The service sector has always been particularly labor intensive, making constant cost increases inevitable. Faced with this challenge, the most logical response would be for providers to automate and digitalize their services to the greatest extent possible.
However, to properly assess the implications, it is necessary to identify which services require human contact and which services can be carried out by a system or machine. Remote maintenance, electronic transfers, and hotel bookings are all examples of services that can easily be carried out using automated practices. This article focuses on instances involving personal contact, for example, complex situations such as complaints, investment advice, medical attention, and scheduling urgent appointments with specific requirements.
The decision to transition from personal to digital services is based primarily, and often exclusively, on costs. Digitalization is almost always the favorable option, and the level of cost savings can be verified in hard numbers. Furthermore, digital services have far fewer limitations. In contrast to human employees, digital systems can run 24 hours a day, they don’t get sick, and are never subject to mood swings. Artificial intelligence (AI) is able to perform voice recognition, offer personalized answers, and even provide better services than poorly trained or apathetic employees. Machines work to a consistently high standard and their mood never changes. There is much to be said for digitalizing services to the maximum extent possible, and I believe this is exactly the trend we are currently seeing.
Figure 1 shows typical effects that occur when transitioning from personal to digital services.
Figure 1: Effects of digitalizing services
The key detail is that contact between the employee and the customer is lost. The financial cost of this contact can be calculated with relative accuracy. However, it is more difficult to quantify the extent to which personal contact influences a customer’s value perception, willingness to pay, and customer loyalty. Furthermore, these factors vary from employee to employee and customer to customer; personal services are highly variable. However, less personal contact results in weaker customer relationships and therefore lower customer loyalty. It is far easier to replace a machine than a person you have come to know, a person you can look in the eye and whose voice you hear.
Digitalization is making customers more price conscious, increasing price elasticity. Use of the internet has radically increased price transparency, greatly intensifying these effects. It is easy for customers to compare prices online, and they have no particular attachment to the automated voice they hear on the other end of the phone. It is more difficult to differentiate digital services than those carried out by an employee.
Since the positive effect of cost savings can be counteracted by the loss of customer value/customer loyalty, it is best to avoid a hasty or radical transition from personal to digital services, particularly as customer segments react very differently to digital offers. These were the findings of diverse projects conducted by Simon-Kucher & Partners in the areas of banking, telecommunications, air travel, and even industrial services. It is no surprise that the willingness to accept digital services correlates strongly with age. Younger customers are considerably more open to digital services than older customers. Furthermore, we have observed that customers in higher price segments prefer personal services. In these segments, digital services are sometimes rejected outright or seen as an annoyance, resulting in customer loss.
The key, however, is to determine whether the customer is willing to pay for the personal service. Costs are inevitably higher and value is only generated if a customer is willing to pay a higher price. Today, everyone is talking about “monetization”; however, increasing customer loyalty can be almost as important. Even if demand for personal services goes up, the higher costs can pay off, for example, through more effective cross-selling. But integrating personal and digital services presents a sizeable challenge. Some systems initially engage with customers using a digital service, but then offer the possibility to connect with an employee. A video call where the customer can see the employee on their screen is an interesting possibility. As depicted in figure 2, this method is used by the furniture retailer, Butlers.
Figure 2: Combining digital and personal services.
A possible solution is to offer both digital and personal services but to differentiate on price. The digital service could be offered for free, whereas a fee could be charged for services involving an employee. In actuality, however, this strategy is often met with resistance. For example, Germany’s national rail provider, Deutsche Bahn, tried to implement a surcharge for purchasing tickets from an employee, when no additional fee was charged when making a purchase from a ticket machine. This plan failed due to significant pushback from customers. Banks experienced similar resistance from customers when they decided to implement fees for cash withdrawals at a counter as opposed to from ATMs.
I would like to draw attention to one aspect in particular as it simply does not exist in the digital world. I am speaking of emotions — emotions are formed through human interaction. Specifically, on the part of the employee, the main issue is friendliness. A product that is highly interchangeable requires a higher level of friendliness. And since hiring employees means fixed costs, then even in the digital age, the following saying applies:
I can always afford to be friendly;
it costs me nothing and gets me so much.
Providers need to think long and hard about making the transition from personal to digital services. Digitalizing services too hastily or excessively may not be the best reaction to cost pressure. Instead, they should put customer value and costs on an equal footing, even though value to the customer is harder to measure. Ultimately, personal service has to generate a higher willingness to pay. Moreover, it is important to recognize the potential loss of customer loyalty through digitalization. It is essential to quantify customer value as only then is it possible to assess the impact of personal and digital services on costs and revenue. Combining both strategies is an interesting alternative.