Many of us make a considerable amount of our annual revenues from providing services, whether these services are the "core" of what we do, or they are after-sales activities that drive additional revenue.
Many of us don't realise that it's possible to "overserve" our customers. Overservice can be costing us "big money" it can be the "carbon monoxide" of business, invisible, unmeasured and a silent killer if unaddressed.
The Goldilocks curve describes the continuum of the customers' satisfaction with your service offerings, and believe me; it is possible to have a service offering that is too hot.
Your offering is too cold.
It's easy to identify an offering that is too cold.
You're unable to (or unwilling to) make sufficient investment in your service functions, and they fall way below the minimum acceptable performance levels for your customers.
Unanticipated growth (you're in the fortunate position of having grown too fast to make the investments necessary to keep up with customer demand) or inadequate evaluation of whats is required to support a customer are common causes of "cold performance".
Whatever the cause, underserving your customers is bad news. Unless you're the only provider in town (and how long does that lucky position last these days?) customers will leave, and take their money with them, at their earliest opportunity. Poor service is a factor that can drive churn in your customer base and impact your profitability. The constant pursuit of new customers is expensive (classically 5x more than selling a product to an existing customer) and impacts the bottom line enormously.
Churn is terrible, but a bad reputation has broader impacts on your business. News of your poor after-sales service will get around within your industry pretty quickly. Negative reputation will hamper your growth, who wants to work with the worst provider in town? Poor reputation leads to additional downward spiral effects, including discounting to win business. Unhappy customers lead to a stressed and miserable service team, who are trying their best to deliver, but who are always in the firing line with angry customers.
So how do we end up in the "too cold" zone?
I already mentioned growth that exceeds predicted demand, but it can also be a strategy for sales growth that has not detailed a service strategy to support that growth. When we focus on short term revenue growth to position for investment or buy-out, this can be the case.
The key to addressing this issue is to understand the service level required for the typical customer during implementation and in ongoing support operations. What does this look like in staff-hours, technology and infrastructure, and what is the organisations' investment strategy to recruit and build capability as the customer base increases and demands change?
If attempting to get out of a situation where we have a reputation for poor service, use RECON meetings to identify customer perceptions and feedback before their dissatisfaction makes them turn away from your business. Use the feedback to develop your turn-around strategy, and highlight top investment priorities and the easy wins that will address customer concerns. Knowing what improvements they will value is an excellent shortcut to service improvement, and removing the guesswork will improve investment focus, whether that is in technology, people or training.
We also have to have a transparent view of what serving customers costs. If we are to improve our performance – we can't ignore these costs to our business. It may require some harsh internal reviews on pricing and the dynamics of providing support activity. Not understanding what providing your services costs can undermine your business profitability. If you are not charging at a price point that ensures your expenses are covered, then you have to be sure that your sales revenues are very healthy to offset the losses incurred.
We must acknowledge that the issue of service profitability will always become an issue at some point. When sales plateau, executives frequently refocus on service revenues to support other, loss-making business units. Still, by this point, the work of changing prices/services levels can be difficult and damaging, as customer expectations have developed over a long time. Changes to pricing and service levels will cause negative responses and complaints from customers.
Your offering is too hot.
Wanting to please our customers, delight them even, is a healthy aspiration for any business, particularly in the early days, when attracting new customers can mean the difference between business survival or extinction.
Being cost-effective, responsive, supportive and accessible can help us to build our customer base and develop a strong position with regards to cash flows. Initially, to demonstrate that we are different from the competition, we deliver incredibly high service levels – lots of "unlimited access" or 24/7 support, at low costs – a desirable proposition for a new customer, and service that generates great word of mouth referrals. The business builds quickly on the pillars of low price, high access and effective support mechanisms.
A potential issue during organisational growth is the temptation to provide services or technical solutions that are significantly above the levels required to meet the customers basic needs, historically for me; this would be in the decision to provide as much service support onsite as was possible. Onsite service was a great differentiator in our market, but a crushing cost burden from an operations perspective. Any additional, unrequested service that you provide is costing you money but may not necessarily create value in the eyes of the customer. I would suggest you stop any activity not perceived as valuable.
Additional issues begin to develop a little later, as the business expands its customer base to levels that are too large to practically to support with "premium level" services, or at least within the resource framework used to build the business. Using a low price point to enter the market and to develop a customer base, makes it challenging to serve a large one. Free cash resources are not available to scale the human resource or infrastructure side of the service equation. As a result, the business starts to make subtle, but impactful prioritisations.
Large, accounts, with options for cross-sell/upsell, are prioritised with services that reflect the premium arrangement they have purchased, and so for them, it is pretty much business as usual. However, for smaller companies, who may rely heavily on the support, the picture begins to change. Because of the low price point, they have been encouraged to pay, their utilisation of services can appear to be uneconomic, what they need in terms of service delivery, may cost more to provide than the revenues they bring in. As a result, their needs become a low priority, their service levels drop, and they begin to complain and stop referring business, as for them, the once supportive and accessible service desk, has become an agonising trip to voicemail and email jail. As the situation continues, they no longer fit the ideal customer profile, and they are encouraged to move on to a different provider, someone better suited to their high demand, low cash needs.
