Being a business that is focused on real value for customers is often talked about by CEOs but in our experience only sincerely acted upon by a few.
Its not enough to just believe in an idea, one must act to make it happen. A key reason for this failure to act is the lack of understanding of the economics behind customer centricity.
Fundamentally customer centricity is about building a sustainable profit generating capability for the organization but there is also a downside of not acting to create this type of culture.
Here are 7 ways of calculating the cost of a lack of customer focus:
1. The CEO loses touch with the marketplace.
As businesses grow on the back of an original powerful value proposition, success can disconnect a company with the marketplace.
A recent example is Netflix’s decision to raise the price without a perceived increase in value for their customers. The result was the loss of 800,000 customers in one quarter. Let’s assume it cost them $150 per customer, (based on this great case study by Neil Patel of KISSMetrics), that was a $12 million dollar investment wiped out in one quarter. Ok so many of those customers would have contributed revenue during their time with the company but what about the impact on Netflix’s reputation? How much will it cost to attract new customers going forward $175-200?
2. Customers start leaving the minute they have a better alternative
Are your customers “hostages” to your business? Do they have alternatives and if they did would they stay?
AT&T faced this challenge recently when the iPhone was opened up to Verizon. Prior to this transition, market research firm ChangeWave, conducted a survey of AT&T customers that found 26% of them planned to switch.
It is unlikely this many customers would switch but let’s do the math. I will assume each customer is worth $2400 (based on $100 per month – 2 year contract). Assuming they have approximately 15 million iPhone subscribers, 26% represents 3.9 million. So the customers at risk are worth approximately $9.4 million over two years
3. Customers refuse to pay higher prices
Loyal, happy customers will pay more for your products and services. They feel good about doing business with you and get value from what your offer. But there is a risk of loss if you try to increase prices or even hold prices in the face of competition without increasing customer benefits.
Two companies that have experienced this recently are Best Buy and Bank of America.
Best buy are under enormous pressure from the online retailers, specifically Amazon who are turning Best Buy into a showroom for products they sell at a lower cost online. Best buy’s only way forward is to offer more value, provide service customers will pay for, create an experience that is better and keeps customers coming back. To date this strategy has been working but with some recent feedback from a blog post from CEO Brian Dunn it shows they still have a long way to go.
Bank of America recently found out the hard way that customers don’t like price increases without a perceived increase in value. Charging a customer for something they used to get for free is an emotionally charged issue. It is a violation of expectations and Bank of America ultimately had to reverse its decision to start charging a monthly fee on debit cards.
4. Negative word of mouth makes it expensive to attract new customers
Negative word of mouth used to be limited to the spoken word but with social media and the web an integral part of our lives there are multiple places to express our dissatisfaction with companies.
Given we believe what other people say about a company more than what the company says about itself, the influence of negative comments is a powerful headwind for companies trying to acquire new customers. Just ask Vonage.
Vonage had an opportunity to be the “Apple” to “Microsoft” the “Virgin Airlines” to “American Airlines” in the telecommunications world. A high value, low cost alternative to the traditional telephone companies. But since its launch it has come under fire not only for poor quality phone service but has been attacked for its aggressive marketing and poor customer service.
The bottom line is Vonage’s cost per acquired customer went up by 7% in a single quarter during 2008 – a time when it was plagued with many of the negative word of mouth issues highlighted above. Vonage’s CEO at the time Marc Lefar said the company’s expenses to secure new customers were “not acceptable”.
5. Your best staff leave
When companies lose a focus on their customers, employees lose hope and often the best leaders look for other rising stars.
Companies like Research in Motion, HP and Kodak come to mind. When the best people leave usually their teams are quick to follow and this further exacerbates the problems.
6. Your business stops growing
Businesses that have lost customer focus and become mired with an internal or product focus stop growing. They may have a core service or product that is still in demand but they tread water not able to create new value to either attract new customers or have existing customers buy more.
An example that comes to mind is Microsoft, which has appeared to stand still for the last 10 years after a period of unprecedented growth. Microsoft is clearly still an incredibly successful and profitable business but our expectations have changed, we expect it to grow like Google or Apple or Facebook.
Here is a good article outlining the reason for Microsoft’s stagnation, essentially it is more about expectations and competition than anything else. The market does not believe Microsoft knows how to create ongoing value for its customers better than the competition.
The bottom line for Microsoft is that is has essentially stopped growing relative to its competition.
7. You go out of business
The last outcome of a lack of customer focus is business closure. When companies do not change with shifts in customer demands they fail.
Two examples that come to mind are Circuit City and Kodak.
Circuit City was caught in the middle between the online leader Amazon’s rise and the big box leader Best Buy’s aggressive expansion.
Kodak’s demise has come from a tectonic shift it was not willing to make. The writing was on the wall as soon as their original digital camera project was killed by internal fears of the impact it would have on the film business. So instead of Kodak cannibalizing its own business its competitors did.
The costs of not having a customer-focused business are immense.
As competition increases and continues to filter into every last industry across the globe; the need to have a culture that is willing to shift with the external trends is going to be crucial for survival.
Ultimately it is the customer centric culture that will win.