Does It Pay to Treat Your Customers Poorly?

Comments

8 responses to “Does It Pay to Treat Your Customers Poorly?”

1. December 18, 2013

   Mike Weinberg

   Jack,
   Thank you for writing this and pointing out the stupidity and flawed arguments in the Bloomberg piece. What nonsense! Is anyone to believe that poor service and a weak brand contribute to profit? Please. To answer your question: there is no choice but to attack the silly and contradictory information, and move on. Not much to learn from that article.

   Some of my favorite companies: Apple, Southwest Airlines, Chick-Fil-A, Porsche…. all are class leaders in profitability and all deliver outstanding service that generate incredible loyalty among their customers.

   I appreciate your posts, Jack. Here’s to a wonderful year ahead.
   Mike
2. December 18, 2013

   Charles H. Green

   While I yield to nobody in my passion for customer service, I must respectfully take a slightly different tack from Mike Weinberg and Anthony Iannarino on this one.

   I agree with them that it’s nonsense to infer causality from the data. But it’s quite another thing to disavow the stated correlation. Unless they think the author is mathematically incompetent, the regression analysis stands, and demands explanation. There is little or no R-squared. What does that mean?

   Well, here’s an explanation. Without fully seeing the datapoints, we can’t know for sure, but the example they begin the article with is telling – the stock price of TimeWarner Cable. Can you say “monopoly?”

   I don’t mean legally convicted of monopoly, I mean plain old massive market dominance. Why do we hate cable so much? Because there is no alternative. And unfortunately, most companies, faced with no competition, jack up prices and cut back on service. It certainly doesn’t mean low service causes high stock price; but it does mean that companies who have monopoly power tend to abuse it, and that raises profits and stock prices.

   Want more examples? OK, remember Northwest Airlines’ lock on the upper midwest market and the resultant horrible service and high prices? How about the patent laws protecting profits on drugs for umpteen years? Ever wonder why this country lags behind others in the speed of Internet connections? Remember Microsoft’s stock price in its heyday?

   The simple fact is: competition drives up service and drives down prices. The absence of competition drives down service and drives up prices. Stock prices merely reflect the bottom line results. And the stock market loves monopolists, because monopolists don’t have competition, and the market doesn’t care how you got to the bottom line).

   So the real question is: how competitive, on average, is the US market? And the answer is, not nearly as much as we all like to think. And to the extent we have imperfect competition, we’re going to find a correlation of profits (and therefore stock prices) NOT with customer service, but with the extent to which a company can afford to IGNORE customer service because they happen to dominate an imperfect market.

   It doesn’t take too many such companies to produce the kind of apparent correlation that the author is talking about.

   I think Mike and Anthony would agree with me that, in situations of high competition, customer service is a powerful driver for competitive success. And unless you’re a monopolist, you ignore service at your peril. But we also shouldn’t let our values get in the way of recognizing data for what it is – the black hats sometimes win the game, particularly if they own all the marbles.
3. December 18, 2013

   Gary S. Hart (@SalesDuJour)

   Jack,

   Thank you for taking the time to read this horse manure and calling Bloomberg out. Writers and media publish controversial junk like this for readership, not because it’s good journalism. One year is not enough to support a theory. Show me a ten year+ study that spans two recessions and you might have something. They also did not segment market demographics. Apple and the companies Mike listed in his comment could not get away with this ridiculous strategy while Wal-Mart can. There’s too much information excluded to draw any conclusions.

   Since the economic downturn, cutting expenses has been the mantra of many organizations. Buyers tolerate poor customer service when they want the lowest prices possible price. In a healthier economy, when people can afford to pay a little more for better service, “the most hated companies” will face a decline in revenue.

   Shiller, among other notables, recently expressed concern about a stock market bubble. I think he was the one who said (paraphrased), companies are not performing better, their income improvement is due to cost cutting and cheap money. When there is nothing left to cut and money is no longer cheap, the negative impact on revenue will be severe.

   One can hope and pray their competition falls for this tripe while they improve customer service.

   Happy Holidays Jack!
4. December 18, 2013

   Robert Terson

   I think Charlie’s point about monopoly is spot-on. When you’re going to get the business anyway, it tends to corrupt your concern for your customers’ experience doing business with you. The medical establishment, for example, provides some of the worst customer service out there, right? Why do you think that’s so? It’s because our choices are limited, and they’re constantly finding ways to make them even more limited.

   All that said, somewhere down the road it’s got to catch up with them and they’ll pay the price for treating their customers so poorly, for not caring about the level of VALUE they’re providing.
5. December 18, 2013

   Jack Malcolm

   I appreciate the thoughtful comments so far. Although I will hold off on replying at length for a while, I do want to clarify something. I’ve been praised for attacking the Bloomberg article, so I guess I didn’t express my position clearly enough.

