Improving the service sector

In my first article of 2022 I looked at ten phrases that were overused in 2021 and which I wished to see the back of (see “Ten phrases I wish to hear less often in 2022”, 1.01.22). In the case of one or two of them, my wish has largely been granted, but alas most of them are still with us and some, such as the dire warnings of the doomsayers predicting the collapse of the NHS every winter, will I suspect be repeated every year till the end of time.

In a similar vein, for my last post of the year I would like to highlight four features of the service sector which seem to me to be the very antithesis of “the customer is always right”, the very opposite of doing what the public really wants. All of them revolve around companies prioritising their own finances above the interests of their customers, and it remains for me one of the puzzles of capitalism that in the perennial battle between cutting costs and improving a service, the cost‑cutters so often win and the service provided to the consumer is deemed of lesser importance.

The first area is one where what originally looked like a positive advantage for consumers has turned into a confusing mess. This is the issue of dynamic pricing. Dynamic pricing was first introduced by airlines looking to sell a wasting asset, ie unsold seats on a flight which was due to depart soon. If a seat is not sold before the flight departs, then it is worthless, and airlines started to address this by abandoning their fixed tariffs and selling seats at a discount as the flight departure date approached. It looked like a win‑win: the airlines at least got some revenue for the seat, and some lucky passengers, able to fly at short notice, got a cheap flight[1].

Unfortunately it opened up the idea that prices more generally could be variable, and now dynamic pricing is widely used not just for travel tickets, but also for things as varied as insurance and mobile phone contracts. With the small but important difference that the driver for the practice is less “reducing the final price to clinch a sale” and more “increasing the opening price to see what the market will bear”.

In poorer countries this practice is called haggling; it spreads confusion, makes markets opaque and price comparisons very difficult and in general impedes the smooth operation of the economy. It also penalises those who are nervous, ignorant or lacking in assertiveness, or in any other way reluctant to challenge the opening quote, which is not a business practice that a civilised society should accept or tolerate. But above all, it is so wearyingly pointless, as one goes through the whole charade of rejecting the initial quote, threatening to take one’s business elsewhere and so on. And always with the feeling that if one had been even more obnoxiously aggressive one could have chiselled the price a fraction lower still.

I have yet to meet anyone who enjoys this process or thinks this is the best or most customer-friendly way to run anything.

Close behind on my list of “ways in which the service sector gives the customer a poor deal” is the habit of outsourcing various parts of what should be a unified process to third parties. The world of online shopping is perhaps the most common place one meets this: one buys something from an online retailer, and then the actual delivery is not carried out by the retailer but is in the hands of one of the courier companies. Which is fine if it works, and no doubt the cheapest solution, but creates real problems when things go wrong.

The issue here is whose contract is with whom, and who therefore has leverage to get either performance or compensation. In this case the courier company’s contract is with the retailer, and their main interest is in keeping the business from the retailer at contract renewal time. As a result, the courier company has little direct interest in how upset the customer is, or in investing large resources in a complaints and rectification process for missing parcels, because the customer has no direct agency in the renewal of the courier’s contract. And while eventually a retailer may be forced to consider changing courier partner if the volume of complaints rises too high, by and large they initially chose them on price not efficiency or reliability grounds and will take some persuading to move away from the cheapest tender.

I did try to address this recently with something I ordered online for Christmas. When it did not appear on time – at the time of writing it has still not appeared – I rang the retailer (not the courier company) and asked for compensation. They were initially non-plussed and said they had given it to the courier company so my complaint should be directed to them. I said my contract was with them (not their agent) and they (not their agent) had failed me, so I wanted my money back from them. Or I would not use their services again.

I am both pleased and annoyed that this worked and I got a full refund. Pleased, because it brought home to the retailer just one small instance where their use of a cheap courier company had cost them. And annoyed, because this is of course another instance of haggling and being obnoxious (see above), and should have no place in a first world economy.

This example is part of a much wider trend in the service sector, which is that nothing like enough emphasis is placed on rectifying problems, and nothing like enough resources are devoted to customer complaints. It is easy to see why, as for most companies, the customer complaints department is a deadweight cost: it does not generate anything, does not benefit the company much in reputational terms if done well, and does not even cost the company much if done badly. As such it is ripe for cost-cutting, cheese-paring and generally running on as small a budget as the company can get away with.

