Merrifield Consulting Group

                                                    A SERVICE GOAL-THE “UNCONDITIONAL GUARANTEE”


            When you think of unconditional service guarantees, which national firms come to mind? Federal Express says, “tomorrow by 10:30 or its free.” Domino's Pizza use to guarantee a hot one in 30 minutes or $3 off; it used to be free, but too many customers complained that the punishment did not equal the crime - they all gladly accepted the $3. Sears guarantees Craftsman Tools for life; L.L.Bean has the same guarantee for their products. Do these guarantees work; do they pay; have the firms mentioned done well?


            Correctly used, guarantees do pay for many reasons.


1.      If no one else is offering the guarantee, then you have an edge. For distributors, it is tough to differentiate yourself by the tangible products that you sell, because all of the competitors stock the same or similar lines, and the customer sees most products as flawless quality, interchangeable commodities.


2.      Firms with distinctive service in the customers' minds average a 5-10% price premium over the mediocre competitions' value added margin. For distribution firms, their margin percent is their value-added, the cost of the goods sold is the suppliers' value-added. If, for easy math, a competitor is quoting a 20% margin, then a service excellence firm could still charge 21-22% and get the business. At 23%, a customer might protest that the firm is good, but not that good. Marriott Hotels has ranked as the number one domestic chain with the frequent business traveler and the meeting planners for the 80's; they currently are charging 5-10% more than their competitors in a glut-supply hotel market. FedEx is charging 20-30% more than their competitors for overnight letter delivery, but no one else guarantees it. Because higher prices flow right to the bottom-line, a distributor could double profits with a distinctive service sold with a guarantee.


3.      Perfect service not only sells higher, but it costs less. Zero errors is the low-cost, high pride and morale, and low employee turnover way to do things. And perfect service gives customers fewer excuses to switch to competitors. If you retain your existing business at a higher rate than the competition, then you grow faster.


4.      Service guarantees motivate more customers to complain about unacceptable service, which gives the firm a chance to turn a negative into a positive with a heroic recovery. The cost of the recovery must be compared with the value of keeping a profitable flow of business from an account over the next 5-10 years and having the customer be so impressed with your concern that they speak positively of you to associates or other potential customers. If, however, the customer quietly leaves or the firm blows the recovery, then a future profit-flow is lost and the disgruntled customer is apt to tell 2 to 4 times the number of people how poor the firm is. The cost of heroic recoveries have a terrific return on investment, and you will get more chances with a service guarantee.


5.      More customer complaints are more opportunities to rethink, refine and re-educate the delivery system. A majority of firms delude themselves into thinking that they have “good service” because no one has kicked them for being bad today. Meanwhile customers may be quietly deciding to leave without complaining, and the firm is too busy measuring how many new accounts they are opening and not how many existing, profitable accounts they are losing.


6.      A service guarantee focuses and motivates the employees to move towards service standards that are important. In the absence of a challenging, meaningful goal, the job is just that. If today's service is not good enough to guarantee, then use the idea of a service guarantee to spark the firm towards high consistency.


            If you decide to offer a guarantee, here are a few design guidelines:


1.      Make the guarantee “unconditional.” “Ifs and buts” water down the impact and the challenge to both the customer and the employees.


2.      Guarantee standards that are both easy to understand and to communicate to both the employees and the customers; complexity like conditions waters down the effect.


3.      The pay-off has to be: meaningful enough to motivate the customer to request it; large enough to cover their cost of failure which we caused them; and/or the punishment must seem fair in the customer's mind.


4.      The guarantee must be easy to invoke. Imagine having to fill out a form and mail it to get a $5 coupon six weeks later which you must hand deliver for a credit against a future purchase.


5.      The pay-off must be easy and quick to collect.


6.      You must guarantee elements that you can control. Domino's doesn't guarantee an “excellent “ pizza, because that is a subjective issue and starting with precut, frozen dough you have limits. 93% of their customers rate the pizza as satisfactory; they are buying speed, convenience, and consistent reliability.


            If guarantees are so potentially powerful, why aren't more firms at least planning for the day that they will offer them? Many managers are still preoccupied with old notions of what makes a firm successful - cut costs, buy low, sell more. Many have not considered the alternative economics of perfect service, heroic recoveries, customer retention, and service guarantees in spite of the roaring success of these types of programs in the past 10-15 years.


            Others assume that they can't guarantee everything, so why not just focus on zero errors and on-time delivery for starters. Some are concerned that if they had great service and offered a guarantee, customers would cheat and cost the firm too much. Case studies show that 1-5% of most customer groups are potentially abusive, so keep track of payoffs on a database. Rank customers every six months from high to low by the number of credits/payoffs that have been issued. Investigate the top ones to find the rascals and invite them to shape up or to go paralyze your competitor. Don't let fears of abuse keep you from succeeding with the other 95-99% of the customers with a service insurance program.


            A service guarantee program can help to achieve several vital objectives. It can be the catalytic vision to get employees motivated to move towards perfect service standards instead of just getting by. It can be a competitive advantage and the catalyst for a “customer retention program” - don't upset them to begin with, but if so, motivate and execute heroic recoveries, and then use mistakes to improve the service system. And, see the payoffs as well spent advertising dollars, because you are not only saving and ensuring the loyalty of the customer, but also activating them to talk about and sell you for a long time.




ÓMerrifield Consulting Group, Inc. Article # 3.2