The holiday season of 2008 may go down in history as one of the biggest nail-bitters in the last few decades. Motley Fool analysts have assessed the state of retail going into this critical season -- the stocks, sales strategies, consumer trends -- and identified the winners and losers at the mall and in investors' portfolios. Click here for the complete report.

When times are tough, it's tempting to discount the whole high-minded "customer comes first" M.O. But that little something extra -- friendly clerks, free tailoring, no-questions-asked return policies -- may be the one thing that keeps customer-centric stores afloat beyond this brutal holiday season.

According to a recent Harvard Business Review study, U.S. companies lose half of their customers every five years, with two-thirds of them claiming that customer care was their reason for leaving. Pleasing people, on the other hand, really pays off: Studies show that improving customer loyalty by 5% can increase profits by a whopping 25%.

Oops, our bad: Here's $10 million
Keeping customers happy -- and coming back for more -- was probably on Best Buy's (BBY) mind when the company sent $50 gift cards to customers who, early on, bought non-Blu-ray HD-DVD players before the format wars went Blu-ray's way.

The spendy $10 million initiative paid off: The company reports that gift card recipients spent 50% more than they normally do per visit when they redeemed the credit.

I had a similar experience years ago when the president of Kiehl's (now owned by L'Oreal) corresponded directly with me. "Thanks for the product samples!" I wrote on a feedback postcard enclosed with my order. "FYI: Love the sample soap's aroma but wish it lathered more." A week later I received a handwritten thank-you note and a $7 gift certificate to try another product -- just for commenting about a gratis sample that had been enclosed in my order.

It was a story I related countless times, and here I'm doing so yet again. (Note to Kiehl's: I am professionally prohibited from accepting any gifts with a value of more than $50. You know, just in case you were, um, wondering.)

Customers have come to expect small retailers -- like Kiehl's at the time -- to offer above-average service. It's when a major player consistently goes well above and beyond that the Street takes notice. And there's one in particular that has become ubiquitous with a high level of customer care -- one whose operational standards are studied by business students the world over ...

And the best customer service award goes to ...
You don't have to be in business school to know about Nordstrom's way with customers. Nordstrom (NYSE:JWN) is the gold standard for exceptional customer service. According to the Nordstrom lore, a sales associate actually let a shopper return a set of tires to the store. (And, no, tires and car parts are not among the high-end department store's SKUs.)

Don't let the company's bricks-and-mortar roots fool you: Nordstrom (which currently has 169 stores in the U.S.) is hardly a dusty relic of retailing. It is handily keeping up with the new dot-com kids on the block, setting the virtual bar higher with every customer-experience improvement it makes.

  • At, you can get live help from a department-specific customer service rep -- a beauty consultant to answer questions about various skin-care lines or a designer specialist to help you find some slacks to match those cashmere socks.
  • And in May, the company launched its "Buy Online, Pick Up In-Store" program for Internet shoppers, which allows you to click and pick up the goods at a Nordstrom store of your choice.

Nordstrom is not alone among crowd-pleasers. The National Retail Federation's 2007 Customer Service Survey lists Nordstrom in the top 10, along with Amazon (NASDAQ:AMZN), L.L. Bean, Zappos and Overstock (NASDAQ:OSTK).

The costs of peeving your customers ...
For retailers who haven't been focused on serving their customers all along, it may simply be too late to re-fashion their reputations. It takes time and money to build loyalty. Wooing new customers to replace peeved ones ain't cheap: It costs six to seven times more to gain a new customer than to keep an existing one.

Few companies can currently afford to beef up "customer experience" when they're struggling just to stay afloat. And in fact, many retailers are cutting back exactly where it could hurt them over the long run: staffing.

According to a 2008 MSN Money Customer Service Hall of Shame survey, retailers still have a ways to go before really raising consumers' ire. Just a few retailers were mentioned among the traditional players that typically rank high on such lists (Internet service providers, cable companies, utility companies, cell phone companies, and insurance companies). Abercrombie & Fitch was fourth on the list behind AOL, Comcast, and Sprint; Kmart was 13th, and Wal-Mart (NYSE:WMT) wasn’t far behind at 17th.

Is customer care enough of a survival strategy?
Even the best-of-breed retailers are going to face unprecedented challenges to keep customers coming through the doors.

Despite Nordstrom's exceptional standing among its customers, investors are tossing it into the bargain bin with all of its peers, such as Saks, Macy's, J.C. Penney (NYSE:JCP), and Kohl's (NYSE:KSS) -- all of which are trading at historic lows. Recently, Nordstrom shares hit a four-year low (below $9).

The company is facing a cash crunch and squeezed margins. And even though sales were down only 8.3% in the third quarter, net earnings margin was halved to 3.9% from 8.4% last year.

If in dire times Nordstrom can fortify its balance sheet and drive higher returns on investment without sacrificing its reputation, even more customers will seek its superior service when they are ready to spend again.