Wednesday, May 28, 2008

Loyalty Impact on Market Share

I have written a number of blogs about customer loyalty and retention in the last year. However, I have not taken the time to demonstrate how to measure the impact of improved retention on market share. The answer may seem obvious; namely, for every percentage point of improvement in customer retention, there should be a corresponding percentage improvement in market share. Wrong answer!
The fact is that unless your competition is also increasing their rate of customer retention, the impact of improved retention rates has a multiplying effect. I am going to demonstrate this effect by creating a simple market scenario and then examine several different cases to show how market share changes with changes in the rate of customer retention. The methodology is appropriate for service organizations, especially since customer retention is considered a major role of the service organization. This methodology provides the measurement of market share shift as a function of the improvement in the rate of customer retention (or reduction in the rate of customer defection).

Scenario: Consider a service market with three groups of competitors in the market. The first player is the manufacturer of the equipment. The second player is a large, national third party (independent) service (TPM) organization, and the last player is the group of all other servicers of the equipment. The manufacturer’s service organization maintains about 90 percent loyalty (that means that about 90 percent of the service customers continue to use the manufacturer’s service organization). When customers leave the manufacturer, half go to the large, national third party company and the other half go to smaller independent service organizations. The large, national third party maintains about 88 percent loyalty with about one third of those who leave returning to the manufacturer and the other two thirds going to other servicers. Finally, the group of all other servicers maintain about 86 percent loyalty with the remaining 14 percent who leave splitting evenly between the manufacturer and the TPM. In other words, 7 percent return to the manufacturer for service and 7 percent go to the large, national third party service organization.
Although these loyalty percentages may not be applicable to specific products, the methodology will apply for all areas and also when there are more than three players in a market. In fact, there is no limit to the number of players that can be analyzed. However, the more players there are in the market to be analyzed, the more data will be required to complete the analysis.

There are two types of analysis that can be made from this data. The first analysis, which will be included in this article, is the examination of the steady state market share that results from these loyalty percentages. (Steady state, as used in this article, will refer to the stable market that would result if there were no further competitive actions taken by any player in the market). The second analysis, which will be discussed in the next blog, will examine short term changes. The results of the steady state analysis for the scenario noted above indicates that the manufacturer will have a market share of about 35 percent, the large, national independent service organization will have a market share of about 33 percent, and the group of other servicers will have a market share of about 31 percent. This is interpreted as the ultimate market share that each player will get if there are no changes in the loyalty (or retention) from any of the three players.
Now that the steady state market share is known for each player, examine the impact of the manufacturer implementing a major program designed to increase customer loyalty. The program is sufficiently successful to improve the customer retention rate from 90 percent to 92 percent. At this point, neither the large, national third party service organization nor the group of other servicers do anything to increase loyalty (or to increase customer retention). The market share of each group now becomes 41 percent for the manufacturer, 30 percent for the large, national service organization, and 29 percent for the group of other servicers.

The following chart does not appear in the actual chart form. Please align to see results correctly.

Market Share (%)
Manufacturer TPM Other
Manufacturer with 90% Retention Rate 35.3 33.1 31.5
Manufacturer with 92% Retention Rate 40.6 30.4 29.0

In fact, the following chart shows how the manufacturer’s steady state (long term) market share changes as the retention rate changes over the range of 80 percent to 98percent.

The following chart does not appear in the actual chart form. Please align to see results correctly.

Steady State Market Share
Mfg retention Mfg TPM Other
0.98 73.2 13.7 13.1
0.96 57.7 21.6 20.6
0.94 47.7 26.8 25.5
0.92 40.6 30.4 29.0
0.90 35.3 33.1 31.5
0.88 31.3 35.2 33.5
0.86 28.1 36.8 35.1
0.84 25.5 38.2 36.4
0.82 23.3 39.3 37.4
0.80 21.5 40.2 38.3

From this chart the results are pretty amazing. The steady state market share for the manufacturer changes from a low of about 21.5 percent when the retention rate is 80 percent to an unbelievable high of about 73.2 percent when the retention rate is 98 percent. The rationale is simple; as the retention rate increases, it acts like a vacuum sweeper capturing new customers but allowing none to leave. Clearly, if a company could achieve a 100 percent retention rate, they would capture 100 percent market share in the long run. Similar results can be achieved by the TPM and the group of other servicers as they increase their rate of customer retention.

Although these results are dramatic, they will never be achieved. That is because they are steady state results. Thus they could only occur after a long period of time with no changes in the market - a condition that never happens. Nevertheless, the results have value for several reasons. The most important reason is that the results give an indication of the direction of market share based on your current level of customer retention. Secondly, the results can be used to evaluate different scenarios so that strategic plans can be translated into market share impact. Thirdly, market share impact can be assessed when your competition changes their customer retention levels. Fourthly, the steady state results provide a good snapshot that can be used as a point of reference. Lastly, steady state results are easier to understand than short term results that must be put in context of time period and other factors. The key point is that this is a planning model which shows the long term impact on market share which results from changes in the rate of customer retention.

Since this is a steady state model, initial conditions (initial market share) do not play a role. Even though the manufacturer may start out with 100 percent market share, it will have NO impact on the steady state market share that will occur as a result of customer retention rates. This is a very important point! Manufacturers usually start with 100 percent market share of the service business. If a manufacturer were to maintain 100 percent customer retention, there would never be any opportunity for competition for the service business. However, once the manufacturer drops below 100 percent customer retention, then the long term outcome will be the market share allocation resulting from the customer retention rates of the various companies that enter and compete in the market.

Another important point that needs to be mentioned is the information required to perform this analysis. As you may have noticed in the scenario at the beginning of this article, retention rates for all the companies in the market were known as well as the way customers were switching. These numbers are not the easiest to get, BUT, they are not impossible to acquire. Techniques are available to make these assessments (based on a statistical sample). As the size of the error in these estimates increases, the error in the market share measure also increases. (I will discuss errors for both the steady state model and the short term model as the concluding blog in the short series.)

