(FORTUNE Small Business) – Muh-muh-muh, nah-nah-nah," Dominic Manzo sang into the phone. He looked sheepishly out through the glass wall of the conference room, where he sat alone trying not to look guilty for pursuing a job on his company's time. This was the third phone meeting with his prospective employer, whose management seemed much more interested in hearing him than in meeting. From a safe distance his prospective bosses were making bizarre requests. He had to talk to a psychologist and a voice coach, who asked him to memorize and repeat two stanzas of a song from the operetta Pirates of Penzance. Manzo endured seven phone interviews--one of which involved tests of listening, math, spelling, and visual skills--then eight onsite interviews and four hours of observing workers before he was hired, chosen from among 120 applicants.

The coveted position? Manzo landed a spot as a customer-service representative, earning $15 an hour, at Headsets.com, a San Francisco retailer of headsets for phones and computers. Yes, he went through all that to be an order taker. "Our competitors are cost cutting and reducing customer-service levels. We are doing the reverse, upping our staffing levels and creating a more knowledgeable customer- service staff," explains Mike Faith, who started the company in 1997. Faith, 41, a native of Southampton, England, believes that investing in the call center will help him sell more headsets by year's end than market leader Hello Direct, a feat that means the business will have to hike revenues 53%, to $46 million. Terry Flynn, general manager of Hello Direct, a subsidiary of Danish giant Great Nordic, has his doubts. "Strictly for headsets, Mike's business will be no more than half our size," he says. Faith insists that his advantage is that he can focus on hawking headsets, which is all he sells. But he admits that just about everyone has warned him that his single-mindedness makes the business more vulnerable to supplier disruptions and upstart competitors.

In the commoditized world of call centers, most companies opt for either outsourcing or automating. "Customer service--even for online retailers--is generally looked at only as an expense. Most companies are trying to cut those costs," says Rusty Gordon, CEO of Knowlagent, an Atlanta firm that creates training software for call-center employees. U.S. companies are expected to cut today's 50,600 call centers to some 47,500 by 2008. Of such conditions are "McJobs" made.

But not at Headsets.com, where Faith hit upon his strategy while listening to management guru Tom Peters on tape. His excellent message: Make customer service a competitive advantage. This year Faith expects the company, which posted revenues of $30 million in 2005, to invest about $500,000 in its call center. He believes that customers who get cheerful voices will want to hear them again. The Faith credo holds that financial success--big, bell-ringing sales--is what keeps employees upbeat.

There really is a bell in Headsets.com's offices--to herald any single order that adds to profits by more than $500--and it has been chiming a lot lately. Sales per employee have almost doubled, from $400,000 in 2003 to $750,000 in 2005. Turnover among his 48 employees, most of whom are customer-service reps, has ranged from 27% to 37% during that time, compared with turnover of 50% or higher at most call centers, according to Knowlagent's Gordon. Part of what keeps workers engaged is that they can earn 20% to 35% of their base pay in biweekly bonuses and incentives. Customers stick around too. Almost half of the company's sales are repeats, mostly small to mid-sized businesses. "They bend over backward to make customers happy," says Nikki Lewis, department coordinator at Intermec Technologies, a bar-code systems manufacturer in Everett, Wash. She has outfitted her 65-member department with wireless headsets since 2004.

Faith, too, worked at a company--actually he founded TimeSavers, a maker of laminated area-code maps, in 1997--where headphones were standard garb. Sensing an opportunity, he gave $40,000 to two employees to start Headsets.com. In 2000, with growth stalled at about $3 million, he took over.

So began Faith's search for new approaches. Nowadays reps don't use scripts because he wants customers to have genuine conversations, not stilted exchanges, with them. He also encourages employees to take their time by measuring profit growth rather than how quickly they can process calls.

When a product is shipped, Headsets.com includes a survey that asks customers to rate their satisfaction by choosing between "excellent" and "other"--he doesn't want a rating lower than "excellent." Staffers have an aggregate ratio of eight "excellents" for every "other," Faith says, up from four to one in 2001. One of his costliest practices is manning the office with enough reps to handle peak calling periods so that customers never have to wait.

Faith's customer-service fanaticism evolved into a fine art in 2002, when he hired Ken Welsh, an Australian voice coach. Welsh, 46, is now key in the rigorous hiring process. When he asks a prospective employee to memorize and repeat phrases or sing a sequence of nonsense sounds, as he did with Dominic Manzo, he is evaluating a candidate's ability to take direction, as well as his memory, aptitude for learning, and voice quality. Welsh flies from Sydney to San Francisco three or four times a year to run workshops and eavesdrop on calls. He focuses on teaching staffers how to read a conversational pause or offer appropriate reassurance. To help them, he has categorized customers into 11 types, including the expert, lonely heart, unsure, and self-centered, each of which responds to different conversational and psychological cues. "The goal when a customer rings up is to reinforce the idea that she is valuable as a person," says Welsh.

Faith also relies on Jon Kramer, a psychologist he sought out in 2001 to help him become a better manager. Kramer's main duty is counseling managers who need advice on, say, changing a rep's work habits. Together Welsh and Kramer cost Faith some $84,000 a year--only about 0.3% of revenues. And the payoff? "When customers call, it's almost as if they've been looking forward to it," says rep Matt Burnaford, 24, who joined in 2005.

It helps that Faith continues to find fresh ways to imprint his lofty vision on employees. He occasionally packs staffers off for an overnight stay at the nearby Ritz-Carlton hotel so that they can experience four-star service. He also sends them to soak up ideas at other innovative online companies, such as Zappos, a leading shoe retailer in Las Vegas, and StubHub, a ticket broker in San Francisco. Headsets.com even hosts dinners where employees get face time with customers. When Faith wants to test how well his company is performing, he calls its 800 number. Once the phone is answered (in fewer than four rings), he pays attention to how the rep on the other end sounds. What he is listening for is a smile.

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