I’m currently reading the book Smart Pricing by Jagmohan Raju and Z. John Zhang. Anything published by Wharton School Publishing has been thoroughly researched and applied in the real world of work—beyond the ivory tower of theory and abstraction often associated with academia.

In the book’s introduction, the authors present a simple concept: “A manager can pull only four levers to increase a firm’s profitability: sales, variable costs, fixed costs, and price.” If he spends more on advertising to gain market share, then he’s pulling the sales lever. By reducing hours to schedule and lowering payroll costs, he’s pulling the variable cost lever. If he’s able to negotiate better lease terms on space, vehicles, or equipment, then he’s pulling the fixed cost lever. The fourth lever, price, is pulled whenever prices are adjusted.

Though only four levers exist, there are some economic probabilities and consequences to consider that make the manager’s choice of levers more like a chess match. Conventional wisdom suggests that, in a soft economy, the most effective way to preserve profits is to reduce costs. With shrinking demand, increased competition, or both, most companies look to reduce their biggest expense: payroll. This results in the furloughs and layoffs we’ve been reading about (or experiencing personally) for the past several years…

Increasing sales is an attractive option but may be hindered by firms choosing to reduce their sales forces and/or marketing expenditures. And who really wants to tamper with pricing in such an uncertain economic environment?

I was surprised to read that the authors’ analysis found “that if a firm can cut its fixed costs by 1% without affecting its operations, its profitability can increase, on average, by 2.45%. Similarly, if a firm can increase its sales by 1% without changing its cost structure or price, the firm’s profitability can rise by 3.28%. The effect of lowering the variable cost by 1% is larger: Profitability can increase 6.52%. However, the effect of improving a firm’s price by 1% is the largest of all: 10.29%. Remarkably…this effectiveness ranking order holds for each of the eight industry groups using the standard industry classification (SIC) scheme.”

In my last blog post, I referenced a number of studies on the relationship between superior customer service and profitability. The latest study, by American Express and Echo Research, compiled research that revealed American consumers are willing to spend, on average, 9% more with companies that provide excellent customer service.

Do you see where this post is heading?

If companies took steps to improve the customer experience, then customer satisfaction would likely improve. Studies show that customers are willing to spend more with companies that provide superior customer service. And research finds that by adjusting the price lever and improving prices by only 1%, companies can increase profitability by 10.29%.

Companies with subpar customer service: It’s your move.

Why do executives tend to support instituting fees that they know will annoy customers and yet oppose investments in training and other processes that will improve the customer experience?

Here’s a guess: Companies can begin assessing fees immediately and then add up the revenue generated at the end of the day. By contrast, any investment in training or other processes that will enhance the customer experience is difficult to measure and, even if it was quantifiable, takes too much time and effort.

The familiar path of least resistance is appealing. Assessing a surcharge requires much less work than improving the customer experience. Just a bit of coding on the website, updates to the point-of-sale system at the unit level, and inclusion of fine print where required by the legal department. It requires a lot less work than raising standards and improving the customer experience.

Many companies contend that raising standards, educating staff, and managing employees’ performance against these higher standards requires too much time and effort. “It’s way too hard,” they lament. “Who do you think we are? Zappos? Can’t we just assess the extra fees and count our money?”

This mentality is hardly surprising. After all, it works. The airline industry has succeeded at charging passengers for everything from baggage handling to pillows. And one airline, Ryanair in the UK, actually considered installing coin slots on its lavatory doors and charging passengers £1 (US$1.40) to use the toilet. Read about it here. The airlines have made nickel-and-diming customers an art form. It’s no wonder the airline industry is frequently cited when customers share their worst customer service experiences.

And now, hotels are being compared to airlines in the way they are trying to close budgeted revenue gaps by assessing a variety of fees. For instance, some hotels add a $2.50 “tray charge” to the automatic 18 percent gratuity included in the room service bill under the assumption that guests won’t mind paying $25 for a Club Sandwich.