While this is a very valuable tool for planning, it does not answer the many short term questions that may be asked. Questions you may want answered might include:
1. Given my current position in the market, what will happen in the next year to my market share if I can improve my customer retention rate x percentage points?
2. 1 just read that my major competitor has instituted a massive program to increase its customer retention rates. When and how much will that begin to impact my market share, and to what level must I raise my customer retention rate to maintain my market share against this competitor?
3. I would like to justify the cost of a new program that I believe will increase my
customer retention rate by x amount. What is the economic payoff, in terms of increased market share, that I can expect from this program?

In my next blog I will address these questions and show a few charts that indicate the rate at which market share changes in the short term.

Saturday, May 24, 2008

Growing Market Share by Using Customer Loyalty

The computer business is looking more like a commodity business every day. There doesn’t appear to be any real difference between computers and it appears that most customers just want to pay as little as possible. If this rings true to you, there is some good news that you might not have heard. The good news is that there are loyal customers in the market. They will buy products that cost a little more and even recommend friends and associates to companies that charge prices higher than the low “street” prices. How does this happen? Customers are not just born to be loyal. Customer loyalty evolves over time and it is the company that knows how to create loyalty in their customers that will not only survive but will have higher profit margins than their competitors who are fighting it out to be the lowest price on the street.

What Is Loyalty?

This article will discuss what it takes to create and manage loyal customers. The first question is what is a loyal customer. There are a number of different ideas of what a loyal customer is. Some of the suggestions are:
1. a loyal customer is one who buys everything he can from you – you have 100% of his pocket when it comes to products and services you offer. This doesn’t happen very often.
2. a loyal customer is one who buys from you more often than he buys from your competitor.
3. a loyal customer is one who thinks of you first when deciding to make a purchase of a product or service that you offer.
4. a loyal customer will not leave you when there is a problem. He will give you the “benefit of a doubt” and not defect to a competitor.
5. a loyal customer will recommend you and your products and services to his friends and business associates whenever there is an opportunity.

While this list in not all inclusive, one or more of the ideas might make sense to you. The key is that a loyal customer is more than a satisfied customer.

One thing that is never mentioned when people talk about customer satisfaction is that customer satisfaction is a passive state for the customer. It doesn’t take any effort on the part of the customer to be satisfied. The automobile companies have found that out. The results of new car customer satisfaction surveys usually indicate a very high level of customer satisfaction (often as high as 90%). The surprise caused the automobile dealers great concern was that high levels of customer satisfaction did not translate into loyal customers. While customers would give high marks to sales personnel, service personnel and the quality of the automobile, the loyalty (often below 50%) did not track the level of satisfaction. In fact, automobile manufacturers have found that there is a great difference between the level of customer satisfaction and the level of customer loyalty. For the automobile dealer, customer loyalty means coming back and buying the next car from the same dealer. The simple conclusion is that there is something more to loyalty than customer satisfaction.

A Loyalty Parable

There was a man in his late 30’s who had a small consulting business. He found out that by using a computer he could dramatically increase his productivity. He was able to write and edit his own reports, automate his billing and manage his business contacts more efficiently with the computer than when he had performed the same activities manually. He estimated that the computer freed up to as many as 5 hours each week. With those 5 hours he could make additional marketing calls, complete assignments sooner and get his invoices out more quickly. The computer was one of his best tools. Unfortunately he was not a computer guru and had to rely on an independent computer operation (U Need Me, Inc.) to support his needs.

UNM, Inc. wanted to build a loyal customer base so it examined each customer to determine how to make that customer loyal. The company decided to implement the following steps:
1. Know what the customer had in terms of hardware and software.
2. Know what the applications were that were most important to the customer.
3. Know the customer’s level of urgency if a problem were to occur.
4. Assist the customer in developing a back-up plan.
5. Make a point to call the customer periodically (at a frequency agreed to with the customer).

This company had as its strategy to know the customer and make sure that the customer was aware of its understanding of his business and priorities. Further, UNM did not strive to have the lowest price. What UNM wanted the customers to know was that it made a point of knowing the customer’s systems and his needs and that they were capable of handling any problem the customer might have.

There was a competitive independent computer operation (I Don’t Need You, Inc) that believed that price is everything. IDNY, Inc. made sure that its prices were the lowest around. Their strategy was that customers should come in and save a buck. This company took the following steps:
1. Minimize overhead by keeping a minimum number of personnel on the payroll.
2. Reduce overhead by hiring the lowest cost workers.
3. Keep the minimum inventory in stock.
4. Provide no extra services.

This company believed that customers are only loyal until there is a price difference. They also believed that the products they sold were price “elastic.” Thus, sales volume was directly related to price and by keeping their prices as low as possible, they would capture the market.

The question is whether both companies will survive. The second question is can each of them have loyal customers?

The Market

There is a place in the market for both UNM and IDNY! The fact is there are some people who are loyal to low prices and there are some people who are loyal to having their needs met. Each company will have a loyal following to some extent. The market generally will consist of three groups; namely, the group loyal to low prices, the group loyal to full service and the third group that floats between the other two groups and is loyal to neither of them.

You can think of this market as having two magnets. One magnet pulls customers who are price sensitive and the other magnet pulls customers who need/want full service. There are some customers that have a specific charge that will draw them to one magnet and others with the opposite charge that are drawn to the other magnet. Some customers have little or no charge and have no great affinity for either magnet. This is the market from which market share growth is obtained – the group of customers with no great affinity to one magnet or the other. It is the roll of UNM and IDNY to convince these customers that their magnet is the one best suited for them. Once these customers have been attracted to one of the companies, the next step is to create enough loyalty so that they will not return to the undecided group and become susceptible to the other magnet.

