The Economics of Customer Service

Elizabeth Nowicki —  20 December 2006

Is the retail customer willing to pay for customer service?  Gaggles of books have been written on the topic of customer service, and those books sell based on the belief that customers *care* about customer service.  But do they?  Do we?  Do I?

The idea that somehow customer service matters to the customer is not complex nor uber-creative.(The smarter, funnier, nicer Professor Nowicki dabbles in the topic.)  But does it *really* matter?  Seemingly, it does matter, according to a recent article (to which I cannot link b/c it is on Cornell’s server):

Virtually all Americans (94%) say customer service is an important factor in selecting where to buy goods and services. And 78% say it is a “very important” factor. In fact, at the “very important” level, customer service outweighs price: 61% of Americans say price is a “very important” factor in
deciding where to spend (compared with 78% who said customer service is “very important”). (Overall, customer service is as important as price — 95% of Americans say price is important, and 94% say customer service is important.) Even in the midst of holiday-shopping pressures, 82% of Americans say they are likely to spend more money this holiday season at stores where they receive better service.

I find it hard to believe, however, that customer service really, really matters.  Exhibit A:  Many friends of mine think Wal-Mart’s customer service is not particularly good.  But those friends still shop at Wal-Mart because it is cheap.  Exhibit B:  The closest coffee store to the Law School has employees who have not yet once smiled at me or said “thank you.”  I usually get to overhear internal quibbling while I wait at the counter, hoping someone notices me and is willing to take a pause to wait on me.  Yet I *still* go to that coffee shop because it is the closest one to the Law School.

Perhaps Wal-Mart’s perceived mediocre service is part of their calculus.  Perhaps Wal-Mart has calculated how particularly mediocre they can become before the savings to customers in dollar value is outweighed by customer frustration with mediocre service and customers therefore stop shopping at Wal-Mart.

I guess I need to make my peace with questionable customer service.  I mean, I *did* just pay $5.40 for a fancy coffee served by a not-so-very-service-oriented person.  (Allow me to note that I worked retail since I was old enough to work.  And I waitressed for years.  So I know a bit about customer service, and what the “front line” employees have to tolerate.  Dealing with customers is a difficult job, to be sure, but it seems to me that the employees who do not like to deal with the public should at least make a small effort to conceal their contempt.  I did not want a happy dance from my coffee barrista this morning – I just wanted . . . a “thank you” or eye contact or a smile or a “enjoy” or something other than being ignored for a bit and then viewed with impatience.  Then again, does my $5.40 entitle me to pleasant service or does it only entitle me to a coffee?)

9 responses to The Economics of Customer Service


    I think what you are also looking at is whether a consumer will return to a store. Customer service can then be a gift or a burden. Good customer service can bring them back into the Best Buy because the associates were helpful, attentive, and the items requested were in stock. However, it can be a burden if the price point is significantly higher than a competitor. Case in point, I worked at Best Buy selling cameras, and many customers would come to the store to learn about them because we had the best service and most knowledgeable digital imaging employees in the Greater St. Louis Area (or so I boasted). But once they got their knowledge, they would go to the nearest Wal-Mart, Sears, Circuit City, or whoever was having the blue-light special that day and bought the item they had so diligently researched with the aid of a Best Buy employee. Therefore, unless the Best Buy employee knew of the competitor’s better prices and offered the customer a price match or discount, the sale was lost, and so was the time spent helping someone who was destined to give their money to Circuit City anyway.
    My point is that great customer service can be very important, but pricing will almost always reign supreme. Especially in highly competitive markets such as consumer electronics. Maybe it works better somewhere else like cell phone companies (can’t wait until my Sprint contract is up!).


    In business school we were taught something called the the 4 P’s of marketing and they are :

    Promotion (which, for the purpose of this discussion, encompasses what we are calling ‘customer service’)

    All marketing outcomes can be analysed in a matrix consisting of a mix of these 4 factors.


