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Cost of poor service - the economic truths

The success of a business, a government department or a public sector body, is either measured in financial terms, or limited by financial budget constraints. But a disconnect often occurs with investment decisions because although customer satisfaction, loyalty and advocacy is key to any organisation's success, it is seldom expressed in financial terms.

Five economic truths
of customer satisfaction that quantify the financial returns on service investment

Service Management Challenges:

- Introduction

- Cost of poor service

- Customer-driven business strategy

The intuitive link between customer satisfaction and loyalty is one that can be hard to quantify. The fact that even satisfied customers defect has done more to drive companies to inaction than it has to demonstrate the clear business gains that can be derived from maximising customer satisfaction and harnessing the link between customer and employee value, satisfaction, loyalty and profit.

CTMA has found that dissatisfaction amongst customers and employees has a significant and measurable impact on financial outcomes for the organisations. For businesses it has a direct impact on growth and places revenue and profit at risk. For public sector organisations, poor service can significantly increase costs and sometimes lead other negative social and community outcomes.

By quantifying this impact, an organisation can prioritise their investments in service and establish a financial framework for customer-driven value creation.

The cost of customer dissatisfaction

There are five key economic truths that quantify financial return on investments made to customer service. Organisations wishing to improve their corporate bottom-line must factor these into investment decisions and growth strategies:

As satisfaction levels drop, loyalty drops faster
Problems drive customers away
Many more customers experience problems than you think
Unhappy customers spread the word!
Effective customer service and response pays

As satisfaction levels drop, loyalty drops faster

There is a significant drop in loyalty between “very satisfied” and “somewhat satisfied” customers - sometimes as much as 50%. A dangerous policy in many organisations is to ignore this fact and simply add together the percentage of “very satisfied” and “somewhat satisfied” customers to get a “better satisfaction score”.

Problems drive customers away

Customer loyalty varies from one industry to another but there is typically a 25% drop in loyalty among customers who experience a problem. In revenue terms this can be the equivalent of losing some, or all, of the revenue from one in every four customers who have experienced a problem.

Unhappy customers spread the word!

Our research confirms that customers typically to tell twice as many people about a bad experience with customer service than they do about a good one. Depending on the industry, between 5 and 10 people are told about an bad experience. Today, the dangers of negative word-of-mouth have been greatly amplified by the Internet and the power of social networks.

Effective customer service and response pays

CTMA's research also confirms the importance of effectively responding to customers when they do complain. Customers can be very demanding but, with an effective response, it is still possible to obtain a more loyal customer afterwards - than you had before they experienced the problem!

The cost of employee dissatisfaction:

Employee dissatisfaction can also be measured in financial terms. When employees experience problems and concerns with their employer or their job it can have a serious impact on:

Productivity and the productivity of their colleagues
Product and service quality
Customer satisfaction
Attendance
Career ambition
Staff retention
Health and safety

Since customer satisfaction and employee satisfaction have such a direct influence on each other, when correctly managed, this can have a positive influence on profitability and growth.

Conversely, endemic dissatisfaction quickly leads to increased costs, reduced profits and corporate decline.

Calculating what you stand to loose - On-line tools

We have created a number of tools and calculators to assist in the calculation of the "lifetime value of the customer", the "revenue at-risk" from poor service and the "cost of multiple call-backs" from customers. Please visit the Tools & Resources part of this web site for these and further insight into how customer dissatisfaction may be impacting your business.

Counting the cost of bad customer experiences - Working paper

At a time when most organisations are searching for ways to reduce their costs, a major challenge is how to justify investment in service quality and improving customer experience.

This paper cuts through the rhetoric of “customer satisfaction” and reveals the compelling financial reasons why business today is ALL about Customer Experience. It summarises the “bottom line” impact of poor service and identifies six key economic truths of customer experience that can help quantify the financial risks of inaction and justify the imperative for improving customer satisfaction.