Growing Market Share

Since this blog has a focus of growing market share the old fashion way it is time to what this means. The old fashion way of growing market share was to build a customer base and continue to add customers without losing them. As noted in the previous paragraph this means adding customers from the undecided. The process of developing customer loyalty builds the barrier that keeps the customer from returning to the undecided group. It also means building loyalty to prevent existing customers from leaving to join the undecided group.

The “churn” of customers for a business is very expensive. There is the cost of acquiring new customers as well as the cost of ending customer relationships that are the major components of customer churn.

It is always amazing to me that companies plan on losing customers. Yet, there are many marketing studies that show that the cost of acquiring a new customer is many times the cost of maintaining a satisfied customer. If this is true, why do companies not work harder to keep their existing customers?

I have seen companies put a great deal of stress on the sales organization to get new customers and ignore the customer service organization that keeps the existing customers.

The Close

This blog was intended to get you thinking about loyalty as a way of growing market share. By describing the market as a tug of war between the various business strategies, it is easier to see that there is only a portion of the market available to grow market share. Not all customers in the market are available because some of them have loyalty to a specific business strategy.

The parable was intended to show that market has no one best strategy and that there are customers that are drawn to both types of strategies. The fact is there are more than just the two extreme strategies described in the parable. However, the point was to describe the market so that the undecided middle could be easily identified.

Of course, the key word throughout this blog was loyalty. In my next series of blogs I will show how market share changes as the retention rate changes. It is worthwhile to see the impact on market share of just aa slight change in retention rates. Most people when they talk about customer loyalty, they generally do not have the skills to create a prediction model that will forecast their change in market share as they change their retention rate. More later.

Thursday, May 22, 2008

Parting Comments on Retention

The key to competing for retention is to quantify and understand the connections between loyalty and profits. How to use measurements as tools to ensure integrity, accountability and decision-making relative to the development and implementation of your customer retention program is one of the most important considerations to retain customers.

Keep your tracking systems relevant and flexible so they function as assets to building and refining your retention strategy.
Finally, close the customer partnership loop with effective communication activities.

Critical measurements & calculations
1. Know your customers. Determine the true cost of each type of customer, from loyal to transient. Create an accurate customer profile of your best customers. Compile a customer baseline and data base. Employees are customers; measure their service performance.
2. Identify where and how often customer expectations have not been met. Conduct a gap analysis to quantify the discrepancy between customer expectations and what you have delivered. Focus on core causes to pre-empt defections. (This is a topic for future blogs)
3. Assess your ability to handle customer complaints and inquiries. Conduct a baseline analysis of lost sales and lost profits. Quantify the effectiveness of your recovery process in reducing defections and retaining customers. Determine the potential payback for prevention and service improvement. Calculate the impact of improved quality and service through ROI calculations

Assessment: To fix or not to fix?
The goal for any business is to make a profit. Because everything cannot be a priority, you need to decide objectively where, when and how to invest your valuable resources of time, energy and money. In the article “Putting the Service-Profit Chain to Work,” in the Harvard Business Review, the authors suggest that customer loyalty and profits result from an interdependent process.

“Customer loyalty drives profitability and growth; customer satisfaction drives customer loyalty; value drives customer satisfaction; employee productivity drives value; employee loyalty drives productivity; employee satisfaction drives loyalty; internal quality drives employee satisfaction; and leadership underlies the organization’s success.” This is a powerful description of how loyalty is created.

Remember, customers leave because they are disappointed in some way. Because the relationships among the essential facets of your business cycle are interdependent, it is critical that you monitor, understand and respond to gaps between expectations, experiences and perceptions for customers as well as employees.

Consideration of the following issues will assist you in assessing the financial impact of various elements of customer loyalty relative to profitability.

Customer retention - measurement issues:
1. Define your best (loyal) customer in terms of depth of relationship (number/frequency of services used), market share and percent of budget spent with your company.
2. Determine the cost of a customer (revenue stream, repeat sales, incremental sales, referral revenue, price premiums, profitability).
3. Determine the percentage of business development expenditures focused on customer retention. Calculate the break-even point for each type of customer (loyal to transient). Do you really know which customers are loyal and which are transient?
4. Assess your service value (cost and benefit to the customer) and include the customer’s evaluation (their expectation, experience, perception).
5. Establish feedback loops between the company and your customer to understand exactly what happens with customer comments, suggestions and complaints.
What action do you take to solve problems? How do you encourage customer feedback and involvement?
6. Collect objective, consistent, independent data through surveys (verbal or written), letters, field reports, service phone logs, focus groups.

How do you use this information to improve customer service and satisfaction? Here are some simple steps to get you started:
1. Determine the gap between your customers’ expectation and their perception of their experience (i.e. reliability, timeliness, empathy, accuracy, competence, cost).
2. Know the truth about defections. What do they cost? Why do your customers leave? Where do they go?
3. Assess your recovery process for service errors. To what extent are front- line employees authorized and encouraged to solve problems on the spot?
4. Evaluate employee productivity through evaluations, customer interaction and feedback to quantify the quality and quantity of their performance.
5. Evaluate your company activities and interactive communication systems relative to employee loyalty.
6. Identify employee retention levels by calculating attrition rates, recruitment and training costs, lost sales and/or productivity. (High employee turnover is a clue that all is not well.)
7. Monitor employee satisfaction through surveys, interviews, roundtable meetings, customer feedback, peer and management feedback.
8. Determine specific employee selection criteria based on company values, priorities and hiring instruments, such as interviews, testing, academic and experiential qualifications and recommendations.
9. Establish employee recognition activities such as rewards and incentives which are awarded based on quality and quantity of work performance.
10. Evaluate the quality of work life correlated with corporate culture and values.
11. Develop and articulate corporate culture parameters and expectations (creative, conservative, participatory, elitist, learning, managed, open, closed, motivated by mission, motivated by fear).

To what extent do these elements correlate with your company’s profit and growth? What are the salient issues for your company? Which are the most difficult issues? To what extent are these issues interdependent?