Other hotels add a “restocking fee” of $2.95 per day, once a guest removes the first item from his minibar—as if he hasn’t already paid enough for that Toblerone chocolate bar. Additional fees include baggage holding fees, towel fees, in-room safe fees (sometimes appearing on the room bill as “Safe Warranty” fees), groundskeeping fees, resort fees, and others.

It appears as though the executives who authorize these fees have more faith in their company’s ability to close revenue gaps by adding fees that will annoy guests rather than providing exceptional customer service that will delight them.

Perhaps they’re skeptical about the research:

Claes Fornell, Professor of Business Administration at the University of Michigan’s Ross School of Business, oversees the data collection and analysis of the quarterly American Customer Satisfaction Index (ACSI) results. The ACSI reports scores for the causes and consequences of customer satisfaction and their relationships to financial performance and other metrics. According to Fornell, a 5 percent improvement in customer satisfaction leads to an increase of over 35 percent of future operational cash flow.

Another customer satisfaction authority, J.D. Power and Associates, looked at ancillary per day spending of hotel guests as correlated with overall satisfaction. They found that guests who rated their overall satisfaction with the hotel a 10 (or Very Satisfied on a 10 point scale) spent, on average $12 per day more on services such as room service, recreation, spas, mini-bars, and laundry service than guests who rated their overall satisfaction as an 8 or 9 (or Somewhat Satisfied on a 10 point scale). With an average length of stay of 2.5 nights, that can really add up.

In another study by consumer research firm PeopleMetrics, 1,250 customers were surveyed on their experiences at restaurants owned by nine publicly traded companies with 300 or more units. Customer engagement was measured by four factors: customer retention; the extra effort a customer was willing to make for a return visit; whether a customer would recommend the restaurant to a friend or family member; and passion—whether the customer “loved” the restaurant.

At the end of the study, the restaurants were divided into two groups: those with low customer engagement scores and those with high scores based on the survey results. When year-to-year financial data for the two groups were compared, the group with high customer engagement scores had an average increase of 29 percent in gross margin versus a 12 percent decline for those restaurants with low scores.

And just last month, American Express and Echo Research compiled research that revealed American consumers are willing to spend, on average, 9 percent more with companies that provide excellent customer service.

If the above research is even directionally accurate then it makes no sense to rely on added fees to generate revenue at the expense of customer satisfaction. Companies are much better off investing in training or other processes that will enhance the customer experience. Delighted customers really will pay more.

I met a colleague at ink! Coffee in Denver last week. I appreciate great coffee as I’ve blogged about before and was really looking forward to trying ink!’s.

My first impression was positive as the barista welcomed me and briefly shared ink! Coffee’s philosophy regarding product quality and freshness.

After determining that I was meeting someone for coffee, she dispensed the coffee into a sturdy ceramic mug—which was refreshing. I took my first sip and was truly impressed with the quality. As advertised, it was rich, smooth and not at all bitter.

About twenty minutes into my appointment, the barista came by our table and mentioned to me that they offer free refills.

“Free refills?” I said. “That’s great! I’d love one. Thank you.”

Then she said something that shocked me.

“Oh…but I don’t get it for you. You have to go to the counter to get it.”

She then justified her response by explaining that we were a team and, as such, we all played different roles. Apparently, her role was to prepare and sell me a cup of coffee and my role was to pause my meeting, get up, go to the counter, and wait in line to request a refill.

ink! Coffee’s slogan is: Coffee. Above all else.

Clearly, this includes customer service.

In the men’s restroom, there is a sign boldly displayed which reads:

THE INK ON ink! COFFEE

In 1994, ink! started in Aspen, Colorado with one cart and a lot of passion. We continue to hand-roast our coffee at high elevation in the mountains which allows us to roast longer at a lower temperature making the coffee rich, smooth and never bitter.

Beans are delivered fresh to ink! stores, brewed into coffee, and served to adoring customers. And because we take pride in freshness, we only keep a pot of coffee around about as long as it took to brew it. Same goes for beans. We never stockpile them.

Our baristas have a passion for great coffee (without the attitude). And most importantly, they know how to make the perfect cup.

