Recently I came across a very intriguingly titled article in the Harvard Business Review – Why customer service is so bad? Because it is profitable. The article extensively discussed how an organisation can deliver bad service and still have a positive impact on profitability. The article primarily looked at brands with a high market share. There are a few interesting observations that the article elucidates, which I believe and so will you, isn’t restricted to the United States of America alone. Be it a bad airline service or a cumbersome process to get through to a customer service representative, these are universal problems that customers face in any competitive economy where cost-effectiveness and profit considerations battle with great customer service.
The article does discuss a very pertinent issue of what we call bad profits in the CX world. It speaks of how certain brands purposefully bring in a hierarchical structure and make customer service so cumbersome that a customer can’t be bothered spending time waiting for a refund or a resolution. By making it difficult for a customer to obtain restitution they save money which positively impacts their profitability. While the article seems to support this with the signing off sentiment that this frustrating hierarchical redressal system can help keep lying or troublesome customers at bay, there are a few key economic elements that it has just not factored in.
Let’s go back and look at the article’s first point of debate – that bad customer service does not affect profitability for brands with a high market share. While I’ve discussed this extensively in my recent blog post Does your customer have a seat at the table in your organisation to drive good profits?, I reiterate it here in light of this article. Every Net Promoter program divides its customers into three buckets – Promoters, Passives and Detractors. Once bucketed, the number of customers in each bucket is what determines their transactional value, tying it to the brand’s customer lifetime value. Simplistically, Promoters buy more products/services from you, stay longer and importantly give you positive word of mouth. They are the most effective sales and marketing channel available.
Let’s look at a simple and approximate calculation of a brands lifetime value:
- If the customer retention rate of a brand is 80%, then it translates into an average life of 5 years.
- If the brand improves its customer retention rate by 10% (to 90%), then the customer lifetime doubles to 10 years, which is a significant difference.
- In the third scenario, if the brand’s customer retention rate drops to 60%, then the customer lifetime value comes down to 2.5 years.
In our studies, we have found that word of mouth typically makes up between 20 to 30 per cent of sales, and in some cases even more.
Our studies also indicate that if a customer hears just one negative comment about a brand, then they need to hear on average five positive comments before they will consider the brand. So as much as Promoters spread positive word of mouth, Detractors block prospects from becoming your customers.
Finally, our studies in the banking sector clearly indicate that Promoters buy 50 per cent more products from their bank in comparison to Detractors.
This means the Harvard Business Review article doesn’t take into consideration factors such as word of mouth recommendation by Promoters and Detractors and their role in building or breaking a brand’s customer base over a period of time. It does not factor customer lifetime loyalty impacts. To understand this better, let me share an example.
A cashier at a supermarket is especially rude to a customer. When confronted by a colleague, he states that the customer only purchased goods worth $100 a week, so even if the brand lost him it wouldn’t hurt. To this his colleague explained that if the customer spent $100 a week, it was about $5200 a year, and over $25,000 over a period of five years. Add to this the customer’s positive recommendation of the supermarket’s products and services, thus bringing in more buyers. This adds value via increased customer retention and low cost acquisition channel for the super market.
In summary, the Harvard Business Review article is limited in the sense that it only considers the impact of not paying restitution on profitability, but not the impact of loyalty based on customer lifetime value, word of mouth and a tendency to buy more products.
What the HBR article states about the impact of customer restitution on profitability is definitely relevant in instances of limited to no competition. In the case of a monopoly where the customer service is bad or in a duopoly where both service providers are equally bad, customers will rant and rave only due to lack of better options. In such a scenario, the lifetime value of a customer becomes infinite until competition steps in with a better service and disrupts the market, such as Uber.
Another scenario where the article may apply is where customer service alone is not the most important factor. As an example, a telecom company may have a reputation for bad customer service, but may also have the largest or fastest network. An airline may offer terrible service, but it may have the most number of flights available. A bank may have a reputation for being safe and secure due to its size, though its customer service is pathetic.
If you want to truly create engaged customers you need to think beyond product or service functionality and even pricing. Having a unique customer value proposition is key as it is the happy experiences that are worthy of recommendation, not ones that are bland and boring.
So irrespective of whether a brand is out there with a fairly large market share just because of its cost-effective pricing or great product, unless the company takes a holistic approach to keeping customers engaged with a strong value proposition and providing great experiences, it will continue to be a battle of good profits vs. bad profits. It also opens doors wide for a disruptor to show up – and then it’s game over. And this, my dear reader, is the determining factor of a brand’s life.