Every company is absolutely convinced that it is customer centric. Serving the customers, the CEO will argue, is what everyone in his operation does. After all, he sent a memo to everyone in the organization about the importance of the customer. He also approved the acquisition of posters that artistically depict the customer as king and now decorate the headquarters’ walls.
This conviction, which is a self-deceptive perception, is the No. 1 threat to any executive trying to launch a customer strategy in his company. Everyone is convinced they are already doing it. In reality, companies are from Mars where their customer relationships are concerned. They actually focus on quarterly results and spend less money investing in long-term relationships. At Strativity Group, we label this behavior “the efficient relationship paradox.” Companies skim money from the customers on the one hand, while trying to collect larger sums of money from them with the other. Not exactly a formula for success.
How can executives who decide to take the road less traveled—the road requiring serious strategic focus on customers—overcome the self-deceptive perception? The answer is money. As with any other initiative that is undertaken in a business looking to make a profit, money talks. Our experience demonstrates that many executives are convinced that investing in customer relationships is a cost item in their budget and is not a way to make a profit. They measure this type of investment against their current margins and see how margins would shrink even further. They’ve all heard the clichÃ© about the lower cost of maintaining existing customers versus the higher cost of acquiring a new one, but they just do not buy it.
In Strativity Group’s 2004 Customer Experience Management study, we added a new section titled “The Economics of Relationships.” We asked executives about the costs and revenue associated with their customers. The results were surprising:
- 88.9 percent did not know the cost of a new customer
- 89.5 percent did not know the cost of total resolution
- 88.5 percent did not know the cost of a customer complaint
- 82.6 percent did not know the average annual customer value
- 61.8 percent did not know the annual customer retention rate
If these basic financial drivers are unknown, it is no surprise that passionate service to customers is not considered a profitable way of doing business. The economics of relationships must guide any customer strategy. Without these economics, there is no valid argument for investing in relationships.
The first call to action for any executive looking to lead a customer strategy is to build the financial model and qualify the critical economics of success. Even though it is difficult, the company must have benchmarking to understand the financial drivers behind customers’ behavior. These financial drivers must go beyond basic customer satisfaction and address customer actions such as:
- What is the current percentage of repeat business versus potential percentage of repeat business?
- What is the current captured portion of the budget versus the potential portion of budget that can be captured?
- What is the cost of a complaint?
- What is the cost of a new customer?
- What is the current retention rate versus the potential retention rate?
These are generic examples that have to be tailored to each company’s business model and industry. But obtaining this information will build the case for customer strategies better than any other “soft” argument. Working with a client recently, we discovered that the costs associated with obtaining a new customer were $15,000. The customer was shocked to see this number and immediately acted on building retention strategies for existing customers. With another client, we discovered that there was a 50 percent churn rate of new customers in the first six months. Addressing this challenge through a better customer strategy was suddenly an obvious need in light of the financial losses. Let your numbers make the case for your cause and you will not have to sell it.
Most companies have a barrel full of superficial slogan-based customer programs. Executives are repeatedly disappointed by the lack of effectiveness of these programs. The truth behind the lack of success is usually their inability to implement long term customer strategies in their rush to implement quick fixes and shortcuts. When presenting a customer strategy, you will always face some push back. If you do not, then you are not reaching the right people or they are not taking you seriously. By doing your homework and building the financial models, you will be able to build the case for shifting from a self-centered product focus to a true customer-centric organization. It is a painful process but a profitable one. Good luck.