Service measurements as ammunition
Quality service, used as an integral part of your retention strategy, provides a powerful barrier against competitive threats. To monitor your service performance and results effectively, use the gap analysis process (discussed in detail in a previous blog) to quantify and evaluate discrepancies between your customers’ expectations, experience and perceptions.

Identify and Prioritize
Use this critical information from the gap analysis to identify and prioritize your customers’ specific problems, needs and desires. Once you have obtained accurate data, analyze the potential payback of preventing a problem, correcting a situation or seizing an opportunity. Finally, calculate the annual return on investment (ROI) for each type of critical service encounter and assess each for its positive influence on loyalty and/or impact on potential defections. This is just a reminder of taking care of the important few and not spending resources on problems that have little or no impact on your business.

Customer rewards as communication
In order to be effective, a customer reward program designed to improve loyalty and retention should meet certain specific criteria. For instance, just because your customer needs something that you’re not currently providing doesn’t mean that you should immediately develop that capability. Determine which of your customers’ needs you can meet profitably, effectively and successfully and never mind the rest.

Louise O’Brien and Charles Jones in an article in the Harvard Business Review recommend the development of “a program through which customers are continually educated about the rewards of loyalty and motivated to earn them.”

Recognize that such a program can only accelerate loyal behavior if planned and implemented as part of a sustained management strategy. O’Brien and Jones postulate that a successful retention program includes five basic elements that provide value from the customer’s perspective:
1. Cash value (What would your customer have to pay in cash to acquire it?);
2. Choice of redemption options (discounts, frequency incentives, rebates);
3. Aspirational value (reward what motivates a customer to change their behavior, such as consolidation of purchases, add-on products or services arid achievement of higher volume levels);
4. Relevance (Does your customer care about the reward and can they earn it in a timely fashion?);
5. Convenience (Is it relatively simple for your customer to respond?).

The goal is to reward your customers for their increased business through creation of a win-win partnership. Because successful marketing relationships derive from customers and their needs rather than with one’s own product or service, you cannot run a business by only listening to the opinions and assumptions inside your company.
Isadore Sharp, CEO of the Four Seasons hotel chain, wisely observed in Fortune magazine that, “Managing a service business through internal reports is like playing tennis while keeping your eyes on the score board.”

In a partnership, one cannot command trust; one must earn trust. To develop trust and build meaningful partnerships with your customers, start by asking them what they want? What are your customers’ objectives? What are their values? What are their ways of doing business? You must not ask these questions unless you are prepared to hear their answers and take appropriate action. Failing to respect your customers, discounting their needs, perceptions and experience is one guaranteed way to drive them into the arms of your competition.

In short, never take your customers for granted! Examine all aspects of your business from your customer’s perspective and invest only in what directly benefits your customers or solves problems identified by them.

And finally, measure your results, refine your operations and communicate what you’re doing.

The bottom line to customer retention is to build your company that efficiently provides the products and services that your customers need and want. Eliminate all aspects of your company that dilute this effort.

Saturday, May 17, 2008

Invest to Prevent Customer Defections

This is my third blog regarding customer retention.

It has been estimated that most companies spend about 98 percent of their time reacting to problems and less than 2 percent preventing them. Every customer that you keep represents at least three that you don’t have to attract. Numerous research studies indicate that the cost of acquiring a new customer usually runs from two to four times the annual cost of keeping an existing customer. Obviously, an effective customer retention strategy translates into profits.

The first, most important, way to prevent customer defections is to identify and define each problem from the customer’s vantage point. This blog suggests several ways to retain customers once you understand the problems and their ramifications. Superior service and database management provide your best defense against customer defections. Service provides the opportunity to solve customer problems and build partnerships; the database serves as a vehicle to personalize customer communication and enhance your relationships.

Establish a Customer baseline
In order to develop a successful retention program, you must have accurate and complete information about your customers. In my experience, at least 5 percent of the information in a typical customer database is inaccurate. Errors translate into wasted money, customer aggravation and loss of credibility. You should know the following basic information about your customer base:
• The number of current customers
• The average number of new customers you expect to acquire within the next month/quarter/year
• The average number of existing customers you expect to lose within the next month/quarter/year
a.) Where will those customers go?
b.) Why will they leave you?
c.) How will you know they’ve left?
d.) What will you do to retrieve them?

Customer service as a retention strategy
A successful service strategy serves two vital functions: defense and opportunity.
1) Quality service provides a powerful barrier against competitive threats because it gives you the chance to ensure your customer’s successful experience with your products; to demonstrate your competence, expertise and reliability; to discover customer needs, problems and desires; and to earn credibility and respect.
2) Quality service provides the opportunity to build a meaningful, interactive relationship with each customer; to earn their good will and trust; and motivate purchase/re-purchase decisions. Both ingredients are critical to developing and sustaining a genuine interactive partnership.

The delivery of consistent quality service requires an unmitigated commitment to delighting customers. A superior customer service attitude must permeate an organization, where all per sons take responsibility for participating and contributing fully to the enterprise. Everyone within the organization must follow the guideline that, when a problem does arise, “fix the customer first” then solve the customer’s problem. This sequence supports the goal of building customer partnerships that will endure over time, rather than reacting to a series of isolated problems.

The best ideas and plans are useless without people to implement them. In order to achieve an attitude of respect and concern toward customers, your organization must invest in each employee over time. Customer service is a multifaceted process that occurs inside and outside the boundaries of an organization. When employees have the training, tools, support and appreciation of their company, they are eager to act in the mutual best interest of the company and the customer.

Understanding customer defections
Usually, customers defect because they are disappointed, they feel let down and their expectations are not met. If you don’t really know what customers value, how can you possibly succeed in delighting them?

Customer expectations derive from wishes and wants as much as actual needs. This explains why customer satisfaction does not guarantee customer loyalty. You may respond adequately to a customer’s specific service need but fail to understand their expectations and their desires.