The result is inevitable, the “all our agents are busy” message, the “we are experiencing unusually high call volumes” excuse that actually means “the level of calls is normal, but we cannot be bothered to staff our call centre properly”. And once again the customer gets a sub-standard service.

But this is not quite the same as the outsourcing issue, because it forces us to ask whose fault this unsatisfactory state of affairs really is. How many times do we choose not to do business with a company because of their poor complaints procedure? Indeed, how many online reviews even consider this aspect of a company’s service? A few of the most egregious companies are known (for some reason airlines based in the Gulf seem to top the list), and yes, there are a few companies I consciously avoid where there is an alternative. But in general we do not consider enough or factor into our decision enough how companies react to things going wrong when we decide whether or not to use their services.

If my last example, the sorry state of customer relations and complaints rectification, was a case where the consumer is probably as much to blame as the companies, my final example is more unusual, as the current practices continue despite many calls for change and despite what would seem to me to be obvious advantages for the service providers in doing things differently. This is the issue of internet pay-walls and micro-payments.

When my father died, both the Times and the Telegraph published obituaries of him. I take the Times on subscription (paper copy), so got that one automatically and it is in my keepsake drawer of memories of him. But I do not subscribe to the Telegraph. No problem – I went out and bought a copy of the paper, and it too took its place in the memory drawer. A one-off, and so cheap, solution to the question of not having a subscription.

But you cannot do this online. If you want to read an article from a paper that is behind a paywall, you cannot buy just that article, as they require you to subscribe for an ongoing period. Similarly if you want to watch a one-off sporting event, you will find it hard to do so, as all the cable sports channels require a subscription. Expensive and ongoing – the exact opposite of buying a one-off copy of the Telegraph.

There is a further problem with this practice, and that is that in buying what you want, you get a whole load of things you do not want as well. If you want to watch all the games in any season for most leading football clubs, you will need not just one subscription but many, as the games are shared between BT Sport, Sky Sports, Amazon, Netflix and the like. And in each case, in order to buy access to what you want to see you end up being forced to also pay for access to a whole host of things you have no interest in.

The field is ripe for micro-payments, for the facility to make a single standalone purchase: “buy this article for 25p, watch this show for £5”. It is the equivalent of me buying that single copy of the Telegraph – clean, quick and with no commitment from either side thereafter, and it would I suspect raise quite a lot of money for the media companies. Plus of course it allows them to showpiece their products and could possibly encourage people later to become subscribers.

It is easy to see how media companies would prefer subscriptions to selling one-off access to publications and events. In theory it means more money up front, and also more sticky customers (most people forget to cancel unwanted subscriptions, to everything from magazines to gym memberships). But in practice, how many people when faced with the paywall and a requirement to take out an expensive subscription simply decide not to read the article or watch the show? There comes a point where the revenue foregone from the many people saying “Subscribe? No, won’t bother” will exceed the revenue taken from the few who sign up. And I suspect we may have reached it.

There have been calls for a micro-payment facility on the internet for as long as the concept of paywalls has been around, and still no-one has come forward to provide them or enable media companies to allow one-off purchases. It remains for me one of the stranger omissions: a rare case of a money-making opportunity but capitalism simply not finding a way to take advantage of it.

Looking back at all of these examples, the common theme is that companies are – as always – prioritising what they see as their own interests (usually monetary, and often short term) above those of their customers. Why should any of us be surprised by that? Indeed, the bigger surprise – as noted by Adam Smith nearly 250 years ago – is how often this self-centred approach does actually benefit society.

As Smith put it, “By pursuing his own interest (the individual) frequently promotes that of the society more effectually”. He found this surprising, and wrote at length trying to explain how what he called the “invisible hand of the market” would guide businesses to improve the common wellbeing of society even when they are seeking merely to benefit themselves.

In the four examples I have outlined, the “invisible hand” seems to have gone a little awry: the current way things work is neither in customers’ best interests nor ultimately the service providers’. It would be nice if in the coming year the service sector collectively decided to do something about all four of them, and actually give customers a better service. But I don’t hold out much hope that they will.

 

[1]              At one point in the 1980s one airline even ran a “mystery ticket” scheme whereby you bought a day return ticket cheap and were only told your destination when you arrived at the airport. Bad luck for those hoping for cocktails on the Côte d’Azur if they ended up with a curry in Cardiff!