Key Points

• The service industry is responsible for almost half of all jobs worldwide.
• Once you get a bad reputation for quality in the service industry, it’s hard to walk it back.
• There are a few hidden costs around the service industry that you might not have considered.

In what can only be described as one of the most competitive business environments in modern history, few things matter more than quality. Quality should be the absolute goal of industries everywhere, especially the service industry, where businesses focus not just on hospitality, like restaurants, but also on banks, hospitals, and even retail stores. 

The challenge is that if you don’t meet customer expectations in this highly competitive market, you are likely to see an impact on a company’s overall reputation. The loss of customers and profits is only sustainable for so long before a business closes its doors. For this reason, exceeding quality standards should be the absolute focus of driving long-term sustainability and success. 

Defining Poor Quality

The challenge with defining poor quality is that you and I might explain it somewhat differently, which begs the question of how it should be defined, measured, and analyzed. Ultimately, a straightforward definition would be a business in the service industry that fails to meet customer expectations, whether through quality of care, food, or some other service offering. 

Digging deeper, this could be measured by way of inconsistency, especially in a place like a restaurant where the food is good one day, and when you return three weeks later, the same meal tastes awful. The same can be said for a hotel that promises you certain features or amenities only to discover that those amenities are closed when you arrive, and it feels like false advertising. 

Ultimately, the cost of quality is a price that a business will pay to ensure that it delivers a service to its customer that not only meets but hopefully exceeds the expected quality level. In some ways, this can be divided into two distinct categories. 

Conformance

In this category, the business takes on costs to ensure that the service being delivered is high-quality. This would include properly training employees, adding quality control procedures in areas like the kitchen or check-in process, and testing anything before it hits the customer’s “hands.” 

Non-Conformance 

When you think about non-conformance, you have the costs that are associated with scenarios where the quality expected by a customer fails to meet expectations. This will include any expenses related to customers who want to be compensated for things like coming to a hotel for amenities that are not open or even legal fees in some cases where lawsuits are filed because of low-quality services. 

The Direct Cost of Poor Quality

While there are hidden costs that most people don’t consider around poor quality, there are costs that many people do. 

Warranty Claims and Returns

The return is one of the first costs associated with poor quality in the service industry. This could be when you send something back to a retail store because of poor quality, such as a microwave or clothes.

The same goes for a warranty claim, where a customer receives a product only to have that product break a few months later. One such example might be a plumber who comes over to the house to fix a leaky sink only for the part they used to make a fix fail within six months, requiring another fix that is costly to the plumber in both parts and time. 

What’s notable about this area is that service industries have to train their staff to handle both warranty claims and repairs, which means another expense added to the cost of doing business. 

Reworking and Scraping

If a painter has to redo a wall that doesn’t quite match a house’s color, even though they initially promised it would, they do two times the work for only one price. The painter has now wasted the initial paint that could have been used for another project and then had to repurchase the new paint that better matched the customer’s expectations. 

The same can be said for any overtime pay that a hotel might need if it’s short-staffed on cleaning crews, who must turn over rooms before new guests arrive. This is a direct cost associated with poor quality, as the overtime cost is far less expensive than that of lost revenue and reputational damage if a guest arrives at a hotel room only to find it the same way the guests who stayed the night previously left it. 

Inspection and Testing

If you want to run a restaurant, hiring quality control staff is one of the most direct costs that might even be a bit hidden. This is better known as a “mystery shopper,” who comes into the restaurant and grades it from the time they give their name to a host to tracking the time it costs to sit down, order and receive the food, and even get the check and pay for the bill. 

The same goes for upskilling a barista on new drinks. Every time these individuals have to be trained so they know how to make new drinks, there is a cost in both time and money. While they are training, they are not serving customers, which could mean slower delivery speeds of drinks. 

Legal Costs

Unfortunately, one of the better-known costs of poor quality in the service industry is the legal fee. Anytime a restaurant diner suffers from sickness from food they ate, a lawsuit is not only likely but almost guaranteed in this day and age. As a result, the service industry business has to defend the lawsuit, which means attorney fees and even potential settlement costs. 

Internal investigations also need to occur, and regulatory penalties may be considered if the lawsuit determines there is or was a failed inspection by a food inspector who validates that the food prep wasn’t up to standard. 

Equipment and Facility Repairs

If a customer arrives at a hotel and discovers the gym equipment is broken, the hotel must pay for the cost and labor of repairing it, all while the guest is annoyed. The same goes for a pipe that breaks in a restaurant as the business has to close while it is repaired, so there is lost revenue associated with this and staff not getting paid for the days they are not working. Any safety upgrades that might need to occur as new equipment is installed must also be considered. 

The Hidden Costs of Poor Quality

The hidden costs of poor quality might seem somewhat obvious after reading about them, but most people ignore them altogether in favor of the more direct costs. 

Lost Sales and Market Share

This is potentially one of the worst hidden costs because it’s hard to bring back customers who might disappear altogether if they have just one bad experience. I can personally attest to being someone who never returned to a barber after getting one bad haircut, which happened very recently. This means they won’t ever get any more revenue from me. 

There is also the reasonable concern that if you, as a business owner, suffer from poor quality, your competitors may not be, and as a result, they will try to grab your customer base with attractive offers. Another consideration might be that if a seasonal offer at a retailer falls flat and doesn’t bring in customers, there are a ton of expenses associated with marketing, and these costs won’t be recouped. 

Reputational Damage

Any service business is fearful of the one-star Yelp or Google Review, as it’s one of the first things a potential customer looks at. This goes for doctors, plumbers, and restaurants, all of which are highly dependent on word-of-mouth reviews like Google Reviews. 

What’s worse is that the hidden cost plays out in public whenever there is a social media backlash. All it takes is just one person complaining about a rude staff member, and then other people come out and amplify this comment. If it ever does, the resulting reputational damage will take a long time to repair.

Customer Churn and Acquisition Costs

Any time the service industry loses customers, it has to spend even more money on marketing to try to replace these once-valuable customers. This could include a gym that lost customers because of outdated equipment. When it replaces it with shiny new equipment, it has to work double hard to bring back customers with low-price membership offers and marketing costs. 

Whenever you have to try hard to onboard new customers with discounts or freebies, there is a hidden cost as the business loses money on every customer who takes advantage of these offers. Depending on the service industry business, there is also valuable data loss when customers walk away from a company, especially when they have valuable preferences walking out the door with them. 

Employee Productivity 

It will take a toll if your employees experience low morale because of constant customer complaints and arguing about everything. A waiter or hotel desk staff member who takes the brunt of customer complaints about the quality of service will be less productive, and a business may experience increased employee turnover. 

The same can be said for telecom tech support staff, who get exhausted whenever a company changes its plans. Calls spike for weeks after these changes, directly burdening these staff members. This results in lost productivity and potentially even revenue, as the staff that is supposed to be helping customers buy more is now just trying to get them not to leave. 

Other Useful Tools and Concepts

There needs to be even stronger consideration of the hidden costs associated with poor service quality. The good news is that introducing artificial intelligence will help in a few ways. One of the best examples may be having an AI model customer reception to a new marketing plan so that you know potential results before a costly rollout. 

Additionally, automation will help implement features that can help manage compliance and/or customer experience. Utilizing automation will help increase a business’s overall efficiency, improve customer happiness, and allow human staff to focus more on delivering a memorable customer experience. 

Conclusion 

The service industry is a giant, accounting for almost 80% of the U.S. workforce and nearly half of all jobs worldwide. It is also considered a significant contributor to the overall US GDP, which is why understanding the hidden costs of poor quality is so essential that companies can improve and deliver better experiences.