At least they’re consistent. This sign really does accurately capture the ink! Coffee culture that I experienced: A focus on coffee—not the customer. Notice the only reference to customers is in the second paragraph where we’re described as “adoring.”

I found this definition of “adoring” at Merriam-Webster.com: To worship or honor as a deity or as divine. In the context above, it would seem that customers are expected to “worship” ink! Coffee. That’s flawed. It’s reminiscent of American automakers’ attitude towards their customers until they began defecting to imported brands at an alarming rate. Only then did Detroit begin to refocus on customers.

In the third paragraph, it’s noted that “baristas have a passion for great coffee…And most importantly, they know how to make the perfect cup.” Both of these references have to do with ink!’s product, not service. In fact, there’s no mention of customer service anywhere—so I really shouldn’t have been at all surprised that the barista had no intention of refilling my cup of coffee for me.

I am a huge supporter of smaller, independent brands that compete against the behemoths and I want to see them succeed. That said, it’s unlikely for a coffee shop (or any other business) to succeed based on product quality alone. Service quality must be part of the equation.

If I were advising ink! Coffee, I would emphasize that its highest priority should be to create promoters of the ink! Coffee brand.

Global consulting firm Bain and Company defines promoters as those customers who are the least price-sensitive, have the highest repurchase rates, and are responsible for between 80 and 90 percent of positive referrals to a company or brand.

Promoters respond to the question, “How likely is it that you would recommend ink! Coffee to a friend or colleague?” by selecting 9 or 10 on a zero-to-10 scale with 10 indicating they are extremely likely to recommend.

Promoters recognize product quality and they expect a commensurate level of service quality. If customers get one without the other, they’re less likely to recommend the company or brand to others. And, by definition, they’re not promoters. They’re either passives (indifferent about your brand) or detractors (responsible for 80 to 90 percent of the negative word of mouth).

ink! Coffee has a great location in Cherry Creek and an amazing product. But the reality is that there is a Peet’s Coffee & Tea and a Starbucks located on the same street. And ink! simply will not succeed in creating promoters and growing market share by focusing exclusively on product quality while remaining indifferent about the customer experience.

Is there an organization that comes to mind when I ask you to consider a predictably poor customer service provider? By this I mean a company or entity you dread returning to because you’ve been consistently disappointed with previous customer service experiences.

When I pose this question to audiences, I tend to hear the same responses: DMV, IRS, USPS… Maybe you’re thinking of one of these—or perhaps you have in mind a cable company, airline, or cell phone service provider?

Now, the easy answer is to exercise your freedom of choice as a consumer and discontinue using these organizations and eliminate the recurring frustration. The problem is that that’s not always possible—or convenient.

In the case of the IRS, doing “business” with them is mandatory. And as long as driver’s licenses and vehicle registrations are required by law, you’ll likely be visiting a local branch of your state’s DMV. The same is true of the USPS. If you miss delivery and have to retrieve a package, send a registered letter, or some other exception, then (at more locations than not) be prepared to wait…

And there are some companies that you may begrudgingly do business with for one reason or another. Maybe your cable services are bundled at a great rate for the next eight months so you’re willing to endure long hold times? Or perhaps you’ve signed a two-year contract with your cell phone’s service provider and so, are willing to tolerate patchy coverage? And you may be willing to relax your grudge against that airline you said you’d never fly again because it’s offering a nonstop flight for half of what your preferred airline is quoting for the same itinerary with connections.

In my case, I gave in to my seven year old, Cooper, and returned to Toys “R” Us last weekend to buy him a LEGO Space Police Galactic Enforcer. Our first stop had been Target but they didn’t carry this particular model. Next, I called Walmart but they did not have it in stock. So I was forced to return to our local Toys “R” Us store.

This particular Toys “R” Us location, to me, is reminiscent of a wholesale club. Its atmosphere (austere), staffing (sparse), and customer service (indifferent) are more suited to a warehouse setting than a retail store. I don’t recall a single hassle-free shopping experience in the past. I do not look forward to returning. From my perspective, it has predictably poor customer service.

