College of Business

Minimum wage hike can be overcome

By: Andrew Czaplewski, Ph.D., College of Business, Colorado Springs Business Journal
April 28, 2017
Businesses need to understand how their response to the new law will impact customers. Managers also need tools to cope with rising labor costs that maintain service levels and increase customer satisfaction.

Problem: In the three years between Dec. 31, 2016 and Jan. 1, 2020, Colorado's minimum wage will increase by 44 percent. To keep costs down, I may need to reduce headcount. However, I am unsure how this decision will impact customer service.  How can I maintain our high level of customer service in spite of increasing labor costs?

The recent and forthcoming increases in minimum wage are already codified into law. Businesses need to understand how their response to the new law will impact customers. Managers also need tools to cope with rising labor costs that maintain service levels and increase customer satisfaction.

The link between labor hours and customer satisfaction is very real for most businesses. Moreover, research indicates a strong connection between customer satisfaction and positive outcomes like loyalty, word-of-mouth, up-selling and cross-selling opportunities, and profit.

Some economists suggest that because only a few percent of employees work for minimum wage, the impact of the coming wage increases will be minimal. However, the minimum wage increase will affect more than just entry-level employee wages. Consider how a more experienced employee making, say, $11 per hour will feel when entry level employees earn wages just shy of their hard-earned senior pay? Equity theory states that employees judge the fairness of their wages by comparing themselves to referent others. Clearly, there will be a negative effect on senior-level morale if entry-level employees enjoy a mandated raise and they are not accorded a proportionate hike. Although the minimum wage law was written for entry level workers, the ripple effect to other employees and wages within the organization is undeniable.

To maintain employee morale and their sense of loyalty to the organization, the wage for your more experienced employees must be raised to a level commensurate to the previous gap above entry-level wages. After next year's wage increase it must be raised again, and the game continues. By 2020, the expected minimum wage for experienced employees based on this example will be at least $15 per hour. Everything shifts upward.

The main point is to understand the full cost of minimum wage increases on your business. It is not as simple as calculating the number of hours required of entry-level employees. The fairness of wages within an organization as determined by referent others means that wages may need to be adjusted throughout the organization to maintain a sense of fairness, and with it, commitment to customer service.Quantifying the relationship between labor hours, customer satisfaction and profits is important. Starbucks, for example, has developed a system whereby they are able to determine, by store, the rise in profits associated with each percentage point rise in customer satisfaction score. They also are able to calculate how much additional labor is required to achieve each percentage-point increase in customer satisfaction.Has your business quantified the impact of customer satisfaction on profitability? Moreover, have you calculated the relationship between labor hours and customer satisfaction? Without this understanding, it would be very risky to cut labor hours in response to rising wages.What are the alternatives? Here are three ideas for responding to minimum-wage increases in ways that preserve or enhance customer satisfaction.

Action Steps

Consider raising prices. The law of supply and demand says that, all else being equal, if you raise the price of something, people will buy less. Customer satisfaction is one thing that can overcome this law. Strong customer satisfaction results in fewer price-sensitive customers. Also, your competitors may be forced to raise prices in response to higher minimum wages too, so raising prices may not make you less competitive. The key is finding out how far you can go without losing more sales than the price increase is worth.

Improve your processes. Improving the efficiency of your processes can enhance the customer experience, make employees more productive and increase profits. When productivity increases, the need for labor hours can decrease. Where are the inefficiencies in your business? Do you have times when employees have down time? Simplifying an operation or fixing an inefficient system can save a lot of labor hours.

Outsource parts of your process. If a third-party vendor can do something better, faster or cheaper than you, it makes sense to consider outsourcing. A great local example is Synq3 Restaurant Solutions. They handle drive-through, mobile and takeout ordering for a variety of national restaurant operations. In most cases they increase customer satisfaction. They also increase the average ticket sale because they have strong employee sales training and a standardized process for cross-selling. Are there parts of your business that could benefit from outsourcing to a specialized vendor?

Look at new customer-facing technologies. The mere threat of a $15 minimum wage in recent years has caused executives to write extremely large checks to research and develop new customer-facing technologies. For example, Lowes is test-marketing the "LoweBot" assistant robot to enhance the shopping experience while reducing the need for employees. Kiosks or tablets with touch screen technology, self-ordering and self-checkout are now within reach of every business. In addition, mobile phone apps can help replace employee-customer interactions and reduce the need for labor hours while maintaining customer service levels. If your business has not explored automation possibilities, now is the time.

Andrew Czaplewski is a professor in the UCCS Department of Marketing, Strategy & International Business. He can be reached at oped@uccs.edu.

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