Oli Paterson

4 Key Factors for Success in Service Business

Service businesses face unique challenges that require effective strategies. To thrive in this landscape, businesses must align four essential components: Service offering, funding mechanism, employee management, and customer management. (Frei, 2008)

Recently, I have been reflecting on what it takes to succeed in a small service business, which led me to “The Four Things a Service Business Must Get Right” by Frances X. Frei. Here are the main points.

Service Offering:

How will customers experience excellence within our service offering? Is it convenience, friendliness, flexible options, price, or something completely different? Identify the steps we will take to ensure the delivery of excellence based on these factors and what actions you will consciously avoid.

Frie gave the example of a bank offering better customer service, more attractive buildings and extended working hours. Despite less attractive interest rates than other banks, they expanded their customer base substantially. So, do people always care about the bottom line? Or can we roll everything into a more attractive offering?

You can optimize your overall performance by understanding customer preferences and aligning the service with their priorities. Excellence is based on delivering needs, and making deliberate choices to enable outstanding service is essential. This may seem painfully obvious, but I often see diluted or unclear service offerings.

We need to identify our customer segments and what is important to them and then build our offerings to fit. Spread betting is not effective here.

Funding Mechanism:

How do you fund your excellence? It comes at a cost, and someone needs to foot the bill. We must carefully consider how our excellence will be paid for in a service business. Frei stated there are four basic funding mechanisms: charging the customer in a palatable way, creating a win-win between operational savings and value-added services, spending now to save later, and having the customer do the work.

Charging the customer in a palatable way can involve pricing strategies that make payment less objectionable. You could charge extra for coffee and let people sit on their laptops all day or meter tables and charge by the minute. I know which coffee shop I would avoid.

Creating a win-win involves finding ways to enhance the customer experience while spending less, often through cost savings. Clearly, this is not easy, and if you succeed in this then it’s likely the competition won’t be far behind. Identify where you lose money in your business. Is there somewhere you can add to the customer experience which will also reduce this cost?

Spending now to save later involves making operational investments that reduce customers’ future needs for auxiliary services. Frei used this example: Intuit ate the cost of free customer support to harvest customer input and use this for product development, eventually generating more revenue.

Having the customer do the work shifts the cost to the customer through self-service options. However, you can’t arbitrarily make the customer work harder because they can’t see the value in it. If the customer is going to do the work, they must want to. Think of airlines using kiosks for self check-in. Most of us would choose this option to avoid line-ups and pick a seat more easily.

It’s important to carefully plan and design the funding mechanism before launching a new service rather than making changes based on experience later. When a service was initially perceived as free suddenly introduces fees, customers don’t like that. It’s crucial to avoid setting unsustainable expectations.

Employee Management:

A company’s success hinges on the quality of its workforce, especially in service businesses where employees have a significant impact. Poor service can result from a broken employee management system that sets employees up for failure. Did we create an environment where our employees are able and motivated to provide good service? We should aim to design a system where average employees can thrive and consider hiring for attitude over aptitude. Frei doesn’t go too far into this one, presumably, it is well-documented elsewhere.

Customer Management:

I met with a competing business owner who very honestly stated, “Some mornings I wake up, and I don’t know who I hate more, my staff or my customers.” Despite the obvious problems with this attitude, I’d be surprised if any service business owner hadn’t pondered this at some point (even for a second).

Customers have a considerable amount of control in the service world. They are entangled in operational processes and can affect their own experience as much as they can others. If a customer is slow in a line-up, they are ruining the experience for all the other people waiting. Managing customers is even more challenging than employees because you can’t train them.   

So, is customer labour cheaper than employee labour? The answer is maybe. One example from my own business has been utilizing forms so that customers can cut down on our data input. Of course, this only works if they enter it correctly. When the address and phone number entered are wrong, we all waste time and money (Yes, this happened recently). The key is to influence customer behaviour to align with your business goals.

The article is linked here and is well worth reading for a more in-depth understanding with clear examples. The funding mechanisms provided some valuable insights for me.

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