Don Peppers: The critical misconception undermining customer service

13th Sep 2010

Business guru Don Peppers talks to about customer service shortcomings - and how to identify the source of these problems.

If recent reports are to be believed, there’s a crisis in customer service. A Convergys study earlier this year revealed that four out of five consumers believe that customer service standards have deteriorated over the last year, with many communicating their negative brand experiences to friends and family.
So what’s the problem? Are businesses simply not investing enough resources into their customer service? Are they struggling to nurture a customer-centric culture? Perhaps it’s simply because the modern customer is more demanding than ever?
Acclaimed speaker, author and founding partner of the Peppers & Rogers group, Don Peppers, has his own thoughts about the deficiencies. And he believes that there is a fundamental problem that is undermining not only service, but the entire business strategy of many modern companies. Quite simply, organisations have long been living under the misconception that company value is created by offering differentiated products and services.
"Customers are far more centrally connected to the issue of value creation for companies than products are," he explains. "You can have all the patents and warehouses full of desirable products that you want, but the only way that you can actually create value is with a customer. Because if you don’t have a customer, it doesn’t matter how many products you have, you don’t have a business.
"In the history of business we have always organised our businesses by production, so we have people who manage factories and warehouses and retail outlets and so forth, and they think in terms of the things that they are managing, which are the processes designed to produce products. But in a sense, all the attention that has been paid to product differentiation has diverted companies’ attention from what is really even more central to their business - and that is the question of customers.”
Long-term value
Elaborating further on this, Peppers makes the distinctino between two different kinds of value that the customer can create. Short-term value is created when a customer buys something from a company which is able to report the profit in the current period. Long-term value, however, is generated by the expectation of buying again in the future or the creation of additional business for a company via recommendations.  
"Long-term value is when the customer changes its opinion of you and becomes, for instance, more loyal so is more likely to buy in the future," Peppers adds. "The event that made him more loyal might be a great piece of service that he encountered today. Well, that service event created the value, the cash effect of which you don’t realise until later, but the value is created with the service."
And the opposite is also true – if a customer has a bad service experience and is infuriated at a company, they may decide never to do business with them again, and even communicate their dissatisfaction and influence others’ purchasing decisions. With the value of the business being the net present value of the future stream of cashflow that the company expects, Peppers emphasises that this means the firm actually loses value as a result of the negative experience.
"The cash effect is not something you’ll see until later when the customer doesn’t come in as much as he was going to, but the value was destroyed with the event," he explains. "So it is important to understand that customers have memories and so they create both short-term value and long-term value today. However, most companies only account for the short-term value. They don’t really think in terms of the long-term value that could be created by providing a customer with great service."
This traditional view that customers only exist to generate sales is pure "short-termism" according to Peppers. There is a focus on short-term value, the immediate profit, but no thought about the long-term value - and therefore customer service has diminished importance. The knock-on effect of this short-termism is that companies use misguided metrics and targets to steer and measure the business.
"If companies believe customers exist to generate sales then they measure their success by the number of sales that they generate and bonus executives based on the sales that they produce this quarter," he continues. "Traditionally, service and customer experience and customer delight don’t really have a role in the product marketing mix.
"Instead what firms do is introduce it separately with the Net Promoter Score, or the Customer Satisfaction Index, or some kind of customer feedback. Organisations try to apply an outside metric because they know that it is important to serve their customers well - it is just that serving customers well doesn’t get them any credit in terms of generating sales.”
The result is that even perfectly well-intentioned companies have put compensation systems in place to reward executives for hitting sales figures. And as has been demonstrated time and time again – for instance in "Goal Setting as a Motivator of Unethical Behavior" by Maurice Schweitzer, Lisa Ordonez and Bambi Douma – this can encourage executives to misrepresent their success to meet bonus targets. The recent financial crisis is a case in point, according to Peppers.
Simultaneously, customer service suffers badly as a result of company priorities lying elsewhere. Organisations see no value in contact centres, for example, because they don’t create short-term value. As a result, they have traditionally been viewed as cost centres, providing customer support at low price points. This has meant that consumers have historically been dissatisfied with their contact centre experiences – with many feeling that call centre technology has only ever been deployed to drive further costs out of the organisation.
"Call centres suffer immensely from cost-reduction syndrome,” suggests Peppers. "In an effort to make short-term numbers and accomplish short-term results, companies are constantly looking for ways to reduce costs. One of the principle ways is automation. And customers are fed up with this. The title of my talk is ‘Press one to get lost’ because I feel that ought to be the first option on the IVR. ‘We don’t want your call, get out of here’. And customers get that message loud and clear."
Changes ahead?
But are there signs of change? The financial crisis has demonstrated the folly of ‘short-termism’. Customer complaints are far more potent now due to the power of social media. And some organisations are breaking mold.
"I think it has been changing. More slowly than I’d like to see it change but it is changing to a certain extent," says Peppers. "Increasingly, forward-thinking call centres think of themselves as service centres that can increase the value of customers over time, because every time a customer is well served by a business, his value to that business increases. And call centres are a perfect opportunity to increase the value of the customer by serving them well."
One school of thinking which has particularly inspired Peppers is the book ‘The best service is no service’ by Bill Price, formerly the global VP of customer service at Amazon. "It’s the best book I’ve read yet on how to manage a truly customer-centric call centre operation," he explains. "And his point is that if you want to run a call centre the right way, then you have to not have any calls. You don’t want a situation where people have to call you to get help – so make your website work, deliver the products on time, make the service work fine, and reduce the calls."
Amazon, as it happens, is one of the organisations that Peppers believes has spearheaded the change, though he also pays lip service to other customer favourites such as Zappos. And the underlying quality that he believes separates these companies from the competition is ‘trustability’ – confidence from a customer that the company intends to act in their interest rather than just telling them something to secure the purchase; and a competency to carry out that intent.
Trust can be destroyed all at once with a major violation of confidence, but it can also be frittered away every day with 1,000 acts of incompetence – such as asking a customer something that you should know the answer to from your previous contact, or an agent asking customers for their credit card details after they have already punched it into the IVR system. But trustability is unlikely to be achieved by organisations that believe that company value is created only by offering differentiated products and services.
"Good intent is a willingness to sometimes give up short-term profit in order to respect the long-term value that the customer presents," says Peppers. "To use the example of Amazon, who I buy a lot of books with, one time I read about a book I thought I ought to have and I went to and clicked on it to buy it. But instead, I got a warning telling me I had already bought the book, am I sure I want to buy it again. They could have had my money because I would have bought that book. But they wanted something other than the profit they could earn on that sale this quarter. They wanted my trust - and it is much more valuable."
The right end of the telescope
So we return to the issue of value. Whether or not customer service really is in crisis is open to debate, but certainly it’s a time of change, and a time when organisations are reappraising the role that their contact centres, for instance, are playing. Whether these changes are successful, however, may rest on whether businesses can dispel the value misconception once and for all, according to Peppers.
"There is an infinite amount of capital available to companies, depending on the return they expect to generate on that capital. But there is only a finite number of customers available with which you can create value. You can’t go to a bank, check out a few customers and pay it back later with interest. There is no secondary market for customers. What that means is that what a company’s primary goal should be, given that customers create all value and that customers are scarce, is to create as much value as they can with the customers and prospective customers that are available to them."
Peppers concludes: "Our advice to companies is that yes, it is important to keep costs low. But it is also important to adopt technologies with the right mindset. Your customers are your most important asset, so rather than asking yourself 'can we add technology to sell more stuff or cut our costs', ask how these technologies can improve the customer experience and raise the level of service. And you know what? If you do that, you are going to sell more stuff and you’re going to do it at lower costs. Organisations have got to look at the problem from the right end of the telescope."

