Economists agree that the first principle of economics is scarcity. And, in free market economies customers are the scarcest resource: precious commodities, expensive to acquire, and in hot demand by the competition. These same precious commodities, however, are all too easily squandered through poor service practices. It is no wonder that repeated customer satisfaction surveys show as many as eight out of ten consumers quit doing business with suppliers for reasons having to do with poor service.
In a very real way, poor service saddles a business with a “tax” that makes anything a governmental body might levy seem like kids’ play. This is especially true since President Trump prevailed in passing The Tax Cuts and Jobs Act of 2017 which enables the United States to compete more effectively across the world by reducing the corporate tax rate to 21%. And, it’s instructive to remember that not all corporate income is necessarily taxable due to the exemptions, credits, and deductions available courtesy of the tangled mess which is the U.S. tax code.
Poor service has the same effect on a business as a tax: it creates economic inefficiencies for the enterprise and distorts a clear picture of the firm’s operating cost structure and thus its ability to price its goods and services properly. As with any tax structure, the higher the tax rate the less money there is to spend. So it is with poor service practices which lead to increased customer attrition and churn.
CUSTOMER ATTRITION IS A TAX
In an earlier essay, Customer Attrition: Marketing’s Ticking Time Bomb, we discussed the devastation which customer attrition can wreak on the company’s books. Attrition due to poor service, especially, can have a deleterious impact not just on the company’s finances – which might be remedied in a subsequent financial period – but on the brand which is far more difficult to restore.
A reduction in customer attrition can translate into significant cost reductions for the supplier. All things being equal, a supplier with a lower attrition rate clearly has the added flexibility of operating at a lower cost posture. Money saved by mitigating attrition can be channeled into new service initiatives, which can be used by the company to more aggressively price a product or service or it can be returned to stockholders among other options.
Customer attrition can only be mitigated by enterprise investments or expenditures in service initiatives. Any action of the enterprise intended to arrest customer attrition or enhance customer retention is, by definition, a service initiative. These initiatives can include programs designed to improve customer relations, software development projects to enhance the customer experience or to better equip the front line, education and training programs for the front line worker, customer joint ventures, and community goodwill programs all account for a nearly inexhaustible supply of service initiative opportunities.
The financial wisdom of investing in service initiatives makes perfect sense. Here’s why: If the total cost of attrition on an annual basis is x then that amount forms the water mark or “break even” point guiding the organization in what is reasonably spendable for service initiatives. A more aggressive implementation of this water mark concept, is to spend some coefficient of x (say 2x) as a way to “pre-fund” service initiatives in order to forestall the onset of attrition in the first place.
DEALING WITH INGRAINED FINANCIAL BIAS
The output measures of service initiatives are difficult to prognosticate with accuracy. And, while the future economic benefit of a service initiative cannot be forecast reliably, the current period cost of a service initiative is there in black and white for its detractors to take potshots at. By rule, Generally Accepted Accounting Principles (GAAP) mandates that service initiatives, not otherwise classified as intangible assets, must be booked as current period expenses. This GAAP bias guarantees that future earnings will be inflated without a matching service initiative expense offset. As a consequence, financial statements alone cannot fairly represent the true value of a firm with a high ratio of investments in service initiatives relative to tangible assets. Generally, there are no disclosure requirements for what might pass as investments in service initiatives – with the exception of the mandated disclosure of R&D expenditures by public companies.
Nonetheless, public or private companies seeking to fairly represent the service posture of the enterprise to others such as investors, bankers, stockholders, and consumers at large should see fit to report the level of activity in this most important area of the business. Furthermore, a proper disclosure in service initiatives will reduce the amount of financial information asymmetry (information which is available to some and not to others) to which interested parties are exposed. It goes without saying, however, that disclosure should always be weighed against the risk of giving away a trade secret.
The output measures for well executed service initiatives must be tracked in order to establish their effectiveness. This, while being cognizant of the fact that there is a lag from the time a service initiative is rolled out to the time it registers a measurable impact. Some output measures are hideously difficult to correlate to a service initiative. That is true. But, executive leadership cannot allow that reasoning to foil the launch of well thought out service initiatives. Output measures are of two distinct types:
- Tangible: An uplift in revenues and profit, a reduction in marketing and sales expenses, a reduction in SG&A expenses, a decrease in settlement costs, or for publicly traded companies an increase in market-to-book stock ratios.
- Intangible: An increase in the number of customer contract extensions or other forms of repeat business, increased internet traffic, unsolicited testimonials, positive press accounts, reduced employee turnover, improved customer satisfaction scores, and most importantly reduced customer attrition and churn.
We started this essay analogizing poor service to taxes. The reality, however, is that the analogy is not a perfect one: taxes are involuntary payments and clearly outside of the control of the enterprise. Customer attrition, on the other hand, is clearly within the control of the enterprise and is not inherently a cost of doing business unless the enterprise chooses to ignore its ability to formulate strategies designed to retain customers.