Minimum wage hike will tax business, can be overcome

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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.

2 COMMENTS

  1. Jock Jones

    Such fallacious reasoning really upsets me. Raise the minimum wage and all workers wages must raise. Sounds wonderful in the utopian, progressive world. And it would be great – if – everything stayed the same because now they have more money to spend. However, the reality in artificially, undeservedly, mandating higher wages raises the cost of doing business. Their skill level and productivity didn’t improve, just the cost of employing them. Suppliers will raise their prices to maintain profit levels. The business owner has two options – reduce the number of employees and his level of service and productivity or raise prices to maintain his minimal profits. In the end, the minimum wage employees’ earning power is right back where they started, at the bottom of the heap.
    What can they do to get up and out? Learn the business they are in, use the skills they have acquired and move up. Go to school and learn the skills they need. Too bad they didn’t learn some skills when they had the opportunity in school. Maybe it is time to reinstall trade schools as a parallel to the regular school programs.
    Let’s face it… you can take, searching for the PC term… the not so bright or motivated kids and put them in schools to be minded by other kids like they do in D20, or maybe teach them some skills to work at least at Good Will. And, the others – call them middle of the roaders – offer them opportunity to do other things like install satellite dishes, call centers, balance a check book, be a carpenter, to think… I’ve had people work for me that would spend $10 at McDs for lunch instead of making a sandwich, then whine they didn’t have enough money to feed their baby. Of course, they had to have their after lunch cigarette at $6 per pack.
    Too bad schools are spending so much time teaching diversity, how to appreciate a tranny, minority history appreciation and not giving our kids instruction on how to survive without government handouts.