Is customer service a lost art, or are today’s customers harder to please?

On the one hand, moments of tear-your-hair-out frustration are commonplace — from shopping in stores where sales associates are nowhere to be found, to dealing with salespeople unable to help locate a sought-after item, to encountering repetitive robotic voice messages that never lead to a live customer service rep. On the other hand, the rise of 24/7 help desks, ubiquitous pop-up bubbles on shopping websites that offer assistance, and the ease with which consumers can dress down businesses in 140-character tweets, have arguably made companies more attentive — and accountable — than ever before.

“We are more demanding,” says Peter Fader, professor of marketing at Wharton and co-director of the Wharton Customer Analytics Initiative. “We have a ‘customer is king’ mentality, and we have come to expect world-class treatment. We want everything to be easy: simple customer returns, constant telephone access to the company and perfect products in every color. We’re just spoiled, plain and simple.”

Yet even in the era of heightened customer expectations, a number of companies excel at customer service. Take Zappos, the online apparel company known for heroic acts of customer service — including hand-delivering shoe orders to certain stressed-out shoppers. Or Southwest Airlines, which has a famously fun airline crew who instigate impromptu airport games and activities when flights are delayed. Or Hilton, which gives out warm, fresh chocolate chip cookies at some of its hotel chains.

Companies with exemplary customer service understand that delivering a superior experience for consumers drives loyalty and improves top and bottom line results. There is no secret sauce, but there are some commonalities. Customer service standouts tend to have extensive employee training and talent management programs. They also tend to treat workers well by giving them incentives, robust career development paths and other benefits.

To do customer service well requires investment, observers say, while also acknowledging that, in an era of budget cuts and downsizing, it is an investment not every company can afford to make. For those firms, there are lower cost ways to enhance service such as focusing on hiring and staffing policies around customer service; improving the execution of a social media strategy, and adopting human resource policies to make sure employees are satisfied in their jobs and convey that satisfaction to customers.

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Despite technological advancements that ostensibly make customer service better, the national level of customer satisfaction has not budged much since the mid-1990s. According to the American Customer Satisfaction Index (ACSI), consumer contentment stands at 75.8 on a scale of 0 to 100. In 1994, when the index was created, consumer satisfaction stood at 74.8.

It seems that even in the land where “The Customer Is Always Right,” many shoppers aren’t happy. A Consumer Reports survey last year reported that nearly two-thirds of respondents said they had walked out of a store in the previous 12 months because of poor service. Among consumers’ chief complaints: 71% mentioned an inability to reach a human on the phone, while 65% said rude salespeople.

The economic downturn is partly to blame, according to Frédéric Brunel, a professor of marketing at Boston University School of Management. Customer service is driven by what people are willing to pay for goods and services, he says. “Since the crash, customers are more price sensitive and have put pressure on companies to compete more [in this area]. That often comes at the expense of service.”

Consider the plight of the airline industry. Customers are accustomed to paying what is, at face value, a relatively inexpensive fare for a flight. But airlines have not been able to maintain the same level of service for those fares. To compensate, they have added new fees for checked baggage and on-board meals. Many have also replaced human customer service associates with computer-automated call centers. This trend began before the recession, but the prolonged slump has exacerbated it. “The airlines are trying to align what, when, where and how much to deliver with the amount of revenue they can get,” Brunel notes.

In a financially constrained environment, companies are increasingly tracking usage of their products in order to segment service delivery. “Because there is more information available, the dollar sign on each customer is much clearer,” says Brunel. “Companies provide a different level of service to a different class of customers. Hotels and airlines do this best, as they have loyalty programs [involving] different tiers of customers ranked in terms of status: gold, platinum, diamond, what have you. The airline knows if you travel 100,000 miles a year with them.” If you do, “you get better service. You get to the front of the queue. You get priority screening at the airport. You get to check bags for free. You get a complimentary glass of wine. You are pampered.”

If you are not a gold star customer these days, however, you are out of luck. Most companies tend to focus on meeting Wall Street’s quarterly earnings expectations rather than on long-term profitability. In a bad economy, that focus is even narrower. Customer service is a natural budget item to slash. “When sales and profits are down, customer service is easy to cut,” notes Ronald Hess, professor of marketing at William & Mary School of Business, who studies customer satisfaction and loyalty. “It doesn’t show up right away. Where it shows up is in long-term customer profitability.”

Companies with customer service problems, Hess adds, tend to have customer retention problems — which can be expensive. A study by Bain & Company, published in 2001, showed that acquiring a new customer can cost six to seven times more than retaining an existing customer, and that increasing customer retention rates by 5% boosts profits by 25% to 95%.

“It’s better to keep the customers you have than to have to keep acquiring new ones,” says Hess. “Long-term loyal customers tend to stay longer and spend more money with you. The goal of every company should be to make sure its customer base is satisfied and doesn’t leave. If you look at the best retailers — [such as] insurance companies and hotels — they have all put money into this. They have invested in customers and invested in service, and they are getting dividends in the form of customer loyalty and higher profits.”

Best Practices: Amex, Mercadona, Zappos

In 2006, Claes Fornell, a professor at the Ross School of Business at the University of Michigan, and other colleagues published what has become a classic study in customer service in the Journal of Marketing. Using data from the ACSI — the Index he created — Fornell found that companies with high customer service ratings are not only more profitable, but also have stronger stock market performance. In other words, it is possible to beat the S&P 500 consistently by investing in firms that score high marks on the ACSI.

