Mark Price: do you know how much poor customer service is costing you?

Mark Price The research firm Greenfield Online and Datamonitor/Ovum released a study last week, “The Cost of Poor Customer Service,” that estimated the amount of money lost by U.S. firms due to poor customer service.  They estimated the cost to be $83 billion per year.  61% of the time, the lost money goes directly to a competitor.

71 percent of consumers interviewed said that they had ended a business relationship due to poor customer service.  In terms of industries, as would be expected, the greatest churn occurs in cable/satellite, financial services and consumer products.

As the research brief puts it:

Consumers feel the most significant root causes of poor service are:

  • Repeating themselves
  • Being trapped in automated self-service
  • Forced to wait too long for service
  • Representatives don’t know my history and value 
  • Cannot switch between communication channels easily

Let’s take a look at the impact at the individual customer level.  For an individual customer, customers ended 1.2 relationships per year, at an annual revenue of $289 per relationship.

Consumers in their “prime spending years” of 27-43 have terminated 1.5 relationships per year, with younger consumers second at 1.4 relationships and consumers 44 and over change relationships 1 time per year or less.

So an average customer in their late 20’s to early 40’s ends relationships valued at $433.50 ($289*1.5 relationships).  Out of that lost money, approximately $308 per year goes to a competitor, with the remaining dollars simply leaving the category.  Let’s say that a customer on average, stays in a relationship 4 years. 

Then the  lifetime value of each lost customer would be $1156 ($289*4 years) per relationship.

This is scary enough, but imagine that it is a Best Customer that you lose.  If Best Customers have a spending level 5 times an average customer (typical in retail), then the company loses $1445 per year for each Best Customer that leaves due to poor customer service.
You can imagine how those dollars add up.

You see, it really doesn’t matter where those dollars go when they leave your company; that they leave at all is matter enough.

So let’s finish making the case here.  If you had 10,000 customers and only 1,000 of them were Best Customers, then of your total business of $2.89mm, your best customers would represent 50% of your revenue ($1.45mm). 

If 30% of those customers leave each year, you have a gap of 15% of your revenue that you have to make up every year before you can grow by $1.  Imagine the impact to the business of improving retention of Best Customers by a mere 10% of the loss. The money goes straight to the bottom line, with no cost of sales at all.

How do you figure out how much poor customer service is costing you?

  • Conduct exit interviews with customers to find out why they chose to leave
  • Look at customers who left last year and see if you can figure out what contact was their final one. Was it a customer service contact? You can do the math.
  • Survey customers after customer service experiences on intent to return

None of these are especially expensive approaches to take. 

If you consider the potential impact of identifying customer service gaps that drive customers to leave, the value can be 100x the effort in time and dollars required.

Can you afford not to?

Mark Price is Managing Partner at M Squared Group.
He is a leader, writer, speaker and consultant on how to increase
revenue by retaining and growing Best Customers by improving their
experience. His particular concentration is “bricks and clicks” —
businesses that engage their customers through the web and through a
physical contact (retail or saleforces). Before founding M
Squared Group
, Mark was the practice leader for customer
intelligence for Zamba Solutions. Mark also blogs on
and is a father, husband, tennis player, skier and fanatic science
fiction/fantasy reader.

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