STRONGBRANDS    Professor Tim Calkins, Kellogg School of Management

Strong businesses are built on great customer service. When people are happy, they come back and provide endorsements. They may even be willing to pay more when they can anticipate superior treatment.

Poor customer service, on the other hand, does enormous damage; it can destroy a business. Customers don’t return, forcing a company to constantly attract new customers, an expensive and difficult task.

It is important to understand the power–for good or ill–of customer service. Here is an example.

A Strange Beer

Last week I was out in Breckenridge, Colorado. I have a place there that I rent out, so I visit frequently to check in. On this last visit, I went to the Blue Stag Saloon, a cozy restaurant in town. I ordered a beer, but I was dismayed to find that it had a strange taste. It also was warm. After a sip, I told the server that I was disappointed and ordered a different brew.

At the end of the meal, I noticed I had been charged for both beers. This wasn’t a huge issue, of course. I ordered two beers and received two beers. I wasn’t outraged or offended. Still, the decision to charge for both had an impact.

The first effect was that I didn’t tip particularly well. I’ve become quite generous with tips in recent years, usually leaving 20% or more. On this occasion, however, I cut back a bit.

The second effect was that I don’t have fond feelings for the Blue Stag. It is a nice place, but in an area with many restaurants, I’ll probably go elsewhere when I am back in town.

The third effect was that I updated the guide-book I give to people who stay at my rental property. I noted that while the Blue Stag Saloon is a good spot, I’d had a disappointing experience on my most recent visit.

I didn’t post anything on Yelp or Open Table or other restaurant review sites. That would have deepened the impact, since many people rely on reviews when picking a restaurant.

The Financials

Let’s look at the financials of this situation.

–Reduced tip: $8

–Lost next visit: $100 of revenue, perhaps 30% profit margin: $30

–Lost referral visits: Perhaps 5 visits, $100 per meal, 30% profit margin: $150

So by charging for the warm beer, the Blue Stag received about $6. At the same time, the restaurant lost about $188.

A Question

Small investments in customer service can generate outsized returns. Brands need to understand the full impact of service and give staff the right incentives and tools.

A question to consider: do you fully understand the financial impact of your customer service? If not, it might be useful to look at some numbers.

 

---