America might be the best in the world at customer service and consumer convenience, but very often I wonder why our supposedly competitive companies cut corners in seemingly small areas that profoundly affect customer service. How much does it really cost extra to put decent food on an airplane, get a person to answer a telephone instead of putting you into voicemail and on hold for half an hour, and to give you pads in a maternity ward to stop bleeding that are not from 40 years ago that nobody would ever use today? Isn’t it sad that a credit card company is currently advertising a card whose primary benefit is a promise not to put its customers into voicemail when they call?

Since I run a company, I know that after you have done everything you can on the sales side, the only two things you can do on the administration side to increase profitability is either to cut costs or to raise prices. We try to educate our customers that we provide better products and service and to get them to pay for it. We don’t try to be the cheapest because we do want to be the best and hope that enough people will realize it and reward us for it.  It is a running uphill fight.  Because competitive forces in the marketplace tend toward the commoditization of goods and services, meaning that everyone thinks that there is no difference between one company and another offering the same thing, this means the war for customers is mainly fought on price. If price is where it’s at, then the business owner has to think about cutting costs.

Despite the fact that people say they will pay more for better quality, most people won’t, and that’s why the focus of business is on cutting costs. Problem is, that people don’t realize how far up the chain this goes and how it matters to us when we don’t realize that we’re part of the chain.

An easy example is the airlines. Take a flight from New York City to South Florida. JetBlue offers much better customer service on board, over the phone and in the airport, a better seat with entertainment, an easy fare structure that allows you to change schedules cheaply and assign your ticket to someone else. Only problem for me is they fly into Fort Lauderdale. The legacy carriers offer precisely the opposite but its fares are often lower these days and they fly into Miami, my airport of choice. If I want to go to Miami from Laguardia, it’s no wonder that I fly American. If they flew to Fort Lauderdale only, I’d fly JetBlue. But Continental and JetBlue both fly to Fort Myers. There, where Continental costs $150 more than JetBlue and I had to buy 9 tickets for my company, I went with Continental, even though I don’t appreciate the restrictions they put on tickets that I purchase and indeed one person cancelled and I forfeited his ticket. But it was still considerably cheaper than JetBlue so I did it and came out a winner for my company even though I resented the transaction.

Here’s a tougher example. My wife had a miserable night at Cornell Hospital when her IV drip ran out and it took a nurse over an hour to get to her. Every woman going into a maternity ward knows to bring her own pads with her to stop bleeding after childbirth because the hospitals give out these disgusting pads that people used 40 years ago. Not one orderly or nurse I asked at Mount Sinai Hospital had ever tried the food that patients eat – that’s how bad it was. Besides wondering how hospitals could have people working there who have no idea what it means to eat like a patient so they could relate to patients, you ask how much extra does it cost to feed people decent food.  How much extra does it cost to put an extra nurse on each floor at $15 an hour or give out decent pads for an extra 10 cents each when they are billing out at over $5,000 a day for care. Don’t they think that patients have a choice in hospitals? 

I know the answer – hospitals are run these days not by their patients but by insurance companies who dictate how much they will pay for goods and services. They will only pay so much for nursing, food and for pads. At least this is what people working in hospitals say when you ask them, and they truly feel under pressure to cut costs to the bone. Truth is the insurance companies pay enough money to hospitals that they should be able to afford to give better services than they do. Hospitals are supposedly not for profit organizations that should not be racing to cut their costs to the detriment of the patient. But consumers are choosing their health insurance providers as if they are all the same and demanding lower costs. As long as nobody feels an incentive to provide better services at a higher price, the system rewards those who cut their costs the most.

There are two explanations here – shortsighted management and a lack of true competition.

When American started selling snacks on board its flights, we found out that for $3 you could purchase a tray of 6 snacks that were better than anything served on board back in the old days. Since food on board is one of those few things that help distinguish one airline from another, you’d think it would be stupid to cut out what used to be a $1-2 expense down to pretzels and then to nothing. Funny thing is what happened when the shoe shifted from the airline providing the snack as part of its service in the desire to produce profit to something you purchase on board as an optional extra that could produce profit: the lovely snack trays appeared, but will they survive? The majority of passengers don’t want to shell out that extra $3 even though they say they would pay an extra $50 to an airline that served it to them. Truth is they won’t pay either the $3 or a large amount of money either way but they would pay an extra $20 if they knew they were getting the snack, the guest agent in the airport who greets them without having to run around looking for an agent or standing on line for 20 minutes to speak to someone, and had their phone calls answered promptly. I wouldn’t pay the extra $150 to JetBlue to provide me a ticket to Fort Myers over Continental but I would pay $40. On routes where JetBlue competed against Delta between the Northeast and Florida during the last quarter year, they charged an average of $20 more per ticket but their occupancy rate was 10% higher, which proves the point. Multiply this by business class passengers who pay ten times more for their ticket and wonder why the airline puts canned fruit on board for their desert and doesn’t put food in the airport lounge anymore. For a few bucks, you want to cut corners with your most profitable passengers?

Management doesn’t realize that people will pay something extra to be treated well and that there is a margin between what it costs to provide the extra benefit and the amount that people are willing to pay. People perceive a value to quality that is often in excess of the cost of providing it. The key is to figure out the margin and how to most effectively provide the extra measure of quality. It’s the equivalent of a package deal with travel – package deals often cost more than a la carte travel but people somehow perceive a value to it. It’s why executive floors in hotels are popular. Nobody wants to pay $250 a night to be nickeled and dimed by a hotel (and you have to wonder why hotels do this – hasn’t anyone figured out that it would be smarter to put some stuff in the minibar for free) and are thus turning toward $150 a night hotels, but they will pay $300 a night if everything is included.

