Growing Business Value in the Trenches

Growing Business Value in the Trenches

A Simple Illustration of how Excellent Customer Service Drives up Business Value

Case Study: Amazon

This is a true story. This personally happened to me.

On the 24th of February 2019, I went on the Amazon Global Store and purchased a Juicer for shipping to the UAE.  I paid almost USD $500 (approx. AED 1,835) including a little over USD $100 for shipping.

Four days later, I received the completely wrong product. I immediately contacted Amazon customer service and they sent me the correct juicer and told me to return the wrong one and they would handle the shipping costs.

Sending the old incorrect juicer back became an issue.  Due to the weight, shippers wanted to charge me AED 2,200 to just send the Juicer back to Amazon in the USA.  I contacted Amazon and as I am based in Dubai, I was sent to their outsourced agents in the region. They told me I was out of luck as they would only reimburse up to USD 80 shipping costs. Furthermore, if I did not send back the item, I would be charged full price for the original order. 

In short, I was told to avoid being charged AED 1,835 for receiving the wrong product which was Amazons fault, I would have to pay AED 2,200 to return it. I would only be reimbursed AED 290 by Amazon and would have to eat the rest of the costs.

The situation was absurd, but the outsourced customer service agents could or would not think outside the checklist that shipping returns were limited to AED 290. In short, they were exhibiting a service level that is distressingly too common.  A philosophy of blindly following a checklist and having the customer pay out of pocket for the company’s mistakes if the company can get away with it.

The economics from the Customer Service Agent’s point of view (excluding original cost of incorrect juicer).

  • If I return the incorrect Juicer:  Company is net positive AED 1,545  (1,835 – 290).
  • If I do not return the incorrect Juicer: Company is net positive AED 1,835.
  • Probability I would buy again from Amazon:  Who Cares? Company gets to pocket AED 1,545 – 1,835

This story has a happy ending though.

After a month of fruitless back and forth with the outsourced agents and after they actually did charge me the AED 1,835, I decided to speak directly with Amazon customer service in the USA.  

I knew they were empowered to act independent of a script and their philosophy would be more focused on long term customer value.  After all I was already an Amazon customer for over 20 years and had prime membership in their biggest markets.

Amazon USA solved the issue in 45 minutes and sent me the following message:

“I am sorry for all the trouble you have faced with us regarding the original order….However to make things right, a refund was issued to your credit card  …It is our privilege to have you as our valued customer & would like to thank you for your continued support….In this case, there’s no need to return the item for us to issue a refund. You’re welcome to keep, donate or dispose of it–whichever option is most appropriate and convenient for you”

Amazon Customer Service 10 April 2019

The outsourced agents had not resolved the issue in over 45 days; and in fact compounded the issue by charging me without resolving the underlying problem. However, the excellent service decision from Amazon USA to apply common sense and solve the issue in 45 minutes not only kept me an Amazon customer, but increased my subsequent purchases with them.

Good story.. what’s the point…??

High satisfaction will drive up a customer’s repeat purchases and their willingness to refer your company to their friends and family. Not only will this increase your profitability, but will also increase the underlying value of your business. Those companies that have strong customer referrals (Net Promoter Scores) enjoy both much higher profitability and higher valuation multiples.

Let’s go back to my story to illustrate the economics of excellent customer service in this example.

Since Amazon USA resolved my issue, I have spent at least AED 40,000 at Amazon in three different markets.  The ROI for Amazon in resolving this issue is easily over 100%. By not trying to force me to eat AED 1,785 for their mistake, they have subsequently received AED 40,000 from me in a little over 22 months, or AED 1,818 per month.

How about business value?  Let’s do a simplified example where we will use Amazon’s Average EBITDA multiple of 95 (average of 31 December 2020 and 31 December 2019 values https://finance.yahoo.com/quote/AMZN/key-statistics/) and apply Amazon’s overall EBITDA margin of 12.5% to my purchases of AED 40,000.

AED 40,000 x 12.5% (EBITDA Margin) = AED 5,000 (EBITDA)
AED 5,000   x 95.0 (EBITDA Valuation Multiple) = AED 475,000 (Increase of Business Value)

So was Amazon better off in resolving my issue? Did it create more business value than if they had simply pocketed my money and ignored me? Considering I would have not used them again the answer is a resounding YES.

Amazon of course is a somewhat extreme example, with significantly high multiples, but the point is clear. Even if the multiple was 3x..  they would have been better off doing the right thing.

(It goes without saying that this primary focus on the customer and excellent service were the key factors in Amazon’s growth and in getting those high multiples.)

For your business, you do not have to write off every mistake with a full refund, but you need to understand the economic mutually reinforcing benefits of excellent customer service.

  1. Repeat Business
  2. Referrals and Word of Mouth
  3. Increase in the business value.
Graph from 2003 showing the correlation between Revenue growth and net promoter score.  southwest had highest revenue growth and net promoter score.  Their Business Value as a result grew much more on customer service than competitors.
(This Graphic is somewhat dated (2003) but the principle still applies. There is a direct correlation between Customer Referrals and Revenue Growth. This is why you see so many surveys today from restaurants to the car wash asking if you would refer that company to your friends or colleagues)

To summarise, the quality level of your customer service will drive the amount of repeat and referral customer business you will generate.  Repeat and Referral revenues are powerful predictors of future projected revenues.  The better your future revenues can be predicted from today (due to superior service) the more your business will be valued from a potential buyer.

When customers are truly loyal, their relationship with a particular company surpasses the basic
model of economic exchange, where money is simply spent
for products acquired or services rendered. Not only do these
customers remain committed to the company, despite price
increases and occasional errors, they also actively recruit
new customers through positive word-of-mouth. These
recommendations indicate true loyalty, since they reveal
customers who are willing to risk their character, trustworthiness
and reputation with virtually no reward beyond the positive
regard and thanks of others.

The Power Behind a Single Number – Satmetrix.com

If you would like to see how your business scores on customer service and the other 8 key drivers of Business value, take the Sophiall ValueBuilderTM 13 minute questionnaire.

8 Key Drivers of Business Value