Wednesday, November 28, 2007

Some Thoughts on Building Customer Loyalty

Most companies recognize the need to achieve product quality and deliver good customer service that meets or exceeds the customer's expectations. In an article from the past autohors David Stum and Alain Thiry describe three common misassumptions that involve efforts to influence a customer's attitude and presume a cause-and-effect relationship:
1. internally-developed quality standards of product and service lead to customer satisfaction;
2. high levels of customer satisfactionresult in a high volume of repeat purchases;
3. measurements of customer satisfaction can predict a customer's future behavior.

Customer satisfaction is not a surrogate for customer retention or customer loyalty.A satisfied customer is a repeat customer, maybe. A loyal customer will keep coming back and will refer others. Between 65 and 85 percent of customers who defect say they were satisfied or very satisfied with their former supplier.

Loyalty-based companies
The primary mission of a loyalty-based company is to deliver superior value to customers. Success or failure can be measured by customer loyalty, best quantified by retention rate, share of purchases or both. Achiving customer loyalty has three effects:revenues grow, costs decline and employee retention increases.

Loyal customers exhibit some or all of the following characteristics: repeat purchases, purchasing across product and service lines, giving referrals and demonstrating an allegiance in spite of the lure of competition. Building a highly loyal customer base cannot be done as an add-on process. It must be integral to the comany's basic business strategy. Companies that recognize customer loyalty is earned by delivering consistently superior value, design their entire business around customer loyalty.

Self-enforcement is the key to achieving outstanding loyalty because the benefits of a customer-driven system are cumulative. First, the company must understand the relationships between customer retention and the rest of the business. Then, they must quantify the relationships between customer loyalty and profits. The program should focus on four aspects of the business, namely: customers, products and/or services, employees and measurement systems. When all these areas align, they reinforce each other and the results are outstanding.

Customers form the basis of a loyalty-based company and success depends on their staying with the company for a long time. However, not all customer are equal. The company should target the "right" or "best" customers and be ready to "fire" those customers who do not fit the business. The customers to fire are those that either use more resource than the margins they generate, or their needs do not fit well into the company's basic business. (I often suggest that customers who consume too much resource are better to fire and then lead them to your competitor.)

Demographics and purchasing history give some indication of a customer's inherent loyalty. Finding loyal customers requires taking an objective look at the kinds of customer to whom the company can deliver superior value. An accurate analysis will identify a customer segment that is fairly homogeneous that improves the economics of serving those customers.

Products and Services
Once a company identifies the customer it should keep, it must figure out how to keep them. That often means the company must consider adding new products and services to meet customers' evolving and changing needs. Companies that fail to use the intelligence they have gathered about their customers to develop the products and/or services customers need or want become vulnerable to competitive threats from other companies who will lure their customers away. Over time, as a company developes an intimate understanding of those (loyal)customers, it can exercise good intuitive market judgement because it knows the wants and needs of its loyal customers. In addition, it is easier to build sales volume with customers who already know the company than it is to build sales volume with new customers. So, the choice is to create new lines of products and/or services to meet the changing needs of loyal customers or to search for a new market segment and create new customers.

Employees as a resource
Employee retention is another significant aspect of customer retention. A customer's contact with a company is through its employees, NOT the top executives. Those employees who deal directly with customers day after day have a powerful effect on customer loyalty. Learning accumulates as people stay on the job. The longer employees stay with the company, the more familiar they become with the business. The more they learn about the company, the more valuable they become. Long-term employees tend to be more productive and more loyal as well.

When long-term employees leave, the bonds of trust and expectations built between the employee and the customers are broken. Successful customer-driven companies know that their best employees are as important as their best customers; once a company recognizes that it has loyal, long-term employees, they should, and most do, everything possible to keep them. The companies often provide incentives that align the employee's self-interest with the interests of the company such as remuneration based on aggregate customer retention rates and sharing their "loyalty surplus" with employees as well as stockholders.

Loyal employees take pride in delivering value to a customer over time, take satisfaction in contributing to the company's growth and eventually those employees will develop a company loyalty as an integral part of a shared sense of purpose with the company.