Replies (3)

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19th Sep 2010 15:22

Wonderful analysis, if only companies in Nigeria are truly customer-centric!

I think the issue of staff and personell welfare ought to be talked about in the the process to customer-centricise companies via call/contact centres.

As pointed out by Don Peppers, most companies see contact centres as cost centres, due to the short-terminism view and sales-centricity of a business and as such staff working in such directorates or units are usually remunerated based on such values.

A company that thinks short-terminism and is sales-centric will hardly invest more in contact centres as compared to one that knows, that the customers value creation and long term relationship is key. My point is personell in such units are not remunerated well for performing such important tasks as first contact.

But as Peppers shows, The companies centricity will have to change towards customers before such personell will enjoy better remuneration.

What a quagmire! 

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By rodneys
24th Sep 2010 11:55

Just want to say that I saw Don at Call Centre Expo this week and he was very good. He touched on several of these points in his presentation and he is very persuasive. Not entirely sure I agree with all of it, but there are good talking points here.

He also provided an excellent micro description of CRM at CC Expo, "CRM is serving customers differently according to the data you know about them". Simples.

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21st Oct 2010 23:06


Excellent points! It is amazing how many companies lose sight of the fact that the best way to get a cusotmer is to not LOSE a customer.  As we say, there has been a long-standing business assumption that customer service improvements are a non-value expense, but the truth is actually the opposite. Investments in solutions to improve customer service while lowering operational costs create an important competitive edge for service providers.

And, customer service goes beyond the call center, all the way to face-to-face interactions with customers in their homes. A recent study ( found that 58% of customers would recommend a company if they are on-time for an in-home appointment. But, if the delivery / technician is just 15 minutes late, the number that would recommend falls all the way to 10%.

It proves your point that to keep your customers, you need to treat them with respect.

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