The other short-sighted management decision is to defer costs or gamble with them instead of cutting them. This is most prevalent in insurance. If I go to a chiropractor to prevent back and neck problems, insurance pays the chiropractor so little that he won’t even deal with insurance. Since I have to pay for this care, I probably won’t at the risk that later in life I will have more problems but insurance will then pay for them. If I go to an acupuncturist for a bad stomach it’s off insurance unless I go to somebody willing to take peanuts, but if I go to a doctor and have a colonoscopy, endoscopy, CT-scan and all the rest, insurance will pay. Fact was that last year I had a bad stomach and all the doctors and technology lost and the acupuncturist solved the problem. It was insulting that I had to pay to solve this problem and that insurance wouldn’t play ball at one-tenth the price. Last year one of our employees went to India and we had to pay $400 for his immunizations; the insurance company doesn’t cover this and told me they’d rather risk him getting sick in India and then paying the bill at that point. The reason insurance does this of course is that insurance companies don’t really care about working with their patients to prevent future costs – they are fixated on cutting costs now because they in a battle to get premiums and customers don’t reward investment, only the provider with the lowest premium, and remember that consumers can switch insurance companies at will thus reducing the incentive for such companies to invest. 

Are they really cutting costs? Those nurses in the hospitals spend too much of their time typing reports into computers for insurance purposes. Every Tylenol dispensed is a computer entry. Patients don’t get treated because nurses are busy typing and it is the greatest distraction from nursing today. People get sicker and die in hospitals because of errors – it is one of the greatest causes of death today. Getting sicker increases costs and death reduces the number of paying customers. Because these companies don’t deal with consumers, they don’t care what you or I think and have no reason to be responsive to our needs.  This is contrary to the thought that a relationship with professionals on a day to day basis would create a higher level of care. This removal of the consumer from the chain of demand feeds this sort of shortsightedness in management.

On the airline side, I cashed in 180,000 miles with United for two business class tickets to Australia. Instead of rewarding me as a frequent flyer, they put my pregnant wife in coach on a 5 hour flight from Auckland, New Zealand to Cairnes, Australia when there were 11 empty seats in the business class section because they said they had no more quota for frequent flyers. My rather forceful protest on board did not get the supervisor to change things but did prompt one cabin steward to tell me privately that this was disgraceful on the part of Air New Zealand, United’s partner. The airline steward insisted that if he gave us the seat, it would bankrupt the airline and that United was extremely tight about this. This was even after they boarded the plane and we had “paid” with miles for our tickets. When I later wrote to customer service, the response from both airlines was that these were the rules of the program. I can’t imagine how this constitutes customer service or rewarding a frequent customer and until I see something different, I am never going to believe all that United says about improving customer service. This was an easy one for the airline – we all know that once the plane leaves, it costs no more to seat you in business class than economy. Why airlines do the opposite defies common sense. Maybe it doesn’t – there’s only one carrier alliance that flies from Los Angeles to Australia via New Zealand.

Companies can get away with this because for all the talk about competition, there is less of it than it appears. Continental is the only major airline with service between Newark and Miami; American is the only one between Laguardia and Miami. Verizon is the only local telephone carrier in the northeast and has no incentive whatsoever to provide decent customer service, which is why it is so poor at it unless you file a complaint with the public authorities and then they pay attention to you. Every time you take the subway in New York, you have no idea when the next train will arrive and you don’t know whether it would be faster to take the local train arriving now or the express train still to come. Or perhaps the bus would be better. Today this is considered standard information being provided to the mass transit public worldwide. Because the Metropolitan Transit Authority controls all 3 options in New York, the MTA is not interested in getting you to work the fastest way so you and several million others stand and stew every day wasting time and money because of the lack of information being provided to you as a customer. 

On the insurance side, most company’s premiums would be much lower if we could pool with other companies to get the same price as larger companies. Insurance companies strictly prohibit such pooling. Eighty percent of American companies have fewer than 8 employees and the overpayments by smaller companies are subsidizing the lower rates paid by larger companies. Those larger companies are themselves a small audience who have the largest say in how these companies are run. State and federal regulators have never dealt with this imperfection in the market and clearly the lobbying power of larger companies means they have their say with government.

The solution to poor customer service caused by shortsighted management fixated on cost-cutting is first to increase competition in the true sense to force companies to be more responsive to their customers, not just to a few large corporate buyers and to government regulators who give them a license to maintain monopoly or oligopoly status. The second solution is for us consumers to think about whether we truly value quality and whether we are willing to use our pocket book to reward those who provide it.

When companies such as airlines, utilities and insurance companies can truly compete for customers and when those customers are in a position to directly perceive the quality they receive and to reward those that provide it, customer service will mean something. Until then, we will be pressing 1 for sales as opposed to 2 for technical support or customer service, because we know that someone will answer the phone in 30 seconds as opposed to 30 minutes. Still, if the way we buy a camcorder is to go to the internet and choose only the cheapest one, JVC will continue to keep you on hold for an hour when you go to customer support to figure out how to use it after you’ve bought it. Will you choose a hotel based on who treats you well or who gives you frequent flyer miles? Solving this problem requires adaptation at every angle in the relationship between customers and providers. 

Basically, we get what we pay for and demand. Problem is, we get what we pay for and demand.