The Customer Service Trap

Wednesday, November 8, 2017—"Great customer service" is a goal nearly every company strives for. However, misapplication of the elements of customer service can be very destructive to profits, growth and can challenge your long-term survival.

At WayPoint, we calculate the exact costs on each invoice, and across more than $75B of distributor business, we can tell that more than 62% of the invoices have costs higher than their gross profit, meaning they're money-losing sales.

Put another way, money-losing sales happen when the gross profit on the sales is insufficient to cover the costs of processing the order and servicing the account. Virtually all money-losing sales are small orders below the company's service-cost threshold. Company-wide profitability is directly affected by the proportion of small orders in your sales mix.

What does this have to do with customer service?

Well, a lot of the activities companies associate with "customer service" are things that make the customer happy because most companies are unwilling to do them, at least in their circumstances. In these cases the costs would be more than can be justified in the situation. The customer may want it, but it's bad for the company.

For example, a very small customer may think it's "great service" to have a carton of spray bottles broken so he doesn't have to buy six when he only really needs one. But then the broken carton doesn't sell because most customers buy cartons; it's an impediment to people that have to work around it while stocking or picking from the bin; and the unprotected product gets dusty and becomes unsaleable or is an easy target for pilferage.

More importantly, that customer will eventually buy five more spray bottles, leaving six broken cartons and six money-losing orders in his wake. A policy not to break cartons can turn a single unit order into and carton order, and will prevent the customer from returning to repeat the process five more times while he slowly uses contents of the carton.

This is the "customer service trap" – institutionalizing unprofitable and dysfunctional practices which inevitably attract the kind of accounts and sales activity that destroy profits. If your competitors refuse to break cartons, where do you think all the money-losing accounts are going to go?

A lot can be learned from companies in the hospitality industry who segment the market, identifying both "premium" and "budget" customers, then tailoring different service offerings and price levels to each. They're matching revenue and profit levels with customer service levels, delivering premium service only where they have premium income, and customers have premium expectations.

Strategy is largely defined by what you say "No" to. That's what drives differentiated customer service, targeted marketing strategy, market position, etc.

It's important to have a strategy that focuses service value on the accounts you really want – those that bring high cash-flow and profits at low expense. Giving the same service to all comers will not make your target accounts feel special while your attention and focus goes elsewhere. It will, however, drain resources and profits into areas that can't possibly justify them.

Financially, no company can profitably provide truly exceptional customer service to accounts of all sizes because there's not enough overall profit to support it. They must balance volume, margins, and differentiated customer service levels. (Some customers want Lexus, some need Toyota.)

Any strategy founded on platinum service to all comers will also attract an overabundance of small customers and small orders, consuming resources and profits, and inevitably resulting in poorer service for truly valuable accounts as resources are diverted away from them. The lack of differentiated service also eliminates the incentives for high-profit accounts to stay efficient, or even stay as customers.

The desire to offer "great customer service" backfires because it lacks focus and differentiation for your premium customer group. You spread your customer service efforts across the whole customer base, effectively averaging them. Average service is perceived as "poor service" by top accounts who expect more, while it's very attractive to the small accounts that drive losses.

Instead, take a page from the experts, and develop a differentiated customer service model. You can bundle no-frills service levels with attractive pricing for price-conscious buyers, platinum service and low prices for high-efficiency volume accounts, and good service at decent prices for those in the middle. The key is offering the appropriate service level where profit and cost-efficiency allow it.

Recognize the customer service trap for what it is, and be smarter than those that fall into it.