Having phoned ahead to verify that they had the LEGO toy in stock, Cooper and I arrived at the Customer Service desk at the front of the store to pick it up.

When I asked the Customer Service employee about the toy and provided my name he said, “If you called ahead, it’s probably in ‘Holding’ at the back of the store.”

Observation #1: The word “probably” does not inspire confidence. The number one reason why customers buy where they buy is confidence.

I said, “Holding?”

He said, “Yeah, ‘Holding’ is where we hold special orders and call-ins. I’ll go back and get it for you.”

Observation #2: When a customer calls a retail store to verify that it has a particular product in stock, provides his name, and states that he’ll stop by later that day to purchase it, (assuming it’s not a swing set or, otherwise, oversized merchandise) that product should be available at the nearest service counter to the front of the store—where customers enter.

He then disappeared for several minutes before returning with the product.

“Great!” I said, “Here’s my credit card.”

Surprised, he said, “Oh, I can’t ring that up for you here. You have to go around to the check-out area.”

Looking at two cash registers behind the Customer Service counter, I asked, “What are these registers for?”

“Oh. Those are only for returns.”

Observation #3: Avoid telling customers that you “can’t” do something or that they “have to” do something. Try a softer approach: “While these registers are for returns, the registers to my left are for purchases.” (I realize we’re talking about Toys “R” Us and not the Four Seasons. Even though you may not work for a luxury brand, there’s no reason why you can’t treat your customers with professionalism and grace.)

Observation #4: Why on earth would you designate the only two cash registers as “returns only” at a Customer Service counter in a retail store—where, presumably, you sell stuff?

So I walked around a long aisle stocked with Nerf products, past the Toy Story 3 display, to the front of the store where, as expected, both checkout lanes were filled with shoppers.

Sensing the irony of the situation, the customer service employee came out from behind his counter, motioned to me, and offered to ring me up at one of the registers located further down in the video game department.

There, he rung up my purchase and asked if I was a member of the Toys “R” Us Rewards Program. (I’m not.) He then made the pitch: There’s no cost to enroll. It just takes a minute to sign up. Shoppers accumulate in-store credits as their spending reaches certain milestones. For instance, for every $150 one spends, he receives a $5 in-store credit that can be applied to a future purchase.

Even though it’s free, fast, and I was already two-thirds of the way to my first $5 bonus, I passed. It’s just not worth $5 or $10 for me to return to this particular Toys “R” Us store. I’d honestly rather spend a little more at Target or another retailer where the customer service is not so predictably poor.

And I’m not alone. Last month, American Express and Echo Research compiled research that revealed American consumers are willing to spend, on average, 9% more with companies that provide excellent customer service.

Toys “R” Us is offering me a savings of about 3% to join its loyalty program but they’re completely missing the point of what truly drives loyalty. Loyalty is not reflected in the number of people who enroll in a rewards program. It is evidenced by positive word-of-mouth, repeat purchases, less price resistance, and other tendencies of loyal customers.

Loyalty has very little to do with plastic keychain rewards cards and 3% discounts. It has everything to do with committing to absolute customer satisfaction, making exceptional customer service the focus and priority of your organization’s culture and brand, and inspiring genuine customer loyalty through predictable service excellence.

Last Thursday night, we took a night off from cooking and brought our kids to Chili’s for dinner.

As soon as we entered the restaurant, my seven year old, Cooper, noticed that the Carolina Panthers vs. Baltimore Ravens preseason football game was being televised in the bar area.

As the hostess lead us into the dining room, Cooper asked if we could be seated somewhere where he could see the game. She found a long table (there were six of us) located directly opposite the bar area and the flat screen television set carrying the game.

We had settled into our booth when Cooper began jockeying positions trying to find a seat from which he could watch the game that was not obstructed by one of the many plants and decorations that make up the eclectic interior of a Chili’s restaurant.

He finally settled into a seat where, if he sat up on his knees and craned his neck, he could see the game over the top of a decorative rooster (pictured).

After a few minutes, Cooper asked me if someone could move the rooster so that he could see the game clearly from where he was seated.

