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.

I recently stayed at a full-service hotel in Scottsdale, AZ that offered a nice workout facility with treadmills and stationary bikes that faced a set of wall-mounted flat screen televisions. The audio for each television was accessed individually at the exercise equipment in order for each guest to listen to his/her preferred channel. To access the audio, one needed headphones that could be obtained at the front desk.

One evening, while I was awaiting a colleague in the lobby, I overheard a conversation between a front desk agent and a hotel guest. The guest had gone to the workout facility and realized that he needed headphones in order to access the audio of the television channel or radio station he’d selected. When he asked for a set of headphones, the representative said, “I’ll need a photo ID in order to hand out the headphones.”

Now, think about the realities of this situation. You have a guest who’s paying about $200 to stay in the hotel for the night, who has likely spent the day working and/or traveling to Scottsdale, and who is probably looking forward to a workout before facing another long day in the morning. The guest has changed from his work clothes into shorts and a t-shirt and has left his car keys, driver’s license, wallet, etc. in his hotel room.

The guest explains that, under the circumstances, he does not have a photo ID with him and offered his name and room number in addition to showing the representative his room key. The rep held firm to policy saying, “Our policy requires a photo ID in order to give out headsets. We’ve lost a lot of them in the past.”

Now examine her response. Several things caught my attention:

1.) The word “policy” is contradictory to good service. Customers do not want to hear about policies that stand between them and what they want. Sure, there are necessary policies. For instance, those that address certain legal, ethical, and safety concerns. It’s also advisable to have policies in place to protect the company’s assets (as in this case, involving the headphones).

That said, let’s consider the math in this illustration and see if we can identify the real asset. How much for a set of headphones—like the ones the airlines offer free of charge? I just checked on-line and found a set of Coby Ultra-Lightweight Stereo Headphones for $4.74—and that’s if I only bought one set. In quantity they’re even cheaper.

Now, let’s try and get past how difficult customers are when they fail to adhere to our policies and take an objective look at what this customer represents in financial terms:

At $200 per night (assuming no ancillary revenue from in-room services, food and beverage, gift shop sales, etc.), after you deduct the costs of preparing the room, in-room amenities, etc., you can figure the hotel captured around $125 in gross profit which may dwindle to around $15 per guest room per night in net profit for the company.

Obviously, the real asset in this example is not the headphones—it’s the customer. Managers (who devise these policies) and front-line employees (who get stuck—and, over time, comfortable—enforcing them) need to understand this. Policies must take into account the customer’s perspective and reinforce the value that the company places on its customers. Doing so will create more opportunities to satisfy customers, gain their loyalty and referrals, and grow the business.

2.) Requiring a photo ID in these situations is inconvenient and insensitive. Most customers making this request will be standing there in their workout clothes and will have left their wallets containing photo IDs back in their rooms. Knowing this reality makes the requirement of showing a photo ID impractical for hotel guests who do not want to hassle with returning to their rooms, waiting on elevators, and perhaps waiting a second time at the front desk if a line forms in their absence.

3.) Saying that “we’ve lost a lot of them in the past” implies that customers are irresponsible or dishonest. It’s critical to never offend customers by implying that they are irresponsible or dishonest. If we offend customers, then we are disrespecting them. Most customers will make allowances for a lapse in service. Few will make allowances for disrespect. When disrespected, customers will go out of their way to change providers and will share the negative story with anyone who will listen.

The guest in this situation was appalled at the desk clerk’s reply and lack of empathy. He did not want to spend the next 6 or 8 minutes returning to his room to access his photo ID only to find that the equipment he intended to use was now being used by another guest. His body language told the story: palms flat on the counter, heavy sigh, followed by an abrupt turn away from the rep in the direction of the workout facility.

This guest decided not to joust with the employee who was standing firm on “policy.” Instead, he resigned himself to an audio-less workout—content to read lips on CNN and make his best guess at what the correspondents were reporting.

As service is my business, I find myself observing lots of situations like this one and, on occasion, advocating on behalf of customers. In this case, I offered my photo ID to the rep and requested a set of headphones. She promptly handed them to me and I said, “Great. Now that gentleman will be able to listen to the programming in the fitness center.”

Realizing my intentions, she reverted back to “policy” stating that if the headphones were not returned to the desk, then my room account would be charged $80!

When I approached the guest in the fitness center a minute later and handed him the headphones, he smiled in appreciation and thanked me. It made my day. And to think, the gal at the front desk could have also had a positive exchange with this guest but instead dutifully enforced a customer-unfriendly policy.

Look around your own business. Are there any customer-unfriendly policies in need of revision or, better yet, elimination?