   While I find the implications of the study disturbing, I still think it’s important to take it seriously and think about it.

   Great discussion. Let’s keep it going!
6. December 18, 2013

   Andrew Rudin

   Jack: like you, I believe it’s healthy to challenge assumptions. Over the years, I’ve learned to dismiss articles by business development bloggers who gratuitously proclaim their thought leadership by injecting the words “Laws” or “Rules” into their titles. There’s no such thing.

   For the same reasons, I think the Bloomberg / Business Week article can be similarly discredited. The offending word here is the first one in the headline, “Proof.” That’s self-serving, inflammatory [malarkey]. To be charitable, I’d call it an interesting, quirky idea, and leave it at that.

   In the short run, the article is inconsequential, and I think it’s silly to get up in arms. This bit of self-serving writing won’t inspire a single CEO to change course, and begin run his or her company like the next Ryanair. There are still some assumptions that I think are not only safe, but ethical: treating customers with respect and dignity is not a bad business practice. I’ll take that one with me to the bank, but I’ll stop short of calling it an immutable truth – there’s always the famed “Soup Nazi” from Seinfeld fame.

   For a good read on the topic of how data can be grossly misinterpreted, read Nate Silver’s The Signal and the Noise.
7. December 18, 2013

   Douglas E. Rice

   As someone about to pursue his PhD in marketing, I feel compelled to weigh in, though I don’t think I’m adding much beyond what has already been said.

   First, the correlation as causation error is a blatant rookie mistake. I’m sure you have your favorite example of mistaking correlation for causation, but mine comes from the book The Invisible Gorilla. A data set was pulled indicating a precise correlation between the days more ice cream was consumed and the days more people drowned. Ergo, eating ice cream must cause people to drown, right? None of us would be silly enough to agree with such a conclusion. The obvious intuitive explanation is that both variables are caused by a third variable–the weather. In the scenario from Business Week, the same thing could be happening. As Charlie suggests, that third factor could indeed be the monopoly power. Or, it could be something else. But there’s no rational reason to assume poor customer service is causing high stock valuation.

   I would be more interested in the data showing a correlation between a single company’s customer satisfaction scores and stick prices over time than a comparison of all companies’ customer service scores and stock prices in one instant. There just seem to be too many factors unaccounted for when comparing such a vast range of organizations. Take one company, measure the customer satisfaction scores and stock prices over a time I’m which little else changes, and that would get you closer to causation. But, then again, why even compare customer satisfaction with stock evaluation? There’s a lot more that goes into stock prices than interaction with customers–management of resources, operational efficiencies, and financing decisions for example. Why not instead compare customer satisfaction with revenue? Or with loyalty/retention if the data is available?

   I share the concerns of others in regards to the sensationalist motives of journalists and researchers. In both collecting and interpreting data, there is a bias toward novelty. Since consumers of information are attracted toward new, interesting, counterintuitive conclusions, there is an incentive to publish that kind of content. As has always been the case, those of us who seek the truth must approach counterintuitive studies with caution. One new study should not be sufficient to overthrow decades of research indicating a conflicting conclusion.
8. December 18, 2013

   Chip Bell

   We need to stop wasting all the investment in quality improvement. Think of the impact on the bottom line if there was no money spent on quality assurance, six sigma and quality control. Need concrete proof? The Wallace Company in 1990 won the prestigious Malcolm Baldrige National Quality Award. Less than two years later, they filed for Chapter 11 bankruptcy protection.

   We need to stop wasting all that money on the scare tactics about how smoking causes health problems. Think of the money the health industry could save if it put resources on important issues. Need concrete proof? My Uncle Pete is 94 this week. He has been smoking two packs of cigarettes a day since he was 14 years old. And, he does not even have a cough!

   Board sweeping generalizations based on limited data especially those that treat correlation like cause and effect tend to get our philosophical motor running. But they help us ask deeper questions about the truth. They help us avoid getting trapped by assumptions that can lead to bad decisions.

   The Bloomberg Business piece should give us some pause. But, like Wallace and Uncle Pete, their conclusion may be just an aberration–the stuff of myths and “old wives tales.” So, as you consider their position that great customer experience is maybe an unimportant factor in marketplace success, how would answer these questions?

   Do vitamin supplements enhance your health? Is Chicago’s crime rate really improving? Should kids wait 30 minutes after eating before swimming? Is there really such a thing as a sugar high? Is global warming a real threat? Is Santa Claus really white? Now, are you absolutely positive?