My first reaction was that maybe the decorations were bolted down the way they are in many hotel suites—lest you abscond with a faux Ming Dynasty era bowl—but I told him I’d ask the question…

A moment later, I asked a passing employee whether or not she could relocate the rooster and she said she would check with her manager.

The next time I looked up, the offending rooster had been moved.

Cooper was elated that he could now clearly see the game. His face lit up! He smiled at me broadly and said, “Thanks dad! Now I can see the game!”

Watching Cooper delight in being able to watch the football game unobstructed reminded me that little things don’t mean a little. Little things mean everything.

Great customer service is not usually the result of one big thing. It’s the result of many little things done exceptionally well—like smiling, making eye contact, adding enthusiasm to one’s voice, or even relocating a decorative rooster.

Thanks Chili’s.

Have you ever noticed the tendency of frontline employees to become defensive—even surly—when you bring a problem or misunderstanding to their attention?

Unless your business has chronic, unresolved issues (in which case, you may want to update your résumé), problems and misunderstandings are exceptions. By definition, exceptions do not conform to the general rule. This makes them infrequent. That’s why they’re exceptions.

When exceptions occur in your place of business, how are they typically handled?

In many cases, exceptions such as misunderstandings or unmet expectations, when brought to the attention of frontline employees, create a palpable communication barrier that neutralizes employees’ smiles, eye contact, and enthusiasm to serve.

It’s as if a customer’s misunderstanding, when expressed, drives a wedge between him and the employee. Instead of seeing the situation as an opportunity to serve, many employees recoil and judge the customer as being difficult or misinformed.

Here are two examples from guests of a leading hotel chain that I came across while trolling TripAdvisor.com:

As a [member of your loyalty program], I was on the Concierge Level with access to the lounge. My stay was from Thursday to Tuesday … the Concierge Lounge was closed from Friday 12 noon to Sunday 5pm. On top of that, nowhere were the hours posted on when any sort of food/service was provided (hours on when the lounge was open is posted, but who really cares if you can go there, without food?). Hours were not mentioned upon check-in, when visiting the lounge, or in the room. Two times that I went, I had just missed the food service. On both occasions, the attendants never once said, “Oh, I’m sorry you just missed our food service. Is there anything I can get you? So you know, we provide food between xyz hours).” Yes, I could have asked, but it made me feel a little cheap, to have to ask about the free food.

This feedback is priceless—especially the final comment about the guest being made to feel a little cheap. I can think of many different feelings hotels would like to inspire in their guests but “cheap” isn’t one of them.

Here’s the lesson I receive from this feedback: When a hotel’s Concierge Level guest misses the food service in the Concierge Lounge, it’s an exception. And exceptions provide opportunities for exceptional customer service.

Too often, employees view customers who “screw up” and misinterpret published hours of operation, pricing, directions, etc. as being difficult (i.e., “If only they’d read!”) when these customers should be treated exceptionally well. After all, due to a misunderstanding, their expectations have not been met.

In the case of the Concierge Level guest, why not make him aware of the Concierge Lounge’s hours of operation for the future (preferably by offering him a pre-printed card so he doesn’t have to try and remember them) and then provide a certificate for a complimentary breakfast in the restaurant?

And if he responds that he’d planned to take a plate back to his room to eat while working, then invite him to order room service and take care of the charge to make up for the misunderstanding. After all, when you consider the future spending of a delighted member of your loyalty program, all of a sudden $15-$30 seems quite negligible.

Now, some will say, “But what about the precedent you’re setting?” This concern, usually expressed by people who’d prefer to point to a sign or policy rather than go out of their way, never materializes. After all, it’s an exception.

Here’s another comment from a hotel guest that illustrates the same point:

We were very disappointed in the surliness of the [restaurant] managers both mornings… When checking in to our “breakfast included” room, we were told that breakfast was from 7 to noon. Oops – those hours were only for the [Thanksgiving Day] holiday, and Friday was ‘normal business hours’, which we discovered when we arrived at 10am on Friday for our breakfast. The male manager did not greet us with hello, but with a snapped “we’re closed for lunch”, but then allowed us to grab some food as they were still cleaning up the buffet. He directed us to “sit right here”, set some water without ice on the table, and we were scurried through the buffet under the watchful eye of a non-friendly female manager. No one offered coffee, juice, etc – yes, it was a tad late but we weren’t really causing them any trouble.

