Readers might be familiar with the story of a car breaking down far from anywhere. A local offered to fix the problem and, after a brief observation, took a screwdriver and turned a nut. Bingo, the car was repaired. A grateful owner enquired what the charges would be and was surprised to hear, “That will be Rs 500.” “What? Five hundred rupees for just turning a nut?” asked the owner. The local replied: “No, it is just Rs 10 for turning the nut — but Rs 490 for knowing which nut to turn.”
A service customer is paying for the result as well as for a host of hidden factors. In this case, the local’s knowledge, competence and skill must have cost a fair amount and time to acquire, which ought to be reflected in the price.
It is not the customer alone who finds it difficult to evaluate the cost of a service. Service providers themselves have problems doing that. A glaring example is the way banks view the service offered by a relationship manager to a high net worth customer. Such a customer would be willing to pay for efficient, hassle-free service from someone he can trust to professionally advise him in managing his wealth effectively. Far from responding to these needs, many banks evaluate their relationship managers on how much money they make from the customer than they do for the customer.
Recently, I was informed by a relationship manager with a global bank that he had allowed a large amount of money to lie fallow in a low-interest rate account rather than advise the customer to invest that money so that he could get better returns — because his continuation as relationship manager for that customer depended on his doing so. The logic was that the less money customers make from their bank accounts, the more the banks make for themselves.
Let us evaluate the cost of such short-term thinking for this bank. As soon as the customer realises what the bank is doing, he would switch to another bank. The loss to the bank is not only the income that would have accrued from the customer’s retention but also what would have come through referrals from such a happy customer. The loss mushrooms further when one counts the potential loss of customers, those who stay away after hearing about this bank from the duped customer.
Why do organisations commit such mistakes in valuation and pricing of their services? There are several reasons, but for want of space, I shall highlight just a few in this column. The first and most critical reason arises from trying to make a profit from each service transaction, rather than from a lasting relationship built through several positive transactions.
F F Reichheld wrote in the September 1990 Harvard Business Review that the profitability of service businesses went up by at least 35 per cent if customer retention improved by a mere five per cent. Further research findings in the past two decades have affirmed the imperative need to move from transaction costing to relationship pricing. Lifetime value of a customer – including the impact of his repurchases and referrals – far outweighs the petty returns sought from unfairly milking every transaction with a customer.
This was understood very well by Fergal Quinn, former head of Super Quinn, an Irish food retail chain. Quinn literally told his staff to become expert boomerang throwers, that is, make every customer who walks out of the store come back. He told them: “If we keep a customer happy and he stays with us for ten years, his purchases would total £25,000. Hence, if a customer, for example, says the fish he purchased yesterday was bad, do not argue with him. Give him a little more than he got the previous day for free, after checking it is fresh.” Quinn went on to provide a budget of £100 per employee per month to fix customer problems on the spot without having to ask permission!
A second reason why service pricing is difficult is that it is not so easy for a customer to compare services. Imagine that you wake up with a severe toothache in a foreign land. By asking around, you identify three alternatives. One dentist can see you immediately, as he has no queue and charges just $10. Another can see you the same afternoon, but he doesn’t believe in painkillers and charges $50. A third can see you the next day as he has a cancellation for a prior appointment; he would charge $150, but he will also provide you with a painkiller to help you with the day’s wait prior to seeing him.
As a customer, you evaluate the cost of waiting, psychic and other costs of not receiving the service in a painless manner, the fear of not obtaining an alternative service in time, the comfort of putting oneself in the hands of a trusted person and so on. It is not as simple as deciding which toothpaste to buy from a range on offer in the same shelf of a shop.
A third factor that makes service pricing complex is the difficulty in evaluating the causal relationship between a service and the eventual result. If an advertisement receives positive coverage and the product it is promoting sells better, a copywriter is justly praised. However, if the advertisement creates negative publicity, but the product’s sale remains buoyant, the copywriter in all likelihood would say, “See, my copy got the market talking of the product, and so brand recall was high in the market.”
Should sales suffer, however, several explanations are offered: general market conditions, poor product quality, ineffective distribution, or competitors’ actions from high-cost promotions to unethical practices and so on. Few copywriters can ever be held accountable for not having done adequate justice to the fee they charged for their service.
The net effect of the complexities of service pricing leaves many customers with a feeling that they have been taken for a ride. To counter this, a service provider should first decide the value proposition for a service, and then consistently deliver it at a price customers are happy to pay in exchange for the value they receive. This calls for a total transformation of a service organisation from a product mindset to that of service — which takes some doing.
The writer, a former corporate executive, was the founder-director of the Centre for Service Management at the University of Buckingham, and is now MD of Chennai-based VSM Consulting Services.
mahesh@vsmahesh.com
