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.

Last night, my family and I visited one of those ice cream parlors that use a heated stone to meld together savory concoctions of an array of sweets and premium ice cream. Because each order is usually custom-made, it takes a bit longer to fulfill orders here than in typical ice cream shops where you order a flavor, a size, and you’re done.

When my family of six entered the store there was only one customer ahead of us. So far, so good. As my kids were deciding on the combination of treats they were planning to add to their ice cream, I noticed another three groups of customers come in behind us. I thought to myself, “Good timing.”

About this time, I realized that the young man working behind the counter was alone. There was no one in back to support the half-dozen or so customers who had lined up behind us. Others noticed too. I was reading the body language of customers who were rolling their eyes, sighing, looking at their watches, and craning their necks over the counter to see if another employee was hiding out in the back room. After several minutes with no forward progress, not surprisingly, the couple at the end of the line walked out.

You might be thinking that this is going to be a blog post about the importance of proper staffing and you’d be half-right. Staffing levels are important. It doesn’t make sense to try and shave labor hours at the expense of customer satisfaction and sales. But staffing is only part of this dilemma. The other aspects are employee attitude and the processes that are in place to mitigate the negative effects of being “in the weeds.”

Our server, Amir, displayed a great attitude. He took a moment to make eye contact with other customers in the line, smiled, and nodded as if to say, “I recognize that you are awaiting service and look forward to serving you.” Instead of appearing rushed and anxious, he smiled comfortably, offered samples to our kids, and served us as if no line had formed. I appreciated that and told him so.

Now, here’s where the processes that lessen the negative effects of being “in the weeds” come in. Having ordered three specials (which included a free kid-sized ice cream bowl for each medium-sized bowl purchased at the regular price), Amir told me that he needed to process three separate transactions. I told him that I was paying with a credit card and it might speed things up to put them all on the same transaction.

He was stuck. Despite sound judgment (and better customer service), he deferred to policy saying, “I know it would be faster but it’s store policy to ring up specials separately.” He was using one of those tiny dial-up machines so the delay (and customer angst) was compounded. So, as customers continued to wait—rolling their eyes, and looking at their watches—he ran my credit card three separate times, and issued three separate charge slips for me to total and authorize three separate times.

It was another example to me of subordinating customer service to protocol and policy. And the customers waited…

So, what’s a service business to do? Last summer, I wrote an article that contains several customer-focused actions that employees can take to get through the inevitable periods of high customer volume that most successful service businesses frequently experience.

Check it out and make sure your staff is prepared to take care of customers during periods of high volume. Also, review any policies that are in place that may not make sense for the customer even if they help you with your internal functions.

After all, customers are the reason that your business has internal functions—not the other way around.

A couple of years ago, I was shopping for a garment bag for my wife.  Her job required travel and her current bag was showing serious signs of wear and tear.  I stopped into one of those mall luggage stores and the salesperson showed me a black Tumi garment bag.  As I was inspecting the bag I noticed the price was $400.  I said to the salesperson, “Wow.  I really like the bag but four hundred dollars is more than I was planning to spend.  Do these bags ever go on sale?”  She answered, “The only time I’ve seen these bags discounted is when a color or style has been discontinued.”  I didn’t see anything else I was interested in buying at the store and so thanked the woman and left.

A few minutes later I stopped by a second luggage store at the mall and looked around. Again, the only bag that caught my eye was the same black Tumi garment bag.  I checked the price tag: $400.  A salesperson approached me about this time and asked if she could answer any questions.  I posed the same question I’d asked in the previous store, “I really like this bag but four hundred dollars is more than I was planning to spend.  Do these bags ever go on sale?” Again, the salesperson answered, “These bags are only discounted when a color or style has been discontinued.”  I thought to myself, “Well, at least they’re consistent.”  But then the woman said something I hadn’t heard before.