For example, the real issue may be that a customer wants to feel appreciated for giving you their service business when any number of other competitors could comply. However, unless you ferret out their expectations, you may miss an opportunity to delight your customer. Or you may realize the customer’s wish to be appreciated but not know what “appreciation” means to the customer.

The key to pre-empting defections is to focus on the root causes. Customers defect for two primary reasons: 1) the need for your product or service has ceased, or 2) your offering has failed to satisfy their needs in some way. Some of the less obvious barriers to customer retention may be understood by answering the following questions:
• Are defections seasonal?
• Are there price differentials during the product/service lifecycle?
• Do defections have a pattern ... location, person, lifecycle phase?
• Is there a correlation between retention rates and price changes?
• What is the industry norm for customer longevity?
• Which company has the best retention rate? Why?
• In what specific ways do your customers feel valued and appreciated?
• In what ways do your customers feel your complacency or indifference?
• In what ways do your customers feel intimidated and/or ignored?
• When do you resort to defensive or angry responses with customers?

Defections of good customers cost you dearly. You lose base profit as well as profit from incremental purchases, profit from reduced operating expenses, profit from referrals and profit from price premiums. Christine S. Filip estimates in an article in the CPA Journal that when a good customer leaves, you will need at least three new ones to replace the revenue stream. It is estimated that defecting customers will tell eight to 10 people about their negative experience with your company.
One in five will tell 20 people. Conversely, a referral from a loyal customer has a 92 percent retention rate vs. 68 percent for a customer acquired from advertising. This is just one measure that indicates the value of word-of-mouth impact.

Database marketing
An accurate comprehensive database enables one-on-one marketing to your best customers. When you communicate individually with your customer, that communication tells them that you know them, remember them and care about their needs.
Personal attention, empathy and extra effort will work to increase response rates, to provide direction for product and service development efforts, to improve sales forecasting, to provide opportunities to test your marketing mix, and to support your marketing decision making process.

In order to function as a viable resource, a company must have an effective marketing database that includes the identification of customers and prospects by name and address, the individual account number for each customer, relevant demographic information, purchase transactions, payment record, record of every inquiry and interaction with your company, product preferences and interests, competitive usage and information about corporate culture.

Obviously, this data is virtually worthless unless you manipulate and manage it to discern trends, patterns and histories to capitalize on successes, identify concerns and use the information as the basis for decision-making. Customers want to feel like individuals, not prospects, consumers or targets. A good customer database can provide a foundation upon which to build authentic customer partnerships through welcoming new customers, thanking existing customers and inviting new prospects to begin a relationship with you. The database can be used further to:
• Examine purchase behavior information to forecast incremental sales and profit potential;
• Correlate, cross-reference and analyze data to understand customer preferences and trends;
• Personalize messages, identify and contact new customers, enhance cross- selling opportunities and sell more (and more often) to existing customers;
• Provide special benefits and services not available to the general public;
• Speak with one congruent, consistent voice (image and vision) through collateral material, letters, press releases, signs, graphics and departmental communications.

Survey data as intelligence
Building and maintaining a current, accurate comprehensive customer data base is much more easily said than done. The compilation, management, and maintenance requires a significant allocation of resources (people, time, money), along with a total commitment to customer service and retention throughout your company.
The goal is to increase your ability to offer each of your best customers the products and services they need and want, as well as to identify and communicate with potential customers who have similar characteristics.

Proprietary customer information can be collected through customer interaction records (purchase transactions, service calls, payment history); customer surveys (written and verbal) that measure satisfaction, loyalty, intent to purchase, perception of quality, expectations and outcomes; and focus groups (targeted population segments).

Secondary data, such as industry statistics and census data, provides a general context and reference for comparisons, market share calculations, trend analysis and other strategic marketing functions.

Of course, the most difficult task is to gather accurate competitive information and substantive new customer information. I suggest creative ethical sleuthing and discerning investment in well-chosen targeted research.
A few important things to remember about customer surveys:
• Define clearly what you intend to measure (satisfaction, dissatisfaction, loyalty, retention, quality, service), and why you want to know it.
• Experience your company from your customer’s perspective.
• Understand the following:
a) The relative scale of loyalty within your customer base;
b) The strength of your relationship relative to your competition;
c) The relevant antecedents to loyalty;
d) The relative effect of various interactions, activities and consequences.

Because profitability depends on what customers actually do, not what they say they will do, you should include a process for reconciling customers’ intentions with their actions.

Building customer loyalty and improving retention have significant implications for profitability. According to Filip’s article, a 5 percent improvement in retention rates can raise profits from 15 percent to 50 percent. The most profitable firms enjoy retention rates of 93 percent to 95 percent while the average firm has a 78 percent to 85 percent retention rate. The cost of finding a new customer is five to six times more expensive than keeping a current one, so it behooves you to manage your customer retention rates proactively:
1. Pay close attention to your best customers and act quickly (within 24 hours) on their requests and dissents.
2. Stay in touch with your customers, be willing to hear accurately and integrate their feedback throughout your company.
3. Find out exactly why a customer defected and act immediately to determine the possibility of rectifying the situation.

People seek relationships (personal and business) that are caring, honest and respectful. Superb service provides the foundation from which to develop and maintain genuine partnerships with your customers. In many companies the customer service personnel have more contact with customers than the sales people.

Another point that is often overlooked is that customer service personnel get inside the customer organization much easier than the sales people who most often have to get in through the front door. The customer service personnel usually bypass the front door and go directly to the area with a problem. Once inside, it is not uncommon for the customer service personnel to understand what is going on inside the customer organization.

Build your customer database right. Record everything that your customers do, say or buy, then use the information to fine-tune future communications. As you develop trust and credibility with your customers, they will reward you with their business and their referrals.

The bottom line is that companies need to understand the value of keeping a customer. Secondly, companies should spend more time and energy to preventing problems. Finally, companies should keep an accurate data base of their customers.

