"Engaging with the people who have shared their thoughts about your business is a great way to get to know your customers and find out more," says John Maguire of the Google Place Page team. "Both positive and negative feedback can be good for your business and help it grow (even though it's sometimes hard to hear). By responding, you can build stronger relationships with existing and prospective customers."
"For example, a thoughtful response acknowledging a problem and offering a solution can often turn a customer who had an initially negative experience into a raving supporter," he continues. "A simple thank you or a personal message can further reinforce a positive experience. Ultimately, business owner responses give you the opportunity to learn what you do well, what you can do better, and show your customers that you’re listening."
Google actually has a user guide with some tips on how to handle your responses, just in case customer service isn't your strong point.
You must have your listing verified before you are able to respond to reviews.
Yelp is probably going to love this, considering they already have something of a beef with how Google uses its content.