I think I will take some time to think about the measurement systems in a company that are necessary to support both employee and customer loyalty becasue they are not necessarily those that are normally in place.

Tuesday, November 27, 2007

Employee Impact on Customer Loyalty

A recent study by Towers Perrin indicates the level of engagement of employees within their organizations. The statistics are frightening. Their study shows just 21% of the employees surveyed around the world are engaged in their work. Thestudy defines engaged as being willing to go the extra mile to help their companies succeed. 38% are considered partly to fully engaged. This suggests that 62% are not engaged. There has been much written about the impact of employee satisfaction and loyalty on customer satisfaction and loyalty.

Some of the other findings (equally serious) are:
1. Only 38% of employees felt senior management communicates openly and honestly.
2. 44% agreed that senior management tries to be visible and accessible.
3. Just 10% indicated that senior managemnt treats us as if we're the most imporant part of the organization.
4. More than half felt that senior management treats us as if we don't matter.

Friday, November 16, 2007

The Rinko syndrome and its impact on customer loyalty

The rinko syndrome is probably most common in older businesses where tradition and policy are well-defined and well-known among all the employees. However, it is also evident in businesses which hire people and give them customer contact jobs with inadequate training.

You may have already guessed or at least have a good idea what the rinko syndrome is. Let me give you the background on the name so that you too can appreciate the robustness of this concept. It seems there was once a small printing company somewhere in the Midwest that was run by a man named “Rinko.” He was very good at printing and was successful. He worked on a job-by-job basis where each job was done for a fixed price.

The limitation of the printing company was that it could only produce certain kinds of documents with certain kinds of fonts on certain types of paper. When a particular job met the guidelines of document, font and paper type, the job was sure to be a success. However, these constraints never held Rinko back from taking a job, any job. On the other hand, customers were never made aware of these constraints. Are you beginning to see the customer problem?

Don’t jump to the conclusion that Rinko just did what he wanted within his constraints. In fact, Rinko was very customer oriented and took time with each customer. He would carefully listen to each situation and try to understand the customer’s needs. If it was unclear, he would ask enough questions to clarify the job so that he understood what they wanted.

It was here that the Rinko syndrome occurred. He would take the customer information and redefine it so that it would fit his operational constraints. So, the rinko syndrome can be defined as:
Rinko syndrome: the redefinition of the customer problem to fit a standard product (or service) even when the resultant product (or service) may not meet the requirements of the customer.

Many customers would not even be aware of how their job was changed and some were so naïve as to be unaware that the job was changed. Since he was a good salesman as well as printer, the customers were often led to believe that his product was the best they could have or that his solution was the best one for their particular requirements. Some customers would be happy because they felt that an expert had accurately evaluated their job and given them the best solution. There will not be a negative side for the timid or naïve customer, however, as customers become more sophisticated, the rinko syndrome can have a very negative impact.
When the analogy is made to technical service operations, the implications are equally serious. Consider where the rinko syndrome can occur in technical service operations.

1. Selling contract service – The customer is guided into choosing the service contract that is the “standard” for the company or industry instead of what best meets the needs of the customer. An example is selling a customer next day service (since that is all you can provide) when the customer really needs two hour response because of the critical application of the product in his business.

I had a client several years ago who had a large field service organization around the United States and provided 4 hour response time for on-site service. He was very proud of meeting that level of performance for his customers until we asked his customers what they wanted. We found that 43% wanted 2-hour response and 27% would be happy with next-day service. By changing his dispatch procedures he was able to meet the varying customer needs and by charging more for the 2-hour response add more than $100,000 to his bottom line without adding any additional resources.

2. On-site service – The customer is guided into believing the equipment needs a new part although the failed part is repairable (perhaps because the service tech gets a commission on parts sales). Another way is the customer is told the equipment failure is very complicated so the service tech changes many parts. This can happen when the service tech really doesn’t know exactly what is wrong and solves the problem by swapping out many parts (rather than taking the time to solve the problem or appearing not to know how to solve the problem).

