Out of luck

If you are not a gold star customer these days, however, you are out of luck. Most companies tend to focus on meeting Wall Street's quarterly earnings expectations rather than on long-term profitability. In a bad economy, that focus is even narrower. Customer service is a natural budget item to slash.

"When sales and profits are down, customer service is easy to cut," notes Ronald Hess, professor of marketing at William & Mary School of Business. Companies with customer service problems, Hess adds, tend to have customer retention problems - which can be expensive. A study by Bain & Co, published in 2001, showed that acquiring a new customer can cost six to seven times more than retaining an existing customer, and that increasing customer retention rates by 5 percent boosts profits by 25 percent to 95 percent.

"It's better to keep the customers you have than to have to keep acquiring new ones," says Hess. "Long-term loyal customers tend to stay longer and spend more money with you. The goal of every company should be to make sure its customer base is satisfied and doesn't leave. If you look at the best retailers - such as insurance companies and hotels - they have all put money into this."

Better service, better profits

In 2006, Claes Fornell, a professor at the Ross School of Business at the University of Michigan, and other colleagues published what has become a classic study in customer service in the Journal of Marketing.

Using data from the ACSI - the Index he created - Fornell found that companies with high customer service ratings are not only more profitable, but also have stronger stock market performance. In other words, it is possible to beat the S&P 500 consistently by investing in firms that score high marks on the ACSI.

The most successful companies consider customer service an important bottom-line metric.

Mercadona, one of Spain's largest supermarkets, provides another example. The company has enjoyed steady profits and double-digit growth for most of the past decade - success that management attributes to its commitment to training employees.

According to a Harvard Business School case study written by Zeynep Ton, a professor at MIT's Sloan School of Management, the supermarket chain invests four weeks of training time and 5,000 euros (US$6,611) for each new store employee. In the US, the norm is only seven hours.

Mercadona has an exceptionally low turnover rate of 3.8 percent. One reason for this is that Mercadona employees have predictable schedules - a rare thing in the retail world. According to the case, workers learn about their schedules one month in advance and don't have to work different shifts from one day to the next. Retail managers in the US routinely switch employees' schedules around on short notice in order to fit the labor supply with store traffic.

For companies looking for inexpensive ways to boost customer service, it's important to avoid penny-wise and pound-foolish tendencies. Consider a recent study conducted by Marshall Fisher, a professor of operations and information management at Wharton, and other colleagues. They looked at two years of store level data for a retailer's monthly sales, staffing levels and customer-satisfaction survey responses to measure the impact of store-staffing levels on sales and customer satisfaction. They found that revenue rose, on average, by US$10 for every additional dollar of payroll added to a store.

"Store staffing levels have a huge impact on revenue," Fisher notes. "It's easy to delude yourself and say that cutting staff doesn't matter. But over time, it does matter and leads to problems. You shouldn't be profligate with what you spend, but you have to be cautious with what you cut."

Adapted from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/wdgZ5n