The result is that the provider business starts to see the revenue position erode, as attracting larger accounts can be more difficult as competition for these is intense. In contrast, the little clients drift away and take their small, but essential payments to other providers (in which the cycle for them, will begin again). Churn starts to affect the business, and it becomes relevant to begin to look at pricing and support levels to ensure that a narrower customer base covers costs. The result of this can be some difficult discussions with the larger and more lucrative customers, as it becomes necessary to change the terms of their service provision to ensure that the business can stay afloat.
How do we get it "just right"?
To avoid the over-provision trap, we need to adopt Goldilocks "just right" approach to our service pricing as soon as is practical in our business. We can do that by assessing the following factors and then make sensible decisions based on our analysis.
Calculate what it costs to provide your service at the hourly level. If your business is all based on services, this would need to cover not only time for the service agent and their infrastructure requirements but also an apportionment of all business costs (fixed and variable).
Understand what the average customer "uses" from you on a weekly/monthly basis. How many hours can you expect to spend servicing them, at the level they expect to be confident they are getting "good service", every month. Consider in addition to the standard costs, any seasonal changes in demand, or any intermittent elements like hardware replacement/repair or upgrade that you may have committed to in your sales process.
Now you know what standard service looks like – you can multiply the cost per hour delivering service by the number of hours you anticipate the customer will use it and presto, you have a price for providing your service to the customer.
You are now in a position to consider your pricing strategy. There are lots of ways of deciding what to charge for your standard service. It could be that service is seen as a by-product of sales, in which case, a cost-neutral approach will be attractive to customers and will have no negative impact on the bottom line. However, services are a fantastic revenue engine for business as services are often required for long periods in between capital purchases, and can work to strengthen bonds between provider and customer over the long term. "Cost plus" is standard in smaller providers, where an additional sum is added to the essential cost of service delivery to cover growth or investment priorities for the business. Alternatively, you can choose to take a "position" – and determine the sort of customers you want to attract, based on their ability to pay. Taking a premium position is usually most attractive as there are always customers seeking to have premium quality service, and they are willing to pay for it. You need a lot less of these guys, but they are pursued relentlessly by all players within a market.
A note here on "free service", I have worked in businesses where service was virtually free. Customers could call on support for free or pay for service interactions that were effectively loss-making. "Free" is a "too hot" strategy. It creates a distorted perspective about service costs and, more importantly, its worth in your market. "Free" makes it incredibly hard to introduce even break-even pricing at a later date. Attempts to do so will take up disproportionate resources to handle customer complaint calls – so beware, if you choose to do this, you are storing up heartache for a later day.
Create clear contracts to spell out what is "IN" and what is "NOT" from your service offering. Having these in place makes it much easier to set "fair usage policies" and avoids any ambiguity that can be used by the customer to get more than they are paying for in service terms. Contracts facilitate discussions, and as a customers business grows, can be used to point out that increased services attract additional charges, without any pain or upset to either party. RECON is a great tool to conduct account reviews, and usage of service and appropriate charges are a natural part of this type of discussion.
Create product tiers. We've discussed understanding what "normal" service looks like, but some customers want the best, and they're willing and able to pay for it. A premium strategy is where you can deploy (and charge for) all the bells and whistles that we sometimes throw in for free, but which cost our business a lot (in our "too hot" go to market strategy). Understand the value of an "all-singing, all-dancing" solution to the customer, and then charge appropriately for it (again understand the cost involved first, then decide what to charge for it).
Document your growth strategy and make plans for investment as you reach identified milestones. Understanding where you are going as a business will help to make sure that you stay in the "just right" zone of the Goldilocks curve by scaling staff and infrastructure in alignment with a growing customer base. You can plan by understanding at what point a service tech reaches a saturation point in their time utilisation. Providing your pricing strategy is correct; the growth in your customer base should be paying for the next hire in advance of when they are needed. To avoid reduced service levels in a rapidly growing business, which can be caused by demand outstripping supply due to hypergrowth, always have a "bench" of potential high-quality candidates in mind that you'd like to have on your team once your growth permits. Pre-identifying quality candidates reduce hiring times and limit the impact of high growth or unexpected organisational exit by critical members of your service team.
Your aim in service delivery is to meet customers expectations in a cost-effective and timely manner. Service offerings that are "too cold" or "too hot" both have impacts on revenue and profitability, but also contribute to customer churn that is damaging to growing organisations. Having a clear service strategy, based in the financial and technical realities of your market will help to support sustainable growth, customer satisfaction and customer retention, which in turn lead to high levels of organisational profitability.