Want happy customers? Service is the key

A note to the executive office: It pays to be nice to your customers.

Companies that provide a great shopping experience tend to be rewarded over the long-term by their customers and investors, according to a new study by Watermark Consulting. Those that don’t – whether because of an incompetent sales staff, cluttered website or cumbersome return process – will be penalized on both Main Street and Wall Street.

“It’s not a perfect correlation,” said Jon Picoult, founder of Watermark Consulting. “There are plenty of instances where you have companies in monopolistic industries that turn profits for awhile, even though they don’t deliver the best experience. But over time, it certainly appears there is long-term value in delivering a great experience and it’s rewarded by both consumers and investors.”

Companies that provide a great shopping experience tend to be rewarded over the long-term by their customers and investors, a new study shows.

This study looked at the cumulative total stock returns for two model portfolios of publicly traded companies – the top 10 “leaders” for customer service and the bottom 10 “laggards” – based on the annual Customer Experience Index ranking by Forrester Research. The data was from the pre-recession market peak of 2007 to the post-recession recovery of 2013. The major findings:

  • The leaders outperformed the market, showing a total return that was 26 points higher than the S&P 500 index.
  • The laggards actually posted a negative return of 2.5 percent during the same period, even as the market rose sharply.   

“That’s a pretty striking difference and it really underscores the penalty that’s exacted on companies over the long-term when they’re not good to their customers,” Picoult said.

Poor customer service not only hurts the stock performance, it can also drive down revenue and increases costs, the study noted. That’s because customer frustration leads to more employee attrition and higher operating expenses.

So why don’t more companies get it?

“It’s an accounting mentality,” said Michael Belch, a marketing professor at San Diego State University. “They look at customer service as an expense, rather than an investment. So, rather than investing a little more in customer service, they keep cutting back to improve the bottom line.”

Belch teaches his students that it costs a whole lot more to get new customers than it does to maintain the ones you already have.

Tod Marks, a senior editor at Consumer Reports who specializes in retail shopping, says customer service is “an afterthought” at many companies. He believes that’s a big mistake.

“In an age when the same products are sold by so many retailers, the point of differentiation often rests on customer service,” Marks said. “People are going to remember a negative experience and that can alienate them and make them switch companies.” (Marks recently wrote about 17 companies that offer great guarantees.)

It takes a real commitment

Providing customers with a positive, memorable or enjoyable shopping experience doesn’t happen by accident. The companies that do this well recognize the link between the customer and their employees, Picoult said.

“Happy, engaged employees help create happy, loyal customers (who, in turn, create more happy, engaged employees!)” Picoult writes in the report. He calls this a “virtuous cycle” that leads to success.

Costco Wholesale was one of the companies in the leaders group used for this study. John McKay, COO of the company’s northern division, told NBC News it often costs more up front to do things that benefit the customer – such as a liberal return policy or paying employees more.

“It’s really been drilled into all of us that if you take care of the customers and you take care of the employees that the rest takes care of itself,” McKay said. “When you look at turnover and training costs and customer satisfaction, there are a lot of advantages to happy employees and paying them well is one of the things that helps keep them happy.”

The bottom line: Companies that impress their customers reap the rewards – loyal customers who spend more and share their positive experience with others. That sounds like a pretty savvy business strategy, doesn’t it?

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitteror visit The ConsumerMan website.