Too much customer satisfaction can hurt profits

Thought customers could never be too satisfied when it comes to service? Maybe you thought wrong...

Last Updated: 31 Aug 2010

There’s a widely held view that the better you are at customer service, the more money your company will end up making. But it turns out this may be misguided: new research has shown that delighting customers to the greatest extent possible can actually be detrimental to your business...

Researchers at the Chartered Institute of Management Accountants, who have been delving into the customer service practices of a major American housebuilder, were expecting to find that impeccable customer service would make it easier to keep prices high, reduce marketing costs and improve brand loyalty – all of which would ultimately lead to strong financial performance. But it didn’t quite work out like that: what they actually found was that although there are financial benefits of keeping customers generally happy, profits start to tumble once you hit satisfaction levels of 90 to 95%.

So what’s going on? Well, put simply, good customer service is expensive. ‘Companies can overspend on satisfaction,’ says research wonk Kenneth Merchant. ‘Moderate customer satisfaction may be good enough for many companies, given that there are diminishing returns to the improvements and investments in customer satisfaction.’ Customer service already accounts for a high proportion of many companies’ costs – up to 60% in the case of hi-tech firms, according to analyst Gartner (which is why an increasing number of firms look to save their pennies by outsourcing their operations). And if you were so minded, you could spend a lot more. So at some point you have to draw the line, or your cost of sale gets too high.

This research rather goes against the grain of recent trends. Many UK firms have raised their game in the customer service stakes in recent years – led by the likes of John Lewis, our companies were recently voted as having the best customer service in the world in the recent UK Customer Satisfaction Index (by UK punters, admittedly). And such measures have increasingly become among the most important non-financial performance indicators. But this research reminds us that you can go too far – there are times when good is good enough.

That said, maybe it’s best not to let the legions of bored Saturday shop attendants in on the secret. They seem to need no encouragement to be rude.

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