    This is an interesting aspect for our company. We certify entities to our proprietary customer service standard and in writing the Standard we took the pain to ask people from different strata of society what is their perception and what makes them want to see in the Standard to make them excited enough to SWITCH from coffee shop A to B. Am pleased to say that a big chunk of them said they would do the switch is a certain level of customer service is delivered but as some of my colleagues commented customer service becomes critical in proportion to the relative value of the product or service being consumed. Thus you would travel a bit more to have a hair do becasue of the perceived importance of your looks against the cost of the hair do. What we do notice is that people across the world becomes more and more customer care demanding as their level of disposable income increases. We seem to acquire refined tastes in proportion to our richeness which implies that we are customer centric animals after all. Nice Christmas to all.


    Kate: We were apparently making the same basic point then: there exist tradeoffs between price, quality and other margins which vary across consumers. Predictably then, we see variation across retailers. My point about WM’s success is consistent with this: even WM consumers who choose the price/service combination offered at WM care about service even if they care more about price (and conversely, Bergdorf customers or David when he buys a suit … care about price even if they care less about price than quality). The most interesting related economic issue, I think, is the multi-dimensional nature of competition for the heterogenous consumers facing these tradeoffs.


    Josh and all: Actually, my point wasn’t that there is a gap between what people say and what they do (though, of course, there is such gap). My points was that people have multiple competing considerations. If the only difference between Wal-Mart and Bergdorf was price, I would have always shopped at Wal-Mart. If the only difference was the quality of service, I would have always shopped at Bergdorf. But there are lots of differences! So, when I want something cheap and simple, I shop at Wal-Mart and grudgingly tolerate their service. When I want something fancy, I shop at Bergdorf and grudgingly tolerate their prices. I would much prefer the store that looks like Bergdorf, but with Wal-Mart prices, but this is not possible, so I settle for the second best. High-quality service is expensive, and, while most people claim to want it, they don’t want it enough to be willing to pay for it.


    I’m not sure if the relevant divide here is between commodities and more unique goods. A television set or automobile is not as unique as David’s new suit, but some retail outlets offer a great deal of pre-purchase service and others discount and offer no service (giving rise to the classic “dealer free-riding” analysis of vertical restraints). The grocery business more or less focuses on solely the sale of commodities (as the term is being used here), but some stores engage in a great deal of promotional effort and point-of-sale activity and other retailers do not. Moreover, there is additional intra-store variation across products. But this distinction is a move in the right direction. Suffice it to say for now that customer heterogeneity of this sort exists and competition between retailers occurs on various margins to lure these consumers: price, service, innovation, etc.

    WM seems to fall into the category of low service and low prices. It is not surprising that we see in equilibrium some specialization across firms rather than a monolithic retail machine offering the same mix of price and service to all consumers (And no, WM is not a monolithic retail machine).

    WM’s success also speaks volumes about the difference between what customers say and how they act, as Kate points out. I’m fairly certain that if we asked customers “do you like low prices?” 100% would say yes … even those who go are willing to pay for the provision of service.

    As for the coffee: the lesson here is that your $5.40 entitles you to your coffee and a unfettered right to try another coffee shop with a price/service ratio more to your liking. If all consumers truly value service (i.e. via willingness to pay) and this outlet does not provide it, it is my prediction that this particular store will either (1) hire employees that will give such service; or (2) go out of business.


    I think Elizabeth discovered the following: when people say that something is a very important factor to them, they don’t mean that it’s the only important factor to them. Who could have thought!


    It’s a very interesting issue, and I think one of the big problems is the information costs here. Even if one is dissatisfied with WalMart, is there any assurance the Target up the street will be better?

    I’ve thought about this a lot re hotel gyms. They are almost invariably terrible. But I’d pay more for a place that had a decent one, and I’m sure there are many people out there like me. You’d think they might try to put pictures of good ones on the web, but I’ve never seen them.

    Here’s some interesting perspectives on “hidden fees;” it might be applicable to “hidden costs” (or difficult-to-discount) rotten customer service:


    I wonder if customer service may not (greatly) affect purchasing decision on “commodity” type goods (such as goods at Wal-Mart or coffee) but would affect purchases of, for lack of a better term, higher-value, more unique goods. Being ignored and/or not recieving a smile does not bother me if I am purchasing coffee. But if I want to purchase a new suit, then quality customer service is particularly important.