FSB Author Article
Five Ways to Manage Customer Loyalty
By Timothy Keiningham and Lerzan Aksoy,
Authors of Why Loyalty Matters: The Groundbreaking Approach to
Rediscovering Happiness, Meaning and Lasting Fulfillment in Your Life
and Work
Managers
are typically taught to things that can be easily quantified and
reported on a balance sheet. Stop for a moment to answer this
fundamental question: "What is the purpose of any business?” On the
face of it, this question seems pretty easy to answer. Most managers
would answer: "To make a profit."
But that's the wrong answer. Profits are
an outcome. They only tell us if our business strategy and execution
are viable.
Peter
Drucker, widely considered the father of modern management, argued that
the common belief that creating profits was purpose of a business was
not only wrong, but harmful. It causes us to make bad business
decisions and lose sight of those things that delight customers. He
summed up the actual purpose of business this way: "There is only
one valid definition of business purpose: to create a customer."
The mark of success for a firm, and
therefore the ultimate objective of its strategy, is to satisfy
customer needs and wants at a sustainable profit.
Whatever strategy and tactics we employ to gain competitive advantage
must ultimately be based upon our profitably providing a better
solution for customers.
Managing Customers as Assets
Customers are the ultimate asset for all profit-making organizations. They provide all of a company's real value. Paradoxically, customers are one of the few aspects of a business that are not managed as an investment. This oversight negatively impacts profits in multiple ways, including inefficient resource allocation (via suboptimal company-customer interactions); product design and launch failures (via poor fit with customer needs); and unstable cash flows (via increased customer defections and price sensitivity).
Therefore, if customers are the primary asset, the ultimate aim of any business strategy should be to maximize the net present value (NPV) of customers to the firm. While on its face such a statement may seem academic, this is much more than a theoretical maxim. Researchers consistently find firms that adopt a customer lifetime value framework for customer selection and resource allocation strategy significantly outperform their competitors in profits and shareholder value.
But this doesn't just happen. It requires the successful integration of all areas of management -- accounting, finance, marketing, operations, and human resources -- in profitably addressing the needs of customers. Below is a good place for us to begin.
Accounting. Analyze the profitability of your customers. Research conducted by the Harvard Business School finds that most customers for most firms do not produce an acceptable rate of return (i.e., they are not profitable). In fact, for most companies, the top 20 percent of customers in terms of profitability produce all of a company's profits, the middle 60 percent break even, and the bottom 20 percent lose the company money. Paradoxically, revenue is a terrible predictor of customer profitability. The highest revenue customers tend to be the most profitable or the least profitable.
Managers
need this information to effectively run their businesses. They need to
know who their profitable customers are and what behaviors are
associated with profitability.
Finance. Incorporate customer metrics in your financial models when making investment decisions. When prioritizing investment decisions, pay attention to the projected impact on the future value of customers to the business. Analysts cannot consistently beat (or even meet) the market -- in the language of finance, they don't add alpha. Research finds that this is because intangibles that reflect the strength of the company-customer relationship are excluded.
For example, analysts are generally skeptical of the impact that customer satisfaction has on a company's market value. Analysts tend to view customer satisfaction information as "soft" data because they don't understand how satisfaction data links to a company's bottom line. Because it is intangible, they frequently regard it as a money drain.
Our own research found that incorporating customer satisfaction into standard models used in investment finance significantly improved the ability to pick winners versus losers. And the winners dramatically outperformed the market by 2 to 1.
Marketing. Put more focus on
current customers. Marketing activity has largely focused on persuasion
-- the
ability of the company to change someone's attitudes or behavior. And
while that is a critical role of marketing, too often this gets
translated into simply persuading someone to try something for the
first time. An old saying goes, "A good salesman can sell anything once.
The trick is getting them to buy again."
But
it is not as simple as focusing on customer retention either (i.e.,
getting them to come back). Today, customers buy competing products
from multiple companies with seemingly no real loyalty. In other words,
customers divide their wallets among competitors.
Consequently,
one of the most important elements in improving financial performance
is getting customers to allocate a larger share of their wallets to the
firm. A McKinsey study found that focusing on share of wallet had a 10
times greater impact than focusing on retention alone. Research
demonstrates that the strongest driver of share of wallet is customer
loyalty.
Therefore, the primary goal of marketing must be the creation of loyal, long-term customers out of first-time or occasional buyers. Accomplishing this requires a clear understanding of what makes customers want to be loyal. Gathering and understanding customer needs is the job of marketing.
Operations. Make
certain that company-defined quality and customer-perceived quality are
aligned. Because operations are often focused on the creation and
distribution of products and services, there is a natural tendency for
managers to focus on meeting technical specifications.
While
the quality movement of the 1980s has done a great deal to establish
standards of technical excellence, we have a long way to go to achieve
user-defined excellence. It matters little if a firm is meeting its
internal guidelines if these are disconnected from the customer.
We
must always remember that the customer did not design the process, and
they don't care that the system we have designed makes our lives
easier. It needs to make customers' lives easier. So when designing and
implementing any process, we need to experience the offering as
customers do (i.e., shop our own stores).
Human Resources. Establish a climate for service in the organization. By service climate, we mean the procedures and behaviors that get rewarded and supported within the company with regard to customer service. Research consistently demonstrates that service climate is positively linked with lower turnover, higher customer satisfaction, and improved financial performance.
While
we all pay lip service to the importance of employees in serving
customers, too often we manage in terms of their operational
productivity at the exclusion of all else. How many employee
evaluations actually include customer metrics as part of the formal
criteria? The reality is that most employees are rewarded for
completing tasks. Few, however, are rewarded for making customers
happy.
A Holistic Strategy
Too
often we as managers think about strategy in terms of our own
functional area: marketing strategy, operations strategy, finance
strategy, etc. But each of these strategies should exist as part of a
holistic company strategy. A winning strategy focuses everyone in the
organization to come together for one cause: to profitably create and
keep a customer.
Author Bios
Timothy
Keiningham is a
world-renowned authority in the field of loyalty measurement and
management, and Global
Chief Strategy Officer and
Executive Vice President for Ipsos Loyalty, one of the world’s
largest business research organizations. Lerzan
Aksoy is an
acclaimed
expert in the science of loyal management, and Associate Professor of
Marketing at Fordham University. They are coauthors of a new book,
with Luke Williams, entitled Why
Loyalty Matters (BenBella
Books, 2009, www.whyloyaltymatters.com
),
and creators LoyaltyAdvisor (www.LoyaltyAdvisor.com),
a web-based tool that analyzes your loyalty across multiple
dimensions proven to link to your success. LoyaltyAdvisor is the
product of a global effort, the most comprehensive study of loyalty
ever conducted.