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Your Customer Value Equation

It’s an oldie but a goodie.  I’m referring to Heskett, Sasser and Schlesinger’s book The Service Profit Chain.  It was first published in 1997 but the substance it contains is as relevant today as it was then.

One of the concepts they introduce is the Customer Value Equation which reminds us that from the perspective of a customer, value is simply the sum of results and process quality divided by the price paid plus the cost incurred by the customer to receive the service.

Too often service providers fail to understand that the total cost of a service includes the price PLUS the other costs incurred by the customer.  These could include lots of things like the commute time by using video conferencing to conduct client meetings, or being kept waiting in reception because you’re unprepared for meetings, not taking or returning phone calls in a timely manner, giving clients access to a client service manager, associate or client concierge rather than requiring that their firm contact be a owner/partner, having a client portal so the client has self-service access information including past financials etc. etc.

Often these cost benefits (for which you can charge a service fee BTW) are invisible and when you consistently deliver on them they become the “standard of performance”.  This has two implications.  First, your clients come to expect this performance level so if you fail to deliver they’ll feel you’ve let them down–in effect you become your own competitor!  Secondly, assuming you do consistently deliver them but they remain invisible, they only notice they’re missing if and when they switch to another service provider at which time it may be too late for you–which is why you should always conduct an exit interview and remind the client that if things don’t work out they’ll always be welcome back!

Two operational implications come from these observations.

First, it’s incumbent upon you to amplify and communicate that you work hard on consistently and constantly delivering these value elements e.g. by publishing metrics in relation to your service standards (e.g. your Net Promoter Score), participating in customer service award initiatives e.g. AccountingWeb UK’s Practice Excellence Awards, publishing testimonials from clients on your website or Facebook page, publishing an article in your newsletter about the concept of the Customer Value Equation that talks to how you take notice of it in your own practice AND, simply talking to your clients when you meet with them in your office or when you conduct a Client Advisory Board about the issue.

The second implication relates to the “process quality” part of the numerator in the Customer Value Equation. For as long as I can remember I have said if you can’t differentiate your product (e.g. set of accounts, a tax return, an audit) you MUST differentiate the process my which it is delivered.  For our industry process quality is THE major driver of value.

The authors of the service profit chain report that various studies have shown that up to 80% of medical malpractice suits do not involve negligence resulting in injury of adverse effects of service.  This suggests that they relate to the way the service was delivered! I suspect exactly the same thing applies in the accounting service sector.

The main process characteristics that customers use to assess process value are:

  •  Dependability – did the service provider do what was promised?
  • Responsiveness – was the service delivered in a timely manner?
  • Authority – did the service provider elicit a feeling of confidence?
  • Empathy – did the service provider get into the skin of the customer and see the world through the customer’s eyes
  • Tangibility – was there tangible evidence that the service was actually delivered?

At the end of each year (or in the case of significant engagements, at the conclusion of the engagement) it would be a good idea to conduct an After Action Review in which you ask your client to score you on a scale of 0 (horrible) to 10 (exceeded expectation) on each of the above performance dimensions AND also ask the client to give you an overall Net Promoter Score which is their response to Fred Reichheld’s Ultimate Question, that question being scored using a 0 to 10 scale is: based on this service (or our service this year) how likely is it that you would recommend us to a friend or colleague?

The NPS question is not a request for a referral, it’s an assessment of how a client feels about the service they have received but it just might prompt your happy client that you would welcome a referral to “qualified” prospective clients.  The question becomes a great conversation starter for discussions on client selection criteria.

What’s important to understand about service quality is that it varies from client to client, it’s a relative concept not an absolute, it’s determined by the customer not the service provider and it will be enhanced by meeting or exceeding your clients’ expectations and/or by managing those expectations.

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