The use of a parts-swapping repair strategy may actually be the correct strategy when downtime is very expensive and the swapped parts are included in the service contract. It is when the parts swapping is done for other reasons that the rinko syndrome is an appropriate descriptor.

3. Tech support – The customer is guided through diagnostics until the tech support personnel can go no further. The customer-oriented person will find the next step toward solving the customer problem. The rinko syndrome person will give up on the problem and tell the customer some story to get rid of him or he will create solutions by trial-and-error until the customer problem is fixed or the customer leaves from exasperation.

I am sure you have seen the rinko syndrome in your service operation. The questions you may have are:
1. Is the rinko syndrome really that bad?
2. Can I eliminate it from my organization?
3. How will I know when it’s gone?

Yes, the rinko syndrome is really that bad! It is the lazy way to solve customer problems. You essentially put all problems (pegs) into the solutions (holes) you offer. The old adage applies: you can fool some of the people some of the time, but …

The rinko syndrome really says to the customer that he is one of many and not special enough to solve his PARTICULAR problem. This insidious process eventually erodes customer confidence in your organization while allowing your personnel to get sloppy about their attention to the customers. If you are trying to differentiate your company from the pack by providing excellent service, STAY AWAY FROM THE RINKO SYNDROME.

The way to eliminate the rinko syndrome from your organization is through training and measurement. Train personnel to be attentive to specific problems and not to compromise the customer requirements! When customer-contact personnel believe their role is to really take care of the customer, and know that management supports this policy, they become aware of the importance of their role. There are service organizations that have incentive programs aimed specifically at rewarding customer-focused behaviors. The type of training that will accomplish this is focused on valuing the customer. This training is NOT a one-time program. Rather it should be an on-going refresher program that is repeated periodically to re-enforce the concept and remind each customer-contact employee of the management commitment to the customer.

Equally important is the need to eliminate performance measurements that encourage rinko performance. (Yes, some performance measures encourage rinko.) Avoid performance measure such as number of customer contacts per day or number of completed calls in a specific time. These speed measures are excellent measures of productivity but they can also backfire when activity level is high. If productivity measures are used, they must be balanced with other measures that focus on taking the time and effort necessary to resolve customer problems. Institute measurements that support effective problem solving and do not encourage front-line service personnel to offer and provide the “quick fix” that ignores the real need of the customer. The measurements of customer retention and customer satisfaction can provide the balance.

The rinko syndrome will disappear (and you will know it) when you have developed the customer-contact personnel in your organization through the appropriate training to the level where they believe their primary mission is to support the customer and your performance measurements are consistent with this policy.

Wednesday, November 7, 2007

You Call That a Loyalty Program?

I just can't stand it anymore. If I read one more blog or news release about a loyalty program that is nothing more than a discount program I will go kick a tree. I wonder who the dimwit was that decided that a discount program (a loyalty program that does nothing more than give the customer a discount for additional purchases) should be called a "loyalty program." It seems to me that the company that initiates a "loyalty program" that is characterized by offering points which lead to future discounts is really telling the customer that their products, services and personal attention are not sufficient to draw the customer back. THAT IS NOT A LOYALTY PROGRAM!!!

There is another aspect to this discount program that seems to be overlooked; and that is that the discount program has two very important negatives. The first negative is that the discount program directly reduces profit margin both in the discount as well as in the administration of the program. The second negative is that it is susceptible to competitive discount programs. For example, I think we can see a number of credit card companies offering dicounts and paybacks for using their cards. The discounts offered are themselves facing competition between different banks. So, following this logic, the "loyalty program" is only as good as its performance against other "loyalty programs.


In my simple definition a loyalty program is one that aims to develop and then provide product, service and customer relationships that are sufficiently enticing that the customer has no inclination to seek other alternatives. These are the three legs of loyalty that I keep espousing as the real foundation of customer loyalty.

My message to those companies that think their "loyalty program" is really creating customer loyalty - YOU ARE WRONG. SO STOP IT.

I will now get down off my soap box.

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