Does better service really lead to bigger profits?

There's some strong received wisdom that better service is somehow financially a good thing. But the piecemeal data around that supports this view is unconvincing, it is often put together by vested interests, such as consultancies that charge fees to help improve customer service, or by idealists who just want it to be true.  It's easy to point to high service companies that generate outstanding results.  But this is a biased and self-selecting exercise, because the opposite is also true - there are lots of inconvenient examples that show low service companies making outstanding returns.  Would you say that Ryanair has better service than BA?  No? So how come it makes more money then?  Service clearly isn't the be-all-and-end-all.  Companies have different business models, different customer bases, different competitors, regulatory environments, sources of economic rent, etc, etc, all of which also affect their financial performance.

To get anywhere on this, we've got to start by comparing like with like.  Here (below) is the most unpolluted evidence I've seen.  This company rents out white vans, and does this through a series of local rental companies.  They're of similar sizes, they all do the same thing, for very similar customers, with the same fleet, and the same rate cards.  But if you look at the performance of the different rental companies, you see two striking things.  First, the ones with better service have better growth rates.  Makes sense.

Here's the more interesting chart.  The ones with better service also have better profitability.

So the ones providing better service, providing more value to their customers, at the same price as the poor service providers, are the ones that also make more money.  And in case you’re wondering about causality – when the worst performer addressed its service problems to climb up the chart, its costs went down as growth went up.

We can speculate all day about the reasons.  Here are a few common explanations:

• Word-of-mouth marketing: happy customers recommend you for free, and reduce your sales or marketing costs.
• Better customer retention: there's good evidence that better service leads to higher loyalty (repurchase) - Lexus is commonly perceived to be the highest service car provider in the US and has repurchase rates of 63% versus 30-40% for most other brands.  
• It could be that it's easier to serve these same regular repeat customers at lower cost: think about how efficient it is at your local coffee shop when you get to the front of the queue, you have the exact money ready, and they have your regular drink ready. 
• Higher service companies may be the ones that sell to better customers: who'd disagree that more agreeable, cooperative, organised customers make better service a lot easier.

I could carry on speculating about underlying reasons, but that’s an intellectual exercise.  What matters here is that, all else being equal, with better service you make more money.

Instead of speculating about why service increases profits, it’s more useful to accept the link and ask: how do we improve service?

It's tempting to look for a process answer here, following visions of efficient, flawless, repeatable mechanisms.  I’m not saying process improvement doesn’t help, but the highest service companies in our charts were also the most informal, with rule-bending and exceptions happening all the time, and none of these had ever been through a process improvement exercise.
 
For an answer I can relate to, I'll bow to the wisdom of the most credible person I've heard talk about this subject, an impressive man called David Neeleman.  He was the founder of JetBlue Airways, which at the time I heard him speak was the lowest cost and the highest-rated service airline in the US for the second year running.  Even in the year of its infamous ice storm crisis where passengers were stuck on planes for up to 8 hours, it still came top in national service surveys.

Mr Neeleman's explanation of JetBlue's excellence was all about service attitude at the top and the bottom.  At the top, his own practice as CEO was to take one trip per week on a JetBlue flight, in which he served as cabin crew during the flight, helped with the bags at the airport, and was an obvious and visible role model of the importance of service.  At the bottom, JetBlue's recruiting practice was focused on hiring courteous people who also cared about service.  Candidate's attitudes to other people were observed closely:  did they hold the door open for other people; were they pleasant to the receptionist?  JetBlue also uses measures in the middle, using Bain's highly-regarded Net Promoter Score system; and Bain has shown excellent evidence of NPS benefits, though Mr Neeleman didn't talk about this at all.

So, recruit a team that cares about service, supported by a leader who continually reiterates its importance and acts as a role model for service excellence, then let that group of people work out how to take it from there.  This is clearly only the tip of the iceberg on service improvement, and I'll expand on it with evidence from some our clients’ successes on another day.

But I want to get back to my main point.  Using the best evidence I know about service, it warms my heart that everyone wins - value begets value – and that better service does lead to better rewards.

Relevant links:

About David Neeleman
http://en.wikipedia.org/wiki/David_Neeleman

About Net Promoter Score
http://www.netpromoter.com/netpromoter_community/index.jspa

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