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Customer Value Economics: The High Cost of Poor Service 

Gautam Mahajan | Oct 13, 2017 467 views 1 Comment

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This doesn’t make sense, you think. Doing less cannot cost more.

You have to look at the net cost. Many actions that add value do not cost much. Smiling, being courteous, listening to customers, keeping promises, going the extra mile, wanting to help, being on time, not making the customer anxious, not making him wait, not making him spend energy, not insulting his intelligence, not destroying his self-image, being prompt, being knowledgeable, etc. etc. can all add value.

And that adds up to higher relationship, better retention, higher sales, better prices and ROI.

The reverse is not caring and adding less value. The net cost in loss of sales, loss of advocacy, loss of referrals, loss of customers and loss of profits and ROI. This all leads to value destruction. You must manage value destroyers (or what I call DNA, Do Not Annoy factors).

The cost of poor experience, bad service leads to not being able to charge higher prices or loss of sales.

Airlines: Expectations vs. Delivery

Let’s take an example of airlines. Some of them are full fare and some of them are low cost. Note they do not say high class and low class, nor do they say high value and low value. Full fare connotes certain givens like free baggage allowance, free food, faster check in for business class. Low cost means none of these.

So if you do not want the hassle of paying for your luggage or seat, and cost is not that important you go full fare.



Let’s say you travel low cost. Your experience beyond what you expect of poorer check-in and luggage may still be good. I just took a Ryan Air flight. I had prepaid for my luggage. The flight was on time, the seats were ok, the price was great, the staff smiled, the luggage was retrieved fast, all adding to the value.

The other day I took a full fare airline. One bag was a hair over 23 Kg, and the other was 12Kg, and I was asked to take things out of one and put into the other. The food was bad, and my luggage came late. The value was awful and the cost of this poor value is high to the customer and to the airline.

Let’s take a person who flies mostly by high cost airlines. He is used to higher prices. Let’s look at his value tree:

gm_value1

He finds the value is 7 which is about average.

Now imagine this traveler has to use a low cost airline. His expectations are lower. His price is low. But the airline staff is friendly and they handle him well. So he is happy.

gm_value2

When you compare the value score it is very high at 9 versus 7. It did not cost the airline more to increase the value. They performed better than normal and the cost was low. So he may consider the low cost airline in the future. (Note the importance of cost was less (30%) for him!)

A third example is a low cost person traveling on a low cost airline. His expectations are low, and he is price conscious. On this flight the airline did not insult him or aggravate him. They were ok to him. His score is 8, even though the experience was average. Note price has become 70% in Importance.

The above example tells you the following:

  1. Segmentation is important to position your product
  2. Much of your offer is based on Customer expectations
  3. When expectations are high, you have to perform better. Poor service, food or unhappy or unsmiling staff lowers the benefits and the value. Cost to airline has not gone up
  4. When expectations are low, performing better (like staff being polite and helpful, which costs nothing) increases value
  5. In this example if the normally full fare flyer found the low cost airline gave more value than his normal high cost airline, he may use the low cost carrier more often than he had in the past, a loss to his full fare airline
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One Response to Customer Value Economics: The High Cost of Poor Service

  1. Namirimu October 17, 2017 at 3:15 am (1 comment) #

    Thanks for that information, actually here where i work thats how we have managed to stand strong by: respecting our customers, quality service, listening to our customers, keeping promises etc.

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