Once again, here’s a situation where guests are punished due to a misunderstanding. Instead of viewing this as an opportunity to make a positive lasting impression on their guests, the managers involved forgot their manners and treated them poorly.

In both cases, hotel guests experienced problems due to misunderstandings. Hotels, like most companies, have lots of moving parts and misunderstandings and unmet expectations are inevitable. And unless these problems are systemic, they’re exceptions and should be embraced as opportunities to pleasantly surprise guests.

According to a study by J.D. Power and Associates, when a hotel guest’s problem is resolved perfectly, it results in overall satisfaction averaging 80.7, compared to only 74.9 if there was no problem to begin with.

And the more satisfied a hotel guest is, the more he’ll likely spend. The same study found that guests who rate their overall satisfaction as a ten on a ten-point scale, on average, spend about 40 percent more on ancillary services (e.g., hotel restaurants, gift shop, business center, etc.) than guests offering a rating of six or seven.

So guests who experience a problem and have it resolved perfectly may be more satisfied than guests who do not experience a problem. And guests who are more satisfied tend to spend more money.

When frontline employees make this connection, guests who show up late for breakfast or question a room charge, will not be labeled as “difficult” and treated as such. Instead, these guests—these exceptions—will genuinely be seen as providing opportunities for exceptional customer service.

If you studied management anywhere along your journey, then you may recall the seminal Harvard Business Review article by Sterling Livingston titled Pygmalion in Management.

Essentially, the article dealt with the self-fulfilling prophecy (or Pygmalion effect from Greek mythology) in management—a supervisor’s expectation of a subordinate’s performance that directly or indirectly causes itself to become true, for better or for worse.

The same thing is true in customer service.

Pygmalion in service suggests that there is a very real self-fulfilling prophecy in the delivery of customer service when an employee’s expectation of company standards and service levels directly or indirectly influences his or her attitude and performance.

Why is customer service consistently better at a luxury or full service hotel than an economy or select service hotel? And why do many high-end retailers have reputations for providing exceptional customer service while discounters generally are known for good prices but mediocre customer service? Why do we tend to receive better customer service at a fine dining restaurant than at a quick service restaurant?

I’m sure some of you are thinking: “Well, Steve, the high-end brands that you’re referring to have chosen to invest more money in their delivery of customer service. It’s reflected in everything from the customer to employee ratio to the fresh-cut flowers in the restrooms.”

I get that reasoning but it only addresses half of the equation.

Every business is made up of processes (like staffing models and restroom accents) as well as the attitudes of its people. And, while there is a cost associated with upgraded processes, there’s no such cost associated with upgraded employee attitudes. They’re free.

Employees choose their attitudes. Positive attitudes towards customers and customer service (conveyed by smiling, eye contact, and adding enthusiasm to one’s voice) are optional—which explains why you and I seldom encounter positive attitudes from enthusiastic and engaged employees.

There’s no reason for a front desk clerk at a Super 8 motel not to smile and welcome a guest similar to a front desk clerk at a Four Seasons hotel. There’s nothing stopping a cashier at Walmart from making eye contact with a customer in the same way a salesperson does while ringing up purchases at Nordstrom. And there’s no excuse for a server at Anthony’s Pizza & Pasta to not add enthusiasm to her voice like a server at Christini’s Ristorante Italiano in Orlando, Florida.

As managers, you tend to get what you expect. Expect your employees to embrace your organizations’ high customer service standards. (They are high, right?) And expect your employees to choose attitudes daily that are positive, helpful, and engaging. (Just like the attitudes you model, right?)

Do this and you will create a Pygmalion effect in customer service that elevates the performance expectations of your employees—regardless of whether or not they work at Nordstrom or Four Seasons.