Why Customer Service Matters to Revenue Growth
For as long as businesses have existed, the vast majority have claimed a focus on satisfying their customers. Unfortunately, in most cases, these pronouncements are little more than lip service. It’s not that the firm’s managers don’t believe that customer satisfaction is important or don’t think that their firm has the appropriate focus, it’s that most firms fail to take the serious steps to create what Ken Blanchard famously referred to as “Raving Fans”.
In Raving Fans, Blanchard draws the important distinction between merely satisfied customers and raving fans. The distinction is that satisfied customers will not be proactive advocates and would consider other suppliers during the next purchasing decision. Blanchard advocates for exceeding your customer service promise every time you deal with the customer. “Exceeding” means over delivering and “every time” implies consistency.
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Let’s talk about two ways that companies can meet these goals. First, is my personal experience with Tony the Trash Guy. We were finishing our basement after many years and, since it had been many years, we had accumulated all kinds of stuff that needed to be discarded. I looked in the Yellow Pages for companies that might come and remove far more than the usual amount of trash. After innumerable phone calls to unanswered numbers and voicemail messages, I was becoming quite discouraged. Unlike all the others Tony returned my call within 5 min. He asked the requisite questions about how much he needed to haul away and asked if we would be home at 4 PM that afternoon. To my surprise, Tony showed up almost precisely at 4 PM. I had moved most of the trash to the garage, but he willingly helped move the heavier trash from the basement. At this point he had most certainly exceeded my already modest expectations. But, it didn’t stop there. He swept up the garage when he was done and left it far cleaner than it had been for some time. Finally, I received a handwritten thank you note in the mail a few days later. This was my first experience as a customer and he clearly exceeded any and all expectations. I used Tony again several times in the future, but more importantly enthusiastically recommended him to quite a few other potential customers.
A second, and often overlooked, opportunity is what companies do when problems arise. Companies that meet, or perhaps even slightly exceed initial expectations, may be satisfied customers, but they’re not yet raving fans. An enterprise software company with Fortune 50 customers had for some time at least met expectations in providing an important supply chain application. When the newest release had bugs that caused critical supply interruptions, the future of the company was at risk. Senior management immediately met with each customer, assigned senior staff to work on site to keep operations going with workarounds and at considerable expense resolved all software issues in a very short period of time. As a result customer satisfaction improved substantially from where it had been prior to the issues.
While these problems were dramatic, customer losses are rarely the result of such obvious issues. A well-known study shows that the primary reason for customer defections is a poor attitude or indifference on the part of the provider.
Why Customers Leave
Moves, merger etc. 8%
Product dissatisfaction 14%
Attitude or indifference by provider 68%
While the previous example may have created significant negative issues for the company, improved customer satisfaction has substantial measurable results for all businesses. A 2006 University of Michigan study showed a significant relationship between customer satisfaction and financial success. A portfolio of public companies that was managed based on changes in the American Customer Satisfaction Index (ACS I) substantially outperformed the S&P over a five-year period.
Likewise, a study by Bain showed that a 10% increase in customer retention results in a 30% increase in the value of the firm. A Gartner study found that a 5% increase in retention resulted in an increase in profits of between 25% to 125%. A 2% increase in retention was found to be the equivalent of a 10% reduction in cost.
New sales are also significantly impacted by improved customer satisfaction. The probability of a sale to an existing customer is 3 to 5 times higher than to a new customer. At the same time the cost of generating a new sale averages five times more than retaining an existing customer. On average, happy customers tell 4 to 5 others while unhappy customers tell 9 to 12 others.
As Ken Blanchard has argued, the value of raving fans is considerable. Companies that take customer satisfaction seriously, and make it the cornerstone of their strategy, will have an unbeatable competitive advantage.