee training, for example.

  • Provide human interaction when serving a customer or dealing with a customer issue. Accenture reports that 83% of consumers would not have switched providers if companies had provided better live or in-person customer service. Companies need to reconsider how they balance customer satisfaction with cost savings through the use of automation and technology.

  • Ensure key metrics don’t encourage behavior that negatively impacts customer satisfaction. All too often, key metrics are focused on things such as financial results, operational results, etc. While no one is suggesting that these types of metrics be ignored, they often work in opposition to customer satisfaction.

Providing high-quality customer service can provide the organization’s a significant competitive advantage. What is required is that leaders recognize the potential to differentiate their organizations and make the investments necessary to leverage this competitive advantage and make their organizations more profitable and more valuable.

How can Midlands Technical College support your customer service experts?

MTC offers a wide array of consulting and training services to organizations of all types including public and private corporations, governmental agencies, and non-profits, of all sizes. Our team has worked with organizations ranging from three to over 100,000 employees. If you would like to discuss how MTC can help you reduce the cost of poor customer service, please contact us at corporatetraining@midlandstech.edu or 803-691-3907.