FEBRUARY 2007 :: COVER STORY : BIG BUSINESS

The Value of Service
How Companies Decide Which Amenities Are Worth It

By Ryan Chittum
Staff Reporter of The Wall Street Journal

Holiday inn President Mark Snyder has figured out what he needs to do for his customers, and what he doesn't.

"Bellmen, they have no use for," he says of the people who stay at the chain's hotels. "Why would I invest in bellmen at the doors for people who've already dragged their bags through three airports themselves?"

On the other hand, food and beverages are a must for Holiday Inns, even though they aren't moneymakers in themselves. That's because having a restaurant and bar in the hotel is a big part of what draws people to the chain and to its rivals in its midprice segment of the lodging market. "That's an amenity that you've still got to continue to offer" to keep up with the competition, Mr. Snyder says. "It's a really critical piece of what we do."

That balancing of costs against benefits is exactly how companies should approach their spending on customer service, says Bjorn Hanson, a consultant on hospitality with the firm PricewaterhouseCoopers. "Look at service as, 'Do we get more revenue than incremental cost, and therefore profit margins are higher?'" he says.

Grande Investment

Such calculations are especially crucial when deciding the number of people to hire. That point was brought into focus by a 2003 Harvard Business School study of Starbucks, which examined the coffee chain's efforts to balance the costs of improving customer service with the expected results in terms of increased revenue.

In 2002, Starbucks was trying to decide whether to spend $40 million systemwide to add 20 hours of labor per week to each store in order to speed up service.

Looking at it purely from the cost perspective, that $40 million would shave seven cents a share off its profits. But, according to the Harvard Business School study, Starbucks found that speed of service was crucial to its customers' satisfaction, and that its "highly satisfied" customers spent 9% more than those who were simply "satisfied." The coffee company made the investment. (Starbucks declined to comment on the study for this article.)

Certainly, the appropriate spending on customer service can vary sharply within an industry, depending on the kind of customer being targeted. For instance, Westfield Group, a shopping-mall operator and one of the biggest retail landlords in the U.S., believes it has found a level of customer service that pays off by differentiating its malls from their competitors.

At many of Westfield's malls, shoppers can find valet parking, bathrooms with family lounges, and concierges who can help with everything from finding a store to scoring dinner reservations. The company also hires an outside consulting firm to visit each of its malls twice a month to monitor customer service at the properties.

Todd Putman, Westfield's executive vice president for marketing and customer service, says the company must balance its spending on services with the need to keep down costs for its mall's tenants. The tenants have to pay fees for so-called common-area maintenance, which includes the customer services that Westfield provides.

So, Westfield focuses its spending where it will be most effective. In its hiring of concierges, for instance, the mall operator seeks to maximize their impact by paying relatively high wages (about $15 an hour) to attract better-qualified candidates.

That makes sense because finding the right employee or employees can mean a lot to the bottom line, says Andy Fromm, chief executive of Service management Group, a firm that surveys some 20 million customers a year for retail and restaurant chains. "A good employee or a good sales associate might be worth five or 10 times an average one," he says. "We've seen that. It's unreal."

Mr. Hanson of PricewaterhouseCoopers mentions an instance on a trip to an out-of-the-way location when he stayed at a low-end motel that made an impression on him. "The front-desk clerk knew the last time I'd been there," he says. "Then he said, 'I remember that you like to check out extra early.' I do. Then he gave me a glass of lemonade. What a way to exceed expectations." And, beyond the clerk's salary, it probably all cost less than a quarter-the price of a glass of lemonade.

Staybridge Suites is an example of a company whose appreciation of the bottom-line value of human interaction has helped it figure out where to spend its money on customer service and where not to.

Staybridge is a higher-end extended-stay hotel brand owned by Intercontinental Hotels Group, which also owns the Holiday Inn chain. This segment of the hotel industry has flourished in the past decade as its model of relatively low-cost, home-like lodging for longer-term guests has caught on with consultants and trainees who spend weeks and sometimes months away from home on business.

Staybridge, like other extended-stay hotels, provides limited services and is sparsely staffed to cut costs. Housekeeping does a full room cleaning just once a week, and the front desk usually has no more than one or two people staffing it. All that helps the hotels keep their prices down.

The Family, The Kid, The Dog

Instead of providing a lot of amenities, Staybridge focuses its customer service on interacting with the guests. "A lot of our guests really want that personal interaction-the thing they get from home that they'd like to get from a hotel," says Rob Radomski, the vice president of brand management for Staybridge Suites. "There are conversations between guests and staff about projects they're working on, and their family back home, and the kid, the dog."

On Tuesday through Thursday nights, Staybridge has what it calls "Sundowner receptions" for two hours in a living-room-like area just off the lobby. The receptions, which offer guests a free meal and a good excuse to socialize, are popular with customers. Mr. Radomski won't say what the receptions cost, only that it's relatively cheap and the cost-benefit equation makes the service a no-brainer.

When trying to figure out the cost-benefit equation of customer service, companies often make the mistake of thinking they can substitute technology for employee hiring and training, customer-service experts say. "The people side of the experience is the most important to take care of," says Tom Knighton, a partner at Mercer Delta Consulting. "The payoff comes in places where customers are interfacing with people."