Has a commercial ever brought you to tears? Images of families reconnecting in an airport or a child hugging their parent with delight because a service was able to bring together a magic moment? I think we've all seen some wet eyes resulting from a well crafted 30-second ad spot.
How about tears brought about from an actual service? Or someone jumping in the air with joy because of how great that check-in process was? Nada. It's a rare, rare bird.
But what if—WHAT IF—services were just as good as they were advertised to be? What if they were even close? Wouldn't that be a shocker? Or OMG, wouldn't that be an incredible business!
I've been looking at the economics and design of services, because frankly it's something clients have been asking Adaptive Path to work on. Not the design of a single app, but the design of the series of touchpoints that make a service.
What I've found, based on some rough top-down estimates, is that mid-to-large-sized U.S. businesses spend, in aggregate, somewhere between 1 and 5 billion dollars annually1 on the planning and design of services. That's a big freakin' pile of cash.
But when you consider that services make up roughly 80% of the U.S. economy,2 it's no wonder. In fact, services are the bright spot of the U.S. economy. While the U.S. has an overall trade deficit with the rest of the world, we run a $144 billion dollar trade surplus in services!3
But back to that $1 to 5 billion of annual spending on the planning and design of services. That seems like a mighty big number, but now let's compare it to the funds spent on advertising those services—the money spent attracting us to services by telling us how awesome those services really are. Here we go:
U.S. Business will spend an estimated $40 billion for ad spends in 20114 in just the top 5 categories of local services, financial services, telecom, restaurants, and travel and tourism. Based on my rough and early calculations, that is at least a 20 to 1 ratio between buying ads to attract customers versus spending to improve the services they receive.
So for every dollar U.S. businesses spend improving a service, I'm estimating that they spend somewhere between 8 and 50 dollars advertising it. OMG.
This is a big gap where businesses choose to invest in their services. They spend a lot of money to tell you how great the service is, and then, all too often, the service doesn't live up to the hype. Brands become hypocrites thanks to their own investments.
For customers, this spending gap becomes what I call the Service Anticipation Gap, or conveniently, SAG. You set their expectations high for what you can do for them, maybe even connect to some deep emotional need, and then dash their hopes when they experience the reality of your service. Customers anticipate our best—because we told them to!—and then even our best often doesn't live up.
For businesses, the Service Anticipation Gap has economic consequences. It's the loss of all future potential revenues and the wasted ad spend when a service doesn’t meet or exceed the expectations set with the customer.
There are certainly bright stars out there; businesses that actually spend much less on advertising than their competitors and win customers through delivering a great service experience—think Amazon. But with the 20-to-1 spending imbalance, there are plenty of saggy businesses and you've probably been disenchanted with many of them.
Let me be clear here. I'm not arguing that advertising is bad. Building awareness and customer interest is key for a business. Peter Morville wrote in Ambient Findability that “findability trumps usability. If you can't find it, you can't use it.” Well, this applies to services too. If you don't know about it, you can't engage with it.
But the service does have to meet expectations when the advertised-to customer does arrive, and that's where this disproportionate spending doesn't make sense. Businesses are spending on a gorgeous house facade, leaving the interior unfinished and messy, then wondering why nobody wants to buy the house for its curb appeal. A more sensible balance seems in order.
So here's what I'd like to propose: Service businesses, look at your ad spending. Is it disproportionately larger than your spending to improve the actual service? Then look at your overall conversion funnel for turning non-customers or inactive-customers into engaged and long-term customers.
You're probably spending a lot on the front end of that funnel, getting a LOT of potential customers up to the point of considering your service. Then there's probably a big drop off somewhere between the front end and when good and profitable revenue actually starts hitting your books.
Now estimate this: Is every additional ad dollar you spend on the front end of the funnel having as big an impact on moving people towards loyal customers as an additional dollar spent further down that funnel, where customers are beginning to experience the actually service? Or do your funnel and your business sag where you no longer live up to customer anticipation?
Do the math. I'm thinking in many cases there's a much better business case for investing a dollar in the service, a dollar that's going to keep working for the business for quite a while because an improvement to a service doesn't fade over time like an ad spend. A dollar spent on improving the service has long-term impact, is more measurable, and can therefore have a higher correlation to and often direct causation of a customer's decision to spend and stay with the brand.
So I implore you! Step back, take a look, and consider if you need to stop the SAG.
About the numbers
A little more detail on where the numbers come from:
1“Mid-to-large-sized U.S. businesses spend roughly $2 billion dollars annually”—Based on the annual economic output of service industries, removing the portion estimated to be contributed by small business, and then estimating the cost of delivering those services and the portion of that cost made up of a typical ratio of R&D spending. You can see more math here.
2”...services make up roughly 80% of the U.S. economy”—from 'The Role of Services In the Modern U.S. Economy' Office of Service Industries, U.S. Department of Commerce.
3The U.S. has “a $144.1 billion dollar trade surplus in services”—from U.S. Department of Commerce fact sheet. While the U.S. is running an overall trade deficit, it has a trade surplus in services. “U.S. services exports totaled $551.6 billion in 2008, up $54.4 billion (or 10.9 percent) from 2007. This rise in exports helped the U.S. to have a record trade surplus in services at $144.1 billion, up $24.9 billion (or 20.9 percent) from 2007.
4“U.S. Business will spend an estimated $40 billion for ad spends in 2011” —based on extrapolating the Q2 and Q3 data for the top 5 service categories outlined by Kantar Media in: Local Services, Financial Services, Retail, Telecom, Restaurants, Travel & Tourism.