The most successful companies consider customer service an important bottom-line metric. Here are some examples: In 2006, American Express, the credit card issuer, started an internal program that involved training and incentivizing its staff to get customers more engaged. The company transformed its traditional service call by getting rid of scripts and taking customer service representatives off the clock — which allowed the representative to decide how long he or she wanted to spend on each call. It also changed its employee compensation structure, directly linking a big portion of incentive pay to customer feedback. The result: Customers increased their spending on Amex products by 8% to 10% and overall service margins widened, according to a case study by Joseph Handelman, a professor at Ross. In the most recent quarter, the company announced that card members spent a record amount on their Amex cards; total revenue was $7.74 billion, up 5% from a year ago.

Mercadona, one of Spain’s largest supermarkets, provides another example. The company has enjoyed steady profits and double-digit growth for most of the past decade — success that management attributes to its commitment to training employees. According to a Harvard Business School case study written by Zeynep Ton, a professor at MIT’s Sloan School of Management, the supermarket chain invests four weeks of training time and 5,000 euros for each new store employee. In the U.S., the norm is only seven hours. Mercadona also has an exceptionally low turnover rate of 3.8%. One reason for this is that Mercadona employees have predictable schedules — a rare thing in the retail world. According to the case, workers learn about their schedules one month in advance and don’t have to work different shifts from one day to the next. Retail managers in the U.S. routinely switch employees’ schedules around on short notice in order to fit the labor supply with store traffic.

Meanwhile, Zappos, the Las Vegas-based company that was founded in 1999, has become “the model of a service culture,” says Hess. “They’re really selective in who they hire. They have extensive training programs: They don’t just train the newbies; they are training middle managers and senior people. They make sure that employees are living and breathing the company culture every step of the way.”

In addition to employee training, the company has a number of policies that make shopping easier for customers. For instance, Zappos encourages customers to order as many items as they wish in order to “try them on” and offers free shipping both ways, a 365-day return policy, and a 24/7 call center and warehouse to deliver lightning-fast turnaround on orders. In 2009, Amazon bought Zappos in a deal worth about $850 million.

Cheaper Ways to Win Customers

For companies looking for inexpensive ways to boost customer service, it’s important to avoid penny-wise and pound-foolish tendencies. Consider a recent study conducted by Marshall Fisher, a professor of operations and information management at Wharton, and other colleagues. They looked at two years of store level data for a retailer’s monthly sales, staffing levels and customer-satisfaction survey responses to measure the impact of store-staffing levels on sales and customer satisfaction. They found that revenue rose, on average, by $10 for every additional dollar of payroll added to a store. For some stores that were especially understaffed, the revenue bump was as high as $28. At the 40% gross margins this retailer was earning on revenue, adding payroll was highly profitable.

“Store staffing levels have a huge impact on revenue,” Fisher notes. “Staff takes care of customers, but staff also takes care of the store — restocking shelves, running the checkout counters, cleaning up. If a retailer is nearing the end of a quarter and is a few pennies a share behind their promise to Wall Street, shaving 10% off store staffing levels for the rest of the quarter is an easy way to cut costs and ‘make their numbers.’ It’s easy to delude yourself and say that cutting staff doesn’t matter. But over time, it does matter and leads to problems. You shouldn’t be profligate with what you spend, but you have to be cautious with what you cut.”

Companies should be more deliberate in their hiring policies, as well. Fisher advises companies to think hard about who they want in their stores representing the brand. “One retailer has decided to hire its best customers, those who also test as extroverted. They are enthusiastic; they are good at explaining the products; and the employee discount is very valuable to this population,” he says, adding that companies ought to make a special effort to match the hiring criteria to the nature of the job. “You want to have two types of people in the stores: one taking care of customers who are extroverts, and the other taking care of the store. That’s a different personality type.”

Perhaps most important is what Fisher calls “the power of management by common sense.” When companies treat employees fairly and with respect, they have more loyal staff and they attract more talented people. He cites retailers such as Trader Joe’s, Costco, and Nordstrom as examples. “What underlies those companies is that they have a different labor model. Staff and customer service are not a cost; staff is an asset you invest in,” he says.

The goal for companies, according to Jill Donnelly, vice president of Customer Service Experts, an Annapolis, Md.-based consultancy, is to: “create a great employee experience so those employees can deliver a great customer experience. Do workers have to jump through hoops to get a day off? Is HR doing all it can to support them? Are their paychecks coming on time? A company’s service will be successful when the processes, leadership, communication, and learning and development are all aligned to support the service standards and the employees who deliver on them.”

Companies seeking economical ways to win customers should also consider refining their customer outreach strategies by hiring social media specialists. L.L. Bean, the Freeport, Maine-based company best known for its sturdy snow boots, recently assembled a 10-member team to interact with customers on Facebook, Twitter and product review websites. Their focus is to answer questions, respond to complaints, alert shoppers to new products and reinforce the brand’s message.

Of course, starting a social media team from scratch isn’t exactly cheap, but compared to running focus groups and conducting surveys, it’s a reasonable customer service expenditure. “Monitoring social media passively — listening in to what people are saying about you — and then taking proactive actions when needed is a good idea,” notes Wharton’s Fader. “It’s a big step to go there, but once you’re there, it’s very low cost.”

Many companies are also incorporating analytics into their social media strategies. Companies have long used analytics — the study of business data to identify patterns and trends — to mitigate risk, reduce fraud and run a more efficient supply chain. Today, they are starting to apply analytics to social media in an effort to better understand what customers want. “A lot of companies have gone too far in rolling out the red carpet for every customer,” Fader says. “Companies need to use their resources more wisely. They need to use analytics to do a better job of tracking people so they know which customers to invest in, and then provide customer service in a scalable way.”