Great service does not always lead to customer loyalty

From the blog of consultant Mitchell Osak.

Conventional wisdom says that consistently providing service excellence will deliver high levels of retention. According to new research from the Harvard Business School, this is not always the case. Companies that offer high levels of customer satisfaction may still experience loyalty problems if competition offers even better service. In fact, the research suggests that the customers you think are your most loyal are likely to be the first to jump ship when a challenger to your service superiority enters the market.

The researchers, Harvard Professors Dennis Campbell, Frances Frei and doctoral student Ryan Buell explored the link between service levels, customer loyalty, and competitive strategy in the U.S.banking sector. The 2002 to 2006 study analyzed data collected from a large U.S.domestic bank that competed in more than 20 states.

The study’s findings confirmed some earlier research on the impact of corporate and service strategy on retention. In a nutshell, companies who generate high customer satisfaction scores remain at risk when competition raises the service stakes. Conversely, the research indicates that firms rated low in service quality are relatively immune to premium competitive service offerings.

The reasons for these counter-intuitive findings have a lot to do with the customer expectations established in part by the incumbent provider. The longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors. Given their higher expectations, service-driven customers are more willing to try other firms and products that trumpet and deliver service excellence.

Despite these conclusions, managers should be mindful of throwing out the service baby with the bath water when setting strategy. The study found that even though high-end customers can be fickle, a company can still attract and retain customers in a variety of markets with a superior customer experience. There are a number of ways to do this:

Avoid complacency

Firms can avoid resting on its service laurels by staying abreast of customer needs, focusing on continuous improvement initiatives and proactively investing to significantly enhance their customer service experience.

Consider each product category separately

Customers will trade off price and service depending on the product they are seeking and the importance they attach to it. In general, customers – in the long run – purchase the goods that represent their ideal combination of price and service. As such, delivering more service than is needed (or is willing to be paid for) would be sub-optimal.

Understand that service sensitivity varies by market…

According to the researchers, there are considerable differences in the type of customers you attract and retain between markets. This variance suggests that managers should tailor their service and marketing strategies depending on local market conditions, competitive threats and customer needs.

…But be wary of too much customization

Local market service strategies come with considerable costs in terms of operational complexity and brand dilution. Firms need to carefully weigh the pro and cons of service customization for each market.

Make it difficult to leave

If high service levels by itself won’t ensure loyalty maybe raising a customer’s switching cost or providing loyalty-based incentives would do the job. For example, managers could offer discounts for long term contracts, extend warranty periods or launch high-value loyalty programs.