How Customer Service Impacts Firms’ Revenue
5 years ago by

Customer service normally doesn’t get the attention that it deserves when companies are traversing the early expansion stage. All the energy is reserved for sales and lead generation, which are the growth “shoo-ins”, for the management. As firms grow initially the focus on customer retention is not as much as it should be, which can result in a loss of revenue in the long term once the initial sales growth starts subsiding. But a smarter upper-management can avoid this by focusing on customer service from the get go.

Significant revenue jump is seen when companies fix their support departments, and that is because there is no better way to generate customer loyalty then by solving someone’s problem. They might not interact with you seeking a purchase, and might just be looking for some assistance, but proper support can generate loyalty that can last for ages, in turn bolstering your revenue consistently.

It is quite easy for a company to forget that existing customers have a plethora of competitors to choose from in most cases. And hence the retention and renewal of existing relationships with customers ensures the consistency of the revenue stream. Relationships that are based on subscription gives the customer cycle of ‘expiration and renewal’ a natural flow, and ensures that companies continue to focus on customer service as a major aspect of revenue generation. All firms need to realize the two-pronged significance of customer service, in both creating and preserving the company’s revenue.

There are hardly any question marks slashed over the significance of the ‘word of mouth’, while customer service can often be dumped in the brand management bucket, with direct repercussions on revenue often ignored. The value of brand ambassadors that every single one of the customers’ who experiences top-drawer customer service becomes, is priceless. The word of mouth cycle is invaluable in terms of brand awareness and also, revenue generation.

Despite all this, quite often the company’s upper management does not give customer service the attention that it deserves, unless the financial ramifications are elaborated in detail. So let us look at the financial significance of customer service via a hypothetical, and simplified, business model.

According to a research by the Technical Assistance Research Programs (TARP), one out of every ten people hearing “word of mouth” information – positive or negative –takes action. This obviously has direct impact on revenue generated through word of mouth. Another direct corollary of quality customer service is the opportunity to increase the price of your product to increase revenue. In another TARP survey merely 10 percent of the customers who had not earlier complained about customer service related issues, expressed any issues with price increase of the product. This in turn means that 90 percent of the consumers who were satisfied with the customer service, went along with the price increase.

The first thing that you need to ask yourself is what exactly is the value per customer of the company? Now picture all of this keeping revenue preservation in mind and let’s move on to the calculations.

Hypothetically your company has 20,000 consumers and every single one of them generates $400. Ten percent of that number would be 2000 customers who experience problems related to customer service. Assuming that half of them won’t complain, and just leave your product – that’s $400,000 worth of revenue loss.

Of the other half that complains, on average you would be satisfying 40 percent (Group A), frustrating another 40 percent (Group B) while 20 percent (Group C) continue to be dissatisfied. Now if 10% of Group A still do not repurchase again, that’s another $16,000 lost. If 25 percent of Group B does not purchase your product in the future, that’s $40,000 in revenue loss. If 60% of Group C does the same would be $48,000.

The numbers here are very conservative despite being hypothetical and if your customer service is worse than the average standard of TARP standards, the numbers would be much worse. The mean model would result in an annual $504,000 loss every year. Now let’s factor in the word of mouth.

1000 customers left without complaining, 260 complained but did not purchase again, totaling up to 1,260 people potentially spreading negative feedback through word of mouth. If every single one of them were to talk to 5 people about your product, that would be 6,300 people worth of revenue that you could miss out on. Even if the value of these new customers is factored in as half of the original customers that is still $1,260,000 revenue that you would be losing simply because of average customer service.

Applying actual numbers to this hypothetical model would give you the actual revenue loss that you would have to endure simply for having an average customer service. Anything worse and the numbers become much poorer. Customer service clearly is a lot more than brand management now. Your revenue stream inherently depends on sound customer service experience for your consumers. While lead generation should continue to be the focus of your business model, it is important to realize that there are few better ways of increasing sales than happy and satisfied consumers.


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