She said, “You’re right.  This luggage is not cheap.  Four hundred dollars is quite an investment in a garment bag.  Did you know, however, that this will be the last garment bag that you may ever have to purchase?”  My quizzical expression prompted her to continue, “Tumi guarantees its bags for life.  It’s made out of ballistic nylon and can withstand the wear associated with frequent travel.  If you do experience a tear, a lost wheel, anything at all, Tumi will repair or replace the bag at no cost to you—for life.  Also, Tumi installs a special metal plate in each of its bags containing a bar code that customers register at the Tumi website after purchasing the bag.  That way, if your bag is ever mishandled, there will be a way to reunite you with your bag even if your luggage tag comes off during handling.”

Needless to say, I bought the garment bag.  It was ironic to me that I was leaving the second luggage store with the identical bag I hadn’t even considered purchasing for $400 fifteen minutes earlier at the first luggage store.  And all because the salesperson took the time to share her unique knowledge and convince me that, as a frequent traveler, I really could not afford not to buy this bag!

While customers appreciate nice employees, they value knowledgeable employees.  And the more unique knowledge employees possess, the more value they bring to the customer experience.

This is a true story:  Last Tuesday, December 30th, I stopped by a local liquor store to pick up a bottle of champagne to celebrate the New Year.  I typically buy a bottle of champagne only once or twice a year and it’s usually the same brand: Moet & Chandon White Star.

I made my way to the champagne aisle and spent a minute or two scanning the shelves but did not see my favorite brand.  I didn’t see any store employees in the aisles, so I returned to the front of the store and noticed a cashier who was busy doing side work because there were no customers checking out at the time.

Here’s our conversation, pretty much word-for-word:

Me: “Do you know if you carry Moet & Chandon White Star Champagne?”

Her: “Did you see it on the shelf?”

Me: “No.”

Her: “Then we don’t carry it.”

About that time, I recalled there was a cooler in one corner of the store where they stocked chilled white wines.  Perhaps they also stocked chilled champagne?  Sure enough, I discovered a whole row of bottles of Moet & Chandon White Star Champagne priced at $52 per bottle.

I reached for the bottle but then decided not to reward this store—and the poor customer service I received—with the purchase.  Instead, on my way out I informed the cashier that, should another customer ask, they did in fact carry Moet & Chandon White Star Champagne.  I mentioned that it sells for $52 per bottle and they’ll find it in the cooler.

She seemed surprised that I wasn’t buying a bottle though had she really thought about it, she wouldn’t have been surprised at all.

I recently heard a story about a Paradise Bakery & Café general manager who earned the nickname “Cowbell Sandy” from her adoring staff.

It seems that a couple of years ago she started an incentive program to increase add-on sales of bottled water, cookies, and other high margin items. She worked with vendors to sponsor the prizes, ranging from iTunes gift cards to iPods.

Employees were so enthusiastic about the incentive program that they were constantly asking Sandy to see the printout to determine how they were performing compared to their co-workers. The report was the only way that employees could see who on the team was generating the add-on sales.

That gave Sandy another idea. Instead of tracking the incentive program electronically and then letting people know how they were doing only when the report was printed, she decided to clank a stainless steel container with a metal spoon and hoot and holler just a bit to acknowledge—in the moment—when one of her team members had added sales.

In doing so, Sandy included an element of spontaneous recognition to the incentive program. This not only created additional enthusiasm among the team, it also created a stir with customers in the mall’s food court. All of sudden, customers were coming by to see what all the clanking and laughter was about. This increased store traffic in a competitive environment with plenty of other dining options to choose from.

A couple of weeks into the promotion, the staff got together and bought a cowbell for Sandy to use in place of her makeshift noisemaker. From there, the nickname “Cowbell Sandy” was inevitable.

The program was a huge success! Top producers were adding an average of $11.50 an hour in add-on sales. Team members were receiving constant recognition from an inspiring manager in a high-energy environment filled with enthusiasm—and customers!

How about you? Do you know a “Cowbell Sandy”? Or, maybe you are a “Cowbell Sandy”? If so, feel free to chime in…