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Include Cost to Serve in Your Price to Accelerate Profitability

Posted by Tom Smith on Tue, Jan, 07, 2014 @ 06:01 AM

service costs hurt profitability

 

 

 

 

 

 

 

 

 

 

Great presentation by Gary Cokins, founder of Analytics Based Performance Management.

Gary suggests that the Pareto principle (the 80:20 rule) applies to cost to serve the same as it applies to revenue and profitability and that by eliminating the 20% of customers that account for 80% of customer service expense you can dramatically increase your firm's profitability.

The key is to know the lifetime value of your customer and the cost to serve them.

Following are 11 ways to increase profitability:

  1. Be aware of the service cost for each customer and reduce it. What can you do to making buying from you more simple? This will save the customer time and save you money. Customers crave simplicity.
     
  2. Establish a surcharge for, or reprice, expensive cost-to-serve activities. If it costs more to give the customer what they want, you need to educate the customer of this and charge them for the extra expense you are incurring.
     
  3. Reduce services. Customers today are very adept at searching your website, and others, for answers to their questions. Provide the information they're looking for with a content-based marketing effort. Answer any question you've ever received from a customer in a blog post. It will help your prospects and customers as well as your search engine optimization efforts.
     
  4. Introduce new product and service lines based on your customers' needs and wants. Empower your employees to help identify what your customers' needs and wants are.
     
  5. Raise prices. The 2012 American Express Global Customer Service Barometer found that customers would spend 13% more with companies that provide great service.
     
  6. Abandon unprofitable or less lucrative products, services or customers. Don't do this before you've tried charging more.
     
  7. Improve processes to drive up service line or product profitability. Start by having an accurate customer relationship management database that every customer-facing employee has access to.
     
  8. Offer the customer profit-positive service level options at varying prices. Zappos is known for providing a consistently outstanding customer experience and next day delivery -- not everyday low prices.
     
  9. Increase activities that a customer shows a preference for. Fine dining establishments have been charging premium prices for "chef's tables" for years.
     
  10. Up-sell and cross-sell the customer's purchase mix toward richer, higher-margin products and service lines. Leverage data to know what to offer your customer next to fulfill their needs.
     
  11. Discount to gain more volume, or greater lifetime value, with low "cost-to-serve" customers. I receive monthly shipments of dog food and cereal at a 10% discount. I save time and money and the companies selling me their products now have an annuity stream.
How are you using your knowledge of the lifetime value of the customer and the cost of providing service to increase profitability?
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Tags: insights from analytics accelerate sales, pricing as a strategic market advantage, consumer insights, customer relationship management, customer bonding programs, lifetime customer value