Saturday, May 10, 2008

Cultural Implications of Customer Satisfaction

As I have noted in the past, I have access to a very large data base of customer satisfaction surveys. I recently published an article in the Business Renaissance Quarterly, Spring, 2008 titled "An Examination of the Cultural Implications of Customer Satisfaction in the High Technology Industry." Rather that try to summarize it in this blog, I am blogging the abstract.

Customer satisfaction has become a very important aspect of business management in the high technology market. Companies that provide products and services worldwide often are concerned that customer satisfaction may be impacted by cultural differences. This study examines measures of customer satisfaction in areas around the world to determine whether or not there is a difference in satisfaction scores provided by Help Desks. A sample of more than 150,000 surveys from 9 companies in the computer and medical electronics areas was used. The statistical results at a 95% confidence level indicate there is a difference in customer perception in Help Desk technical support. The results clearly indicate that companies need to understand these differences in order to optimize the use of their resources and to adjust their service offerings to respond to their different customer needs and expectations.

This article is the first of a series that will be developed with more granularity. While this study looks at the more global picture, the next article will focus on countries rather than geography and may include other areas of service such as field service and depot repair.

Friday, May 9, 2008

The Flight of the ‘Service Zombies’

This is the second part in a series on customer retention.

Employees get excited when management demonstrates a serious commitment to listening to customers and staff suggestions for serving them. Building customer loyalty is everyone’s responsibility and everyone’s input is critical. Sharing in formation is as critical as collecting it. Empowered employees delight in delivering superior personalized service.

Author Peter Drucker points out that, “When people are held responsible, they act responsibly.”

How can you hire terrific, responsible employees?
• Articulate clearly your company values.
• Identify the aspects of a customer service attitude you desire.
• Interview and screen to elicit information about alignment of the person’s philosophical attitudes, principles, values and behaviors with your priorities. Look for employees who like to deal with people.
• Train employees about your corporate philosophy, product knowledge and productivity skills.

When was the last time you encountered a “service zombie?” Karl Albrecht writes about those apparently apathetic, unfriendly, robotic front-line service employees in a Quality Digest article. He suggests that when people are emotionally overworked, they adopt normal defense mechanisms to contend with emotional fatigue or psychological burnout. The contact intensity of interacting with an endless stream of people, handling work-related feelings and situations, and the stress of listening and solving customer problems on-the-spot results in a desire for people to disconnect, distance, or defend themselves. Obviously, customers interpret such behavior critically because they are quite entitled to be selfishly preoccupied with their own needs and concerns.

Managers must acknowledge the difficulties inherent in service systems involving these types of interpersonal dynamics. Employee training should include problem-solving skills, dealing effectively with all types of people, listening and communication skills, and win-win negotiation techniques. Managers need to genuinely listen, appreciate and guide front-line workers with compassion, respect and wisdom.
If your employees believe you are providing fair, honest, consistent, intelligent leadership, you will earn their loyalty. Leadership demonstrating competence and personal commitment earns trust. True loyalty derives from adherence to strong principles and values, congruence between words and actions, and clear respectful communication within a collaborative environment that values the contributions of all persons toward common goals.

Vendors as customers

Many companies fail to recognize their key vendors as important customers. Vendors treated as valued customers can collaborate to solve problems, share in risks, investments and gains. Strategic horizontal and vertical alliances with your primary vendors can significantly enhance your marketing muscle in terms of time, labor and cost savings.

The Wal-Mart alliance with Procter and Gamble stands as an excellent example of a synergistic, strategic and profitable partnership.

You will realize enormous dividends when you care for, and keep, every one of your best customers. To accomplish this feat, understand and speak to them as individuals, offer them many advantages and give them good reasons to stay with you.
The strength of a business partnership is based on customer attitudes and repeat patronage. No matter how often a customer buys, there is no guarantee that the customer will choose you next time. Value is always perceived relative to alternatives available at the time.

A framework for retention

• Seek first to understand your customers —this may require attitude re-adjustment within your company. Everyone needs to listen openly, with a view towards understanding your customer’s perspective and expectations.
In effect, stand in your customer’s shoes, sit in your customer’s chair, experience your company from the customer’s perspective — top management included. Become your own mystery shopper.

To assess the worth of a group of repeat customers, calculate the cumulative effect of your marketing strategies and investments in acquiring and maintaining customer relationships and loyalty. Use a cash-flow analysis to measure the impact of improving customer retention in the same way you measure anything else.

Measure your specific customer satisfaction issues against industry and competitive benchmarks. The list of measurement criteria will be derived from substantive and personalized research about your customer perceptions, expectations and experiences.

• Gather relevant data from customers — Listen to customers directly about their needs, problems and product/service expectations. Do not rely on management intuition and assumptions.

Ask former customers in what ways their needs were not met; ask customers what problems they have not yet expressed; identify critical incidents for each customer need or performance problem; determine how effective each need was met, at each point of contact, from your customer’s perspective, using a five-point rating scale for each performance attribute and critical incident; and assess customer loyalty levels with a five-point scale, having customers rate you overall and indicate the likelihood they will continue to buy in the future.

Expected returns

To measure the impact of customer retention through improved quality and service, calculate the expected return on investment.
John. A. Goodman, President of TARP, suggests using five pieces of data
1. The profit value of a customer.
2. The number of customers who experience problems.
3. The percentage of customers who bother to complain about problems.
4. The impact of problems on loyalty.
5. The impact of your service system on loyalty.

Understand the data

Sort the performance attributes and critical incidents into two groups — positive influence on loyalty, and impact of potential defections.

Correlate the low scores and high scores. Don’t be fooled! Satisfaction is quite a passive state. Understand the core process for each issue; know the real reasons why you succeed and the real reasons why you have a problem.

