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How to Quantify the Economic Impact of a Customer Service Model

John Tschohl, called the “guru of customer service,” by USA Today, Time and Entrepreneur magazines, is a best-selling author, service strategist and president of Service Quality Institute. John is a regular contributor to the Desk.com Blog Expert Corner series

Customer service research firm TARP (Technical Assistance Research Program) developed two statistical models that monitor service by documenting value/ROI of a service system by measuring its performance and by determining how to improve service in a cost-effective manner. The customer service models also project results of a service system before it is implemented and provides a way to prove that customer service will achieve bottom-line results. The models apply to buying patterns, profit margins and dozens of other factors. For a quick, rough estimate of your business’s customer service ROI, enter some basic information into the TARP ROI calculator.

Model #1: The market impact of a customer service model

The market impact of customer service refers to the market/financial worth of a customer and how to quantify the economic impact of a business’s various levels of customer service. The Market Impact of Service Model is salvation for executives charged with overseeing a service system. It enables them to document that service is a profit center generating substantial additional sales. It also identifies improvements in service that are needed to increase market share or to boost revenue by a predetermined amount. The model produces “weights” indicating effect of the component parts of service on the overall effectiveness of service. Then these weights are incorporated into simple formulas that can be used in planning.

In summary, the market impact of a customer service model reveals:

  1. Increased sales and ROI from better service.
  2. Amount of reduction in service costs through prevention of dissatisfaction.
  3. Positive market impact by the satisfaction that good service causes among a larger proportion of customers. Using the model, comes up with specific information for a company such as incremental cost versus incremental benefit.

Key calculations in the market impact of a customer service model

The customer service model estimates increased service-generated sales and ROI by combining company-provided data and data obtained from customer surveys. The result is calculations such as these:

  • Net purchases resulting from complaint satisfaction.
  • New purchasers resulting from positive word-of-mouth (recommendations resulting from effective complaint handling).
  • Sales resulting from positive word-of-mouth recommendation by satisfied customers.
  • Profit on sales from complaint handling and resultant word-of-mouth recommendation.
  • ROI from money invested in service.

Measuring “unarticulated dissatisfaction”

The Market Impact of Service Model also enables you to determine the amount of profit and ROI increase for increments of decrease in “unarticulated dissatisfaction.” That is dissatisfaction that a customer has not told you about but which is likely to motivate him or her to patronize your competitor.

Model #2: sensitivity to profits model

Not all customer service efforts are created equal — you’ll find some tactics produce more significant results than others for your business. To help determine where to spend your budget, you may find the sensitivity to profits model useful. The primary use of the sensitivity to profits model is to postulate the impact of various customer service expenditures on customer satisfaction before expenditures are made. The model equips executives to make educated decisions about priorities.

Monitoring your service system

In addition to the more complex statistical modeling, monitoring your service system also makes it possible to determine degree of customer satisfaction needed to retain the customer’s brand loyalty or company loyalty. This is vital data.  Research has documented the importance of satisfaction in establishing brand loyalty — which determines a company’s ability to retain or to increase market share.

To maintain a level of service that retains customers, you need a mechanism for monitoring service performance. Do it by periodically re-evaluating all service support systems to make certain that they really do support the service strategy.

There are a variety of ways — at different levels of complexity and commitment — to measure and prove the impact of customer service to your business’ bottom line. No matter the customer service models and systems you choose, the data you are able to collect, analyze and share will help give you the facts you need make the executive team take note in a language they understand.

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