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13 Ways To Calculate The True Cost of Customer Service 

| Jan 20, 2016 1,909 views 3 Comments

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You’ve heard the heady numbers.

For example, a 2014 NewVoiceMedia study revealed that U.S. businesses lose $41 billion per year due to poor customer service. You see that number and think, “Wow! Let’s get on this customer service thing!”

Your executives aren’t as excited. 

They like the idea of good customer service. They’re just reluctant to invest in improving it. Things like creating a customer service vision, implementing a more useful survey, or training employees cost time, money, and resources.

New flash – three things executives don’t like spending are time, money, and resources.

So, how can you get your executives’ attention? General statistics won’t do it. You need to put some real numbers on how customer service is affecting your business.

Here are 13 ways you can calculate the true cost of customer service.

Revenue

Your executives are much more likely to listen if you can convincingly show them that investing in better customer service will generate more revenue.

These examples won’t apply to every situation, so try to find one that works for yours:

Repeat Business. Start by identifying your churn rate (the percent of customers who leave). Use your Voice of Customer Program to estimate how many leave due to poor service. Calculate the lost revenue.

Average Order Value (AOV). This statistic works great in environments like retail where service has a direct impact on sales. Determine the average value of a single order. Identify specific ways that improved service could increase that number. Calculate the additional revenue you could gain.

Sales Per Hour. I like this metric even better than AOV for situations where hourly employees are generating sales. You pay employees by the hour, so why not calculate how much revenue they generate per hour? Determine the current rate, identify factors that will improve it, and calculate the potential revenue gain.

Lifetime Value. A customer who spends an average of $50 may not be impressive. But, what if they spent $50 every other week and could reasonably be expected to remain a customer for ten years? That customer is suddenly worth $13,000 to your business. Calculate the average lifetime value for your customers and you’ll see exactly how important they are.

Returns. Customer service can prevent products from being returned due to customer error. Better customer education can lead to better customer satisfaction with your product. Estimate the percentage of your returns that could have been prevented. Multiple this percentage by the dollar value of your annual returns. This calculation, known as preventable returns, represents the potential saved revenue due to improved service.

Lost Sales. Poor customer service can cost you sales in a number of ways. Rude employees and long lines might cause customers to abandon a planned purchases. A phantom stockout (where the item is in stock, but can’t be found) can also cause customers to leave empty-handed. Calculate the revenue lost to these problems and you might have a case for investing in service.

Cost

It stands to reason that better service will reduce costs. The trick is showing your executives exactly how this happens in your business.

Here are a few examples. Try to see if any are relevant to your business.

Service Discounts. Companies often give customers freebies or discounts to compensate for poor service. For example, a restaurant might offer a free dessert when a meal is poorly cooked. Calculate the cost of these discounts and estimate the potential savings you could achieve by reducing the problems that cause them.

Employee Attrition. Customer service employees don’t like to play for a losing team. Turnover often improves when employees feel they are empowered to help their customers. Calculate the cost of turnover (including recruitment, training, and lost productivity costs). Estimate the savings you could achieve from reducing turnover by a reasonable amount.

You’ll need to know your labor cost per contact for the next few examples. This is your employees’ fully loaded salaries (including taxes and benefits) divided by their average contacts per hour. 

For example, if you pay a customer service agent $15 per hour (including taxes and benefits) and they handle an average of 10 calls per hour, then your cost per contact is $1.50.

Contact Reduction. Identify the top reasons why customers contact you. Determine whether there’s a problem you can solve that would prevent customers from needing help. Estimate the number of contacts that could be reduced by solving that problem and calculate the potential savings by multiplying the number of contacts saved by your cost per contact.

First Contact Resolution (FCR). Determine the percentage of issues that are resolved on the first contact. (Here’s a handy guide from Oracle.) Improving FCR means reducing wasteful contacts. Set a target for FCR improvement and use your cost per contact to calculate the projected savings.

Escalation Rate. Complex contacts often get escalated from a less expensive source to a more expensive source. For example, escalating an issue from chat to phone costs extra money. Start by identifying the number of escalations for a specific time period (week, month, quarter, etc.). Next, multiply this figure times your cost per contact for the more expensive channel. Finally, estimate the potential savings you could achieve from reducing escalations by a reasonable amount.

Marketing

You can also acquire more new customers through better customer service. See if either of these examples will work for your business.

Referrals. Track the number of new customers you gain via referrals from existing customers. (You can also use a Net Promoter Score survey to gauge your customers’ likelihood to refer.) Calculate the value of these new customers using Average Lifetime Value or a similar statistic. Estimate the revenue gain from improving your referral rate.

Online Rating. Your business’s ratings on online review sites like Yelp and Trip Advisor directly correlate to new customers. One study estimated that a one-star increase in a restaurant’s Yelp rating leads to increased revenue of 5 – 9 percent. You can put together a business case for improvement by making some reasonable assumptions about the value of enhancing your company’s online reputation.

Resources

I realized I’ve covered these metrics at a very high level. You might be looking for some additional guidance. Here are a few resources to help you out:

  • Check out this case study on sharing KPIs with executives. 
  • Leave a question in the comment box and I’ll do my best to answer it.
  • You may also contact me directly with your questions about performing these calculations. 

Finally, this post is part of an on-going series about the connection between operational excellence and customer service. You can read the other posts here.

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3 Responses to 13 Ways To Calculate The True Cost of Customer Service

  1. Michael Lowenstein January 21, 2016 at 6:42 am (1022 comments) #

    I’d suggest that there’s a 14th way to calculate the financial customer service, if the organization is innovative enough to apply it. That is using service staff to identify other elements of problem or complaint, via direct outbound solicitation of customers. This helps to build relationships, and it also helps to build, and prioritize, a full inventory of customer problems. Acting on the real problems and complaints – not just those that are received – monetizes for the enterprise in terms of key loyalty drivers.

  2. Jeff Toister January 21, 2016 at 9:01 am (59 comments) #

    Hi Michael. Yours is a good addition, and I’m sure there are even more than 14.

    I heard a great story about one company receiving a small, but unusual complaint about a small product being shipped in a very large box. There was only one complaint, but the customer service leader decided to investigate. It turned out the company was using the large box because it was the only one that fit the product’s unusual dimension.

    The leader instituted an outreach campaign (like you suggested) and found that other customers were mildly annoyed by the large box, but didn’t think it was worth complaining about. So, the large box escalated shipping costs and mildly annoyed customers.

    It turned out there was an easy fix. The company’s merchandising team got the supplier to make a small alternation that allowed the product to ship in a much smaller box. This initiative saved money and prevented future complaints.

  3. Michael Lowenstein January 21, 2016 at 11:15 am (1022 comments) #

    Most customers will not complain, unless prompted. It is often the unexpressed, but real, complaints that drive behavior.

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