To assess your risk, conduct a gap analysis to determine the discrepancy between customer expectations and what you have delivered:
Step One: Quantify your customer needs, expectations, perceptions and values.
Step Two: Measure the relative importance of each component of service:
[1] expected levels of service, [2] unacceptable levels of service, [3] perceptions of service provided by you; by your competitors, and [4] customer’s priorities for improvement.
Step Three: Calculate the most critical aspects of customer service, using a gap analysis, to determine the relative importance of improvement priorities.
Step Four: Deploy your resources quickly arid directly to the attributes and critical incidents that affect loyalty and retention.
Step Five: Measure the effects of your actions.
Step Six: Give the improvements a chance to work, and then communicate with your customers about what you’ve done.
Step Seven: Measure again, evaluate again, and take corrective action.

Indication of priorities

The key here is to determine the relative importance of various critical incidents by determining the correlation between specific problems and customer retention.
Compute the cost or impact of a particular problem by multiplying the ‘frequency of the problem’ by the ‘percentage of customers who indicate they may not repurchase or recommend the product or service.’

By performing a number of these calculations, you will have a bottom-line, customer-driven indication of priorities.

Successful service companies must put employees and customers first period! Service managers must under stand the factors that drive profitability: those companies understand that they must invest in people, technology supporting front-line workers, effective recruiting and training practices, and compensation linked to performance for employees at every level.

The challenge is to create innovative measurement techniques to calibrate the impact of employee satisfaction, loyalty and productivity on the value of products and services delivered to customers in order to determine the corresponding impact on profitability and growth.

The bottom line is that customer retention is not about feelings; rather is a dollars-and-cents issue. There are some customers that are better fired than coddled. Yes, I said that there are some customers that must be fired (of course in a very humane way). This is a subject left for a future blog.

Thursday, May 8, 2008

Learn the Key to Profitability and Longevity

Who are your customers. Really? Obviously, not all customers are equally valuable to you.

Some consumers make product purchases only, thus are essentially transaction-based customers. Others have potential as repeat and loyal customers.
Because you have limited resources to deliver 100 percent satisfaction, you must target customers and focus your products and services wisely. This means scrutinize every aspect of your business, relative to your com petition, to identify your best, most profitable customers.

What does your company do best? Which customers can you serve and delight consistently, over time? Determine what they need and want, then exceed their expectations. Anticipate what they will need and want next. Finally, invest to keep them. You may use criteria such as company size, location, extent and/or level of demand, technical requirements, and potential for long-term purchase or use.

Cost of a customer

Determine the true cost of each type of customer (best, good, weak). You may want to group customers by industry (SIC code), sales volume, company size, geographic location, products purchased, product applications, demand for similar types of technical support and service programs.

In service industries, the cost of business is serving the customer. Peter Drucker describes the calculation of activity-based costing in his article, “Information Tools,” Harvard Business Review, January/February, 1995: “Yield per customer, both the volume of services a customer uses and the mix of those services, determine costs and profitability.”

He further postulates that executives need four kinds of information to make informed judgments:
1) Foundation information (i.e., cash-flow, liquidity projections). These figures can indicate the existence of a problem that requires diagnosis and treatment.
2) Productivity information (value-added analysis, benchmarking). You need data relative to the productivity of all factors of production; total-factor analysis.
3) Competence information (core competencies, special or unique abilities). Every company needs the ability to innovate and change relative to the entire field or industry; to ask innovation questions.
4) Resource-allocation information (scarce resources: capital and performing people convert into action), Ask: what happens if the proposed investment fails to produce the expected results?

If the investment is successful, what will it commit us to? When should we expect what results? Measure the results of capital expenditures against expectations. Allocate human resources thoughtfully. Identify the expectations of senior executives before hire or promotion; appraise performance against expectations.

Know your best Customer profile

Develop a profile of a profitable customer group with common traits, and then prepare a comprehensive list of customers and prospects. Once you build some successful relationships, tailor your products and services to meet the needs of each particular niche — better than your competition.

You may want to experiment with different types of accounts with similar profile characteristic once your defined your market position. Seek more prospects that share common traits and needs with your best customers, then expand into those market niches and tailor products and services to accommodate their unique requirements.

When you understand and solve your customer’s business problems, you deepen the relationship by interacting with them as individuals, in ways that are meaningful to them. Conduct continuous relevant personalized research to discern salient information, then use it wisely for decision-making and to guide your business and marketing strategy.

AT&T, L.L. Bean, Canon, MBNA all excel at using their superior customer databases to interact with their customers as individuals. Every instance of contact with your customer is a point of reckoning, either as delight or disappointment. Make sure you “get it right” at each critical point. Then, eliminate every step and activity within your operation that has no value to your customers.

Customer partnerships really develop after the sale with the consistent delivery of service and value-added benefits, competence, reliability and trustworthiness over time.

Focus your efforts

In their book, “The Discipline of Market Leaders,” Michael Treacy and Fred Wiersema present a powerful case for the efficacy of market leadership through focus and discipline. They cite compelling examples of successful companies that focus “like a laser” on their target customer, achieve and maintain a narrow and unique value, and dominate a specific market niche.

They suggest three customer propositions:
I) operational excellence; low price and hassle-free service (Wal-Mart):
2) product leadership; offer the best product performance and innovation (Intel, Nike); or
3) customer intimacy; the cultivation of customer relationships to satisfy customers’ unique needs with the best solutions and support for optimum results (Airborne Express).

The bottom line is when you understand and solve your customer’s business problems; you deepen the relationship by interacting with them as individuals, in ways that are meaningful to them.

Wednesday, May 7, 2008

Retaining customers

Never, never, never take a customer for granted — I mean it! Throughout the past year, I have written about customer satisfaction and its permutations (customer loyalty, customer partnerships, customer bonding, tracking and measurements and employee loyalty). Now I want to talk about customer retention, the key to profitability and longevity.
The importance of retention becomes evident once you understand clearly the relationship between customer loyalty and profits. Some large companies estimate that as much as 95 percent of their profits derive from long-term customers. Many other companies know that a mere 5 percent decrease in customer defections can boost profits any where from 25 percent to 95 percent.
The decision to cultivate a highly loyal customer base must be integral to all aspects of a company’s business strategy. You must know who your best customers are and what it takes to keep them. Then, you must meet, exceed and anticipate their needs better than the competition and give them reasons to buy more. Retention depends on what customers actually do, not necessarily on what they say they will do. Customer loyalty implies a conscious choice to remain faithful.

