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Good Customer Service is Worth Much More Than You Think

Old ways of measuring the value of effective customer service systematically underestimate the power of a positive interaction between customer and representative.

The economy is in a fragile state: millions of Americans are unemployed. Businesses large and small declare bankruptcy weekly. Supply chains are fractured, consumer demand dramatically altered.

This economic crisis, stemming from the global spread of coronavirus, gives startling urgency to the old truism ‘keep the customer happy.’ Indeed, companies should be laser-focused on this issue. But embedded in the notion is a complicated question: exactly how happy should you keep the customer? Or more specifically, how much is good customer service really worth?

hand checking box next to smiley face This turns out to be a historically thorny topic. Despite voluminous academic literature connecting the dots between customer satisfaction and customer loyalty, “an enduring debate about whether increasing service satisfaction leads to greater retention and better financial results has continued,” says K. Sudhir, a professor of marketing and management at Yale SOM. For decades, the methods used to measure the gains from good customer service have been undermined by bias and uncertainty. In a new paper coauthored with Guofang Huang of Purdue University forthcoming at Management Science, Sudhir deploys a novel and more precise way to measure of this relationship.

The researchers focused on roughly 42,000 customers who called a large credit card issuer in January of 2009. Because customers were randomly assigned to customer service agents, Sudhir and Huang were able to draw a clear line between the quality of an agent, measured by customer surveys, and two fundamental metrics of customer satisfaction: the likelihood of recommending the credit card to a friend, and the likelihood of a customer canceling their card over an 18-month period.

On their face, the results demonstrate the intuitive fact that customers who interact with more skillful representatives are more likely to recommend the card to a friend and are less likely to cancel their accounts. But the extent of this effect far exceeds what people previously believed. Old methods of estimating the value of good customer service systematically undervalued positive downstream results by at least half. That is, interacting with a well-trained representative made people half as likely to abandon their credit card than prior methods of measurement would predict. This effect is more pronounced as the issues under discussion become more important to resolve—when, say, a customer calls asking if his APR can be changed or credit line increased as opposed to requesting a change of address.

Given this, managerial decisions based on old insights “can lead to an underinvestment in customer service,” write Sudhir and Huang. And a company “may find it profitable to increase customer satisfaction by improving the skill level of its customer-service workforce.” One suggestion by the researchers is to expand the use of elite or specialized representatives, who currently tend to be reserved for high-value customers; these same teams could be used to tackle difficult customer calls. Companies could also create stronger incentives to improve customer service.

Regardless of the specific outcomes, though, the method used in this paper is “of significant value to managers seeking to determine the appropriate levels of investment in improving service within their respective firms,” Sudhir and Huang write. “We hope the current research not only offers a practical approach to evaluate and understand the benefits of investments in customer satisfaction, but helps improve the customer experience at many firms.”