It is understandable that as margins are squeezed in tough market conditions, reducing costs has been a key way to maintain or even improve performance for many businesses. There is, however, a delicate balancing act between ensuring costs are kept to a minimum and maintaining a sufficient level of customer service.
Balancing this tight rope is something that requires careful consideration, since excessive cost cutting amounts to a major surgery that can bring with it a high mortality rate. Whilst falling margins require action, a loss of customers could prove fatal.
The holy grail for businesses is identifying ways to offer outstanding service for the lowest cost. But often business leaders are faced with difficult choices, having to decide whether to prioritise financial considerations or customer service. In this post, we identify 4 key considerations every organisation should make to ensure that reducing costs doesn’t become costly…
1. Identify areas that can take the strain
The way to offset the potential problems that often accompany cost cutting is to identify areas in which processes can be streamlined, without affecting the customer’s experience. In difficult economic circumstances, where purses are pinched, customers will seek out what they value most. As the perceived differences between suppliers and products narrows, the experience a company offers is now of paramount importance.
Meeting core customer needs is therefore vital. It was in 1987 that Jan Carlzon, the then president and CEO of Scandinavian Airlines Systems, coined the term “moments of truth”. Organisations should focus on identifying these elements of customer journeys that have a disproportionate impact on experience and, so far as is possible, the degree of service customers expect in these moments should be preserved. So if, for example, it is found that customers prioritise prompt service, cutting the number of agents available to answer calls may not be a wise move.
By working backwards from these key moments in customer journeys, organisations can identify areas in which it may be possible to reduce journey costs, without causing significant damage to customer experience.
2. Reduce redundant interactions
In 2016, customers in the UK spent 2.18 billion minutes on the phone with contact centres. However, Ernst and Young estimate that around 25-30% of customer operation interactions don’t contribute to revenue. These “redundant” interactions are often a result of a previous problem within a customer’s journey, for example:
- Repeat calls to resolve a single issue (typically around 10-15%)
- Calls for updates regarding a purchase or payment
- Calls for clarification regarding confusing offers, documentation or correspondence
Organisations should look upstream in the customer journey to identify problems that might be causing redundant calls, for example, agents not explaining products sufficiently. By eliminating these problems at the source, organisations can potentially deliver a significant reduction in cost through preventing redundant calls, whilst having the additional benefit of removing sources of frustration for customers.
Importantly, organisations should be careful that they are measuring the right things, since the measurements taken ultimately drive the behaviour of employees. For example, a focus on reducing average handling time can ultimately be counterproductive in the long run (see our previous post), since it encourages employees to finish a call faster rather than deliver a first-time resolution, ultimately increasing the number of redundant calls due to confusion or because the problem wasn’t resolved.
3. Prioritise a customer base
All customers are important but, in reality, some are more important than others. When looking at opportunities to reduce costs, organisations should avoid doing anything to the detriment of their most significant customer base. These are the customers that will not only deliver you profit today, but are also integral to your future growth.
Depending on what industry you operate in, studies suggest it is anywhere between 5 to 25 times more expensive to acquire a new customer than retain an existing one. And yet, existing customers are 50% more likely to try new products and spend 31% more, when compared to new customers. Although customer acquisition is vital for long-term growth, focusing on opportunities for customer retention and upselling can help to increase revenue at a lower expense than acquiring new customers.
4. Listen to feedback
No organisation will ever provide the perfect experience for every single one of their customers. In turbulent periods, where cost reduction is leading to change, it is even more likely that service failures will occur. What is important is how quickly these problems are identified and how efficiently an organisation responds.
Feedback should be taken holistically, from a range of sources. This is because most customers who do have a bad experience won’t tell you, they will simply leave. An often cited TARP study suggests that management will only be aware of between 1-5% of customers who advance their complaints through a formal feedback system, substantially lower than the actual number of customers who encounter difficulties.
It is vital that any feedback that is taken is actionable. Areas that work well should be identified as this helps to build your understanding of consumer expectations, and pain-points should be addressed to minimise the source of dissatisfaction, thereby reducing churn rates.
A good example of actionable feedback is the response to the introduction of self-serve channels. These channels provide a real opportunity for organisations to serve customers at a significantly reduced cost, but for some customers these channels will not work. In fact, 23% of customers will seek to revert to human or analogue channels.
Organisations must look at the bigger picture and identify that it is important to provide a ‘back-up’ channel for these customers, even if it means a serving them at a higher cost. The alternative is to let these customers walk away, ultimately losing the benefit you have gained by creating a cheaper journey for the 77% of customers who pass a self-serve journey without a problem.
From cost reduction to cost optimisation
Reducing costs can provide short-term wins, but ultimately a continued focus on cost reduction is not a sustainable model for growth. Organisations need to look both upstream and downstream for impacts. While it is easy to focus on trimming fat, it is often more effective to look at business process transformation.
Although it is crucial that processes are as efficient as possible, eventually cost-reduction will plateau and the only way to deliver savings will entail damaging points and processes that are integral to the customer journey. This would be counter-productive, since ultimately the savings delivered will be offset by a loss in sales and retentions.
Costs should be aligned to business strategy, in order to differentiate between the strategically important ‘good-costs’ from the non-essential ‘bad costs’. Making the case for investment in market slow-downs is not easy and may even been seen as counter-intuitive. However, in some cases, increasing investment in the short term can lead to reduced costs in the medium and long. Typically, this might be on technology projects that transform business processes.
Although ensuring costs are kept as low as possible, it is important that equal focus is paid to directing resources to areas that can generate the best return. After all, even if a project requires additional resources at the start, if it generates good returns or solves a key customer pain points, it justifies the initial outlay. A narrow focus on cost reduction could mean organisations are overlooking these potential opportunities.
Across sectors, it is therefore important that any organisation looking to reduce their costs consider the long-term sustainability of their target, as well as evaluating this aim against the bigger picture of corporate strategy and valuable and non-valuable expenses.