First in a series - this blog.
This is the first of a series of four blogs devoted to the topic of customer retention. Here I will talk about retention, what it is, and why it drives successful business operations. The three subsequent blogs will present a conceptual framework for issues, rationale, cost models, and examples for use in developing and maintaining a loyal and profitable customer-base.

Blog #2: Business assessment
I will next examine business from the perspective of the customer’s perception and expectations. You cannot hold customers through contact alone; you must interact with them as individuals in ways that are meaningful to them. Who are your customers? Are they groups, such as consumers, employees and vendors? Are they types, such as product-based transactional encounters or relationship-based repeat purchasers? Which among each group are your “best” customers and how do you know?
What does each want and how do you know? What does each expect and how do you know? What are the characteristics of your second-best and next-best customers?
I will discuss the core processes of service, data collection and analysis, surveys, and company and industry baselines. I will also include calculations to determine the market impact of increased customer retention and the expected return on investment for problem prevention and improved service quality.

Blog #3: Solution investment
The third blog will address the process of investment in solving problems, as identified by your customers. It has been estimated that most companies spend about 98 percent of their time reacting to problems and less than 2 percent preventing them. In the spirit of problem prevention, I will offer suggestions for customer defection protection, effective one-on-one database marketing, assessment of the cost of solving, and not solving, problems.

Blog #4: Measure and Refine
The final article in the customer retention series will discuss measurement systems and their purposes, what kinds of measurements are important and the effective use of data in decision-making. I will suggest ways to keep your systems relevant and flexible so they are assets to the building and refinement processes of your customer retention program. I will discuss how to close the customer partnership loop with communication.

A customer-driven approach to business examines products and services in terms of customer perceptions and expectations.

Customer retention can be defined as the ability to consistently meet or exceed customer needs, wants and expectations throughout the life cycle of the customer-company relationship which results in repurchase loyalty and positive word-of-mouth comments.

Tracking system & measurements
Several elements that are required to build an effective tracking system: 1) it must be easy to administer; 2) it must provide reliable data; 3) it must focus on the customer’s priorities; 4) simple reports should tell managers where and how to allocate their resources for maximum benefit.

John Goodman, President of TARP U.S., suggests that customer satisfaction and customer loyalty are the operational measurement standards of customer expectations.
A comprehensive retention program focuses on two essential measurements. The first measurement requires the identification of where and how often customer expectations have not been met.

William A. Sherden, in an article in Small Business Reports, recommended the development of a timeline for a typical customer relationship that identifies each key event and interaction starting with the initial sales contact and ending with the loss of the customer. He wants to use the information to analyze customer defection trends and identify warning signals. Once each issue is understood clearly, then develop solutions to resolve the core process problems.

Goodman, in an article in National Productivity Review suggested presenting customers with a list of potential problems or questions, across a broad range of transaction types, then soliciting which and how many, problems or questions they have experienced. The key points to remember are that: 1) you must evaluate each critical incident, where your company interacts with your customer, and determine accurately the nature and ex tent of problems where they occur; and 2) whatever the customer says is a problem, is a problem.

The second measurement should determine your company’s ability to handle customer complaints and inquiries. This includes obtaining a baseline indication of the extent to which your existing recovery process reduces defections or helps retain customers who might otherwise defect to the competition.
Comparisons against industry baselines will improve your frame of reference. The financial consequences of problems and customer-response systems can be determined by measuring word-of-mouth behavior. This can also be used as an indicator of future profitability.

Pre-empt defections
Customer loyalty provides strong protection against competitive threats. The strength of your business relationships are reflected in your customers’ attitudes, repeat patronage and their word-of-mouth endorsements.

Focus on the core causes of defections rather than triggers and warnings signals, after the fact. Some of the best ways to pre-empt customer defections include: 1) monitoring customer expectations, needs and desires, 2) monitoring the gap(s) between customer expectations, benefits, needs and experience, 3) removing the gaps and satisfying your customer’s expectations, needs and desires better than the competition, and 4) removing the customer’s perception of gaps between expectations and experience.

From an analytical perspective, compare the value of your products and services against competing offerings to assess, and thoroughly understand, defections.
Determine the relative significance of antecedent factors and the possibility of different outcomes. Identify and compare the variables of your best customers as compared to next-best customers relative to defections. Compare your defection statistics with key competitors and the industry baseline.

The key point to be made here is that most companies do NOT measure the number of customer defections nor do they analyze why customers leave.

A retention tool
Active listening, for the sole purpose of understanding, is the most important aspect of effective business communication. A thorough and accurate understanding of your customers’ expectations, from their perspective, can give you the necessary information to avoid, or solve, problems. This is the best consulting advice a company can get and it costs nothing! Armed with this critical information you can delight customers, develop needed products, or make adjustments to enhance their interactions with your organization.

When you really understand your customers and earn their trust and respect you derive many substantial rewards: 1) you deepen the relationship and begin a partnership; 2) you earn the opportunity to serve them; 3) you learn how, what, how much, and when to sell to them; 4) you reduce the opportunity for your competitors to penetrate your customer base and even your potential customers.

Companies that manage customer relationships successfully over time, take an integrated approach to management which includes marketing, information technology, market research and quality operations (manufacturing and/or service) and financial operations. A successful company recognizes that, after the first sale, it has an opportunity to begin a relationship which may develop into a partnership. Pursue any activity that preserves or enhances the relationship with your most valuable asset, your customer.

As Peter Drucker points out, “The customer is the only reason for any business to exist.” I couldn’t have said it any better!

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