The Economics of Customer Service: A Rational Approach

Origins of Customer Service

Conceptualize a medieval barter trade. A merchant ship docks at a coastal point of call, possibly along Africa or the Americas, to procure interesting artifacts from the inland traders.

The trade is unwieldy as neither the visiting merchant nor the inland trader can understand each others strange dialect. Only after wild gesticulation, sign language and shouting is an agreement reached over an exchange rate between say, ivory and mirrors. A deal is concluded and the same process repeated for other wares.
Several visits later the two traders have begun to communicate in a limited manner. Gradually product guarantees begin to creep into the negotiations. The natural evolution is customer service as products fail to meet customer expectations.

 

In the initial trade, the terms of sale were strictly What-You-See-Is-What-You-Get (WYSIWYG). Due to the language barrier, the vendor had no way of establishing the intended use of the product. It was entirely up to the buyer to satisfy himself on the product’s value and utility.

Customer service aims to bridge the gap between a customer’s perception of utility and value of a product or service with that of the vendor.

Customer service will generally arise out of defect (perceived or real) of a product or process. In most organizations, the after sales service is not billable and may constitute a significant proportion of the cost of sales.
With the scale and complexity of modern trade, the cost of customer service must be computed. Key to costing customer service is a clear map of the service delivery channels. Service delivery channels may be either interactive or non-interactive.

Types of Customer Service

Non-billable customer service
This is any service auxiliary to a core product or service. An example is the help desk at a department store. The cost of running the desk is built into the cost of the products on display, and the store must bear with each customer complaint, no matter how long it may take to resolve.
Similarly, once a client has paid an insurance premium, the broker or Insurance company has to put up with every call, visit or letter from the client. The same holds true for banks, airlines and hotels that cannot bill for the additional costs of servicing even their most irascible customers.
Organizations with non-billable services aim to minimize the costs without impacting on the effectiveness of their customer relationship management.
Billable customer service
The service element is contractual and each service provided is billed as predetermined by a service level agreement. IT support organizations are a good example. Software support agreements typically provide structured support options ranging from telephone and email support to “Platinum” (24-7) support. Each service is billed accordingly. Firm’s that are able to bill for their services seek to ensure that they provide their services profitably.

Customer Service Channels

Interactive Channels
For the purposes of this discourse interactive channels are those requiring interaction with a “live agent “(i.e. service rep.). Staff costs will often be the most expensive company resource. In addition to channel medium costs e.g. costs of telephone services, the cost of service representatives must be taken into account.
In order of highest to lowest cost, typical interactive channels are face to face, telephone, letter/fax and email.
Non-interactive Channels
These channels do not require the intervention of “live agents”. The channel medium cost is fixed and does not increase with interaction level e.g.. The number of “hits” on the company web site will not affect the hosting charges. Some examples are knowledgebase on company web site, Email auto-responders, Interactive voice response systems (IVR) and brochures or other publications by the organization.

Customer Service Channel Costs
A fictitious company with 50 members of staff is considered for purposes of illustration. The table below compares the fixed and variable costs of the main communication media aggregated over three years. The footnotes describe the assumptions made in arriving at these figures.

 
Email[1]
Phone[2]
Website[3]
Mail [4]
Face to Face[5]
Year 1
$9,629.20
$7,800.00
$5,400.00
Year 2
$2,899.20
$6,800.00
$2,400.00
Year 3
$3,329.20
$6,800.00
$5,400.00
TCO
$27,190.90
$21,400.00
$13,200.00
Monthly Fixed Cost
$755.30
$594.44
$366.67
Transactional Unit Cost[6]
$0.02
$0.25
$1.00
 

Interactive Channel Costs (1000 transactions)

 
Email
Phone
Mail
Face to Face
 Grand Total
Transactional Unit Cost
$0.02
$0.25
$1.00
Monthly Fixed Cost
$755.30
$594.44
 
Transactions Media Cost[7]
$20.00
$250.00
Live Agent Cost[8]
$1000.00
&1000.00
$1000.00
$1000.00
Total Channel Cost
$1,755.30
$1,614.44
$1,250.00
$1,000.00
$5,619.74

 

[1] Email costs aggregated over 3 years. Derived from total cost of ownership (TCO) of a Windows 2000 mail server configured with Exchange Server (50 users), Sybari anti virus software, pro-rata costs of lease line and the average annual costs of support and licenses.
[2] Phone costs consist of 10 lines running through a fully configured 50 extension PABX system.
[3] Costs of web design, hosting and maintenance. Includes recommended redesign after 2 years.
[4] Cost of stationery and postage.
[5] Live agent salary estimated at $6.00 per hour
[6] Each customer service interaction is estimated to last 10 minutes.
[7] Based on the cost of 1000 transactions for each medium of communication.
[8] The personnel cost for 1000 transactions

 

 Non-Interactive Channel Costs

 
Email
Phone
Website
Grand Total
Monthly Fixed Cost
$755.30
$594.44
$366.67
$1,716.41

 

From the forgoing section it is evident that a firm could make considerable savings by redirecting customer service activities from interactive to non-interactive channels.

In the example, the fictitious company would make a very substantial saving on their bottom line of $46,839.96 in one year. Major department stores like Wal-Mart have a no-questions-asked returns policy in their stores. It would certainly cost the chain if they were to deploy customer service personnel to quibble with customers over returned items, most of fairly moderate value.

Many companies have invested in helpdesk solutions for this very reason. ROI on a properly implemented helpdesk can be achieved in as short a period as one quarter.

It must be said that the key features in a helpdesk solution should be channel management – the ability to parry service requests to the cheapest channels.

The aim of a helpdesk is not to improve customer service (although it invariably does) but to manage it.

After all, as has been cynically noted by a web commentator, to really make customers happy, give out your product free, home delivery with a lifetime warranty.