Strategy & Leadership

How Customer Service Is Fundamentally Changing the Business Model

In a tepid economy and with increasing online competition, companies are turning to one business that can’t be outsourced to the Internet to trim costs and make money: customer service. We spoke with Kaihan Krippendorff, a business strategist, author of “Outthink the Competition,” and former McKinsey & Co. consultant, about the financial impact of great customer service, and the technology that has enabled businesses to shift from viewing service as a resource drain to being a revenue driver.

You’ve written a book and done a lot of consulting work about how companies can exploit opportunities that others ignore. How is customer service one of those opportunities?

Krippendorff: When I started doing the work I do, I focused on helping my clients create sustainable competitive advantages. In the 1980s, that term became popular, and people started looking for sustainable advantages, which almost always take three forms: You either lock up customers, lock up resources, or build economies of scale. Over the last two years there has been a shift, and those traditional sources of advantage are eroding. That really puts customer service at the forefront. You can no longer just lock up customers. You have to actually win them over. You can no longer control resources. Economies of scale don’t matter as much.

In a recent Fast Company article, you write about how service generates a lot of Best Buy’s profit. Have you seen other examples of the financial impacts of customer service?

Customer service has traditionally been seen as a cost center. The focus has been on how to provide the minimal customer service needed and to spend very little on it. Increasingly, companies are seeing that service can be both a revenue source and a source of cost savings in the core business. Best Buy, for example, is in such a low-margin business of selling electronics, and even warranties are not as profitable as I would imagine customer service to be.

If you look at good customer service as a potential cost savings, the benefits can be huge. Intuit over-invests in their call center in that they have developers from the R&D team man the phones. They’re trying to give their R&D people insight into where people are getting stuck using Intuit software, and that allows Intuit to make fixes before they become really big problems. Over-investing in call centers and solving problems early creates fewer reasons for customers to call in the future, which saves a lot of money.

What tools have enabled this shift in mentality about how companies view service?

The cloud really changes things and enables companies to build without having to do a lot of integration work. The cloud also lowers the cost for companies using these tools, which creates an opportunity for entrepreneurs who couldn’t compete because they were competing with Oracle, Microsoft, and SAP. The cloud is one big driver of this shift.

The other is the shift to mobile. Whenever you see a shift from one customer behavior to another behavior, it creates an opportunity for the small guy to jump ahead of the wave before the big guy.

You also see a proliferation of devices these days. Twenty years ago, I probably owned three brands of electronics. I had a Sony TV, an HTC phone, and whoever made my landline. Now, the average customer has many more brands and types of devices. They still only want to call one place, but they’re not sure whom to call. The cable companies are getting a lot of those calls, which creates opportunities for companies that can service multiple devices — an opportunity that I don’t think existed before.

How have the companies you work with changed their approaches to customer service?

About 50 percent of my work is with large, Fortune 500 companies in technology, retail, and financial services. When I do work for the customer service groups within these businesses, I see a shift toward moving more into the spotlight. They’re starting to change the metrics that guide their organizations and are willing to consider less cost but more value. They’re stepping up to being revenue-generating business units on their own.

I also do about 50 percent of my work with companies in the $5 million to $10 million range, and customer service has always been one of their top differentiators. I don’t see a major change in the importance of customer service, but I do see better quality customer service because of all of these tools and inexpensive technologies that enable them to look as big as their much larger competitors. Software-as-a-Service really equalizes things as smaller companies have access to many of the same tools as much larger companies.

Any other companies whose customer service stands out?

Lexus’ primary advantage is customer service. Compared with Acura, service is the difference in the companies’ strategies in the United States. Toyota and Honda launched a premium brand in the United States around the same time, and Acura has a more traditional strategy of focusing on the product. Lexus focuses on the product, but its key differentiator is customer service. The Lexus dealership near where I live is open from 6 a.m. to 10 p.m. I show up at 8 a.m., they give me a loaner or I can sit and have a cup of coffee. They have a TV for my kids to watch cartoons if I’m waiting on a Saturday. That’s an unprecedented level of customer service. When we buy a new car, that’s going to really influence our decision. We’re less likely to go to an Acura, unless Acura offers us a much better deal, because we’re paying for that service.

Related: Get Creative About Customer Service: Meet Them on Their Terms.

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