Gain Insight Into How Your Customers Think: An Interview With Michael Lowenstein

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Every manager understands that having a single integrated view of the customer across the enterprise is a laudable goal, but, according to guru Michael Lowenstein, few companies have actually achieved it. His new book, One Customer, Divisible: Linking Customer Insight to Loyalty and Advocacy Behavior (Texere,Thomson/South-Western, 2005) looks at businesses that have bucked the odds by gathering the right data from customers and using it to create insight and situation-specific value. In this edition of Inside Scoop, CRMGuru founder Bob Thompson talks with Lowenstein about the ideas and messages in the book.

This interview, recorded Dec. 13, 2006, was edited for clarity.

Bob Thompson
I’d like to welcome Michael Lowenstein, vice president and senior consultant, customer loyalty management at Harris Interactive, to this edition of Inside Scoop With Bob Thompson. We’re going to be talking about Michael’s new book called, One Customer, Divisible, with a very intriguing subtitle, Linking Customer Insight to Loyalty and Advocacy Behavior. Michael, welcome to our program.

Michael Lowenstein
Thank you. It’s great to be here.

Bob Thompson
Let’s start by telling our members at CRMGuru about your background and what it is you’ve been doing and a little bit about your company.

Michael Lowenstein
I’ve been involved in customer and staff behavior research for several decades, from both a strategic and a tactical standpoint. I look at customer loyalty behavior; customer touch and experience; and customer advocacy and word of mouth; and also, I conduct related employee loyalty, advocacy and what I call “mirroring research,” which links staff’s attitudes and engagement to customer behavior.

Bob Thompson
We’re going to touch on this a little bit later. I think you’re one of the few researchers I’ve found in the loyalty area that have actually spent quite a bit of time on the employee side of things or the staff side, so I’m looking forward to chatting with you about that.

Michael Lowenstein
It’s critically important. I mean, it’s basically the No. 1 lever of touch-point experience, and if you don’t have employee loyalty and engagement and advocacy, it’s almost impossible to have customer advocacy.

One Customer, Divisible

Bob Thompson
Good point. Let’s start a little bit about your book, One Customer, Divisible. Tell us who you wrote that for and why you wrote it.

Michael Lowenstein
This is my fourth book, and each time I’ve written a book, my motivation has been to get into important current and emerging CRM-related issues. And for One Customer, Divisible, the reasons, really, were pretty simple. What I’ve found is that, irrespective of industry, the vast majority of companies find themselves challenged to identify, store, share or apply the kinds of customer data and insight that are going to optimize and leverage customer loyalty behavior.

So if a company is going to have the right message to the right customer in the right medium at the right time, then creating a top level of touch-point experiences—and doing it profitably with the right organizational structure, with the right culture—everything begins with data and ends with insight.

And the audience is really anyone and everyone involved in CRM. If we look at CRM to mean having a single integrated view of the customer across the enterprise, that’s a goal that every manager understands is essential. But very few companies have achieved it. And, from my perspective, getting there requires the right kind of customer data, available in real time, to everyone in the company.

Bob Thompson
You know, at CRMGuru, we’ve used CRM as a business strategy and not just an IT implementation. I noticed that early on in your book, you made a comment about that, something along the lines of, “This is not just about CRM or as the market tends to view CRM.” Can you tell me a little bit more of what you meant by that?

Michael Lowenstein
I think we can agree that there’s always been this tendency to look at CRM as the technological or automated side of relationships with customers. And I tend to look at it in more holistic terms. If you break it down, really, and start understanding what CRM is, “C” is the customers, which, for me, are all stakeholders, inside and outside. “R” is relationships, and that’s, again, inside and outside for mutually beneficial value. And “M” is management. And you can start with scarce resources, which is basically, time, money, people, facilities and technology, but then, you also have to overlay things like information, structure, culture and strategy. So, CRM, I think, is a customer-based palette. Really, how do you create optimized value for customers?

Bob Thompson
Right. But I think you’ve implied that CRM has been lacking this focus on loyalty and, particularly, an interest in what employees are doing.

Michael Lowenstein
I think that’s fair. Every time that we see these articles and columns about where CRM, supposedly, has failed or has not met objectives, it’s always been because some system or other has been too expensive or too complex or taken too long to get under way. Or one of the parties—either the supplier or the user—hasn’t agreed upon objectives. But when you really start to dig under the surface and understand what it is that you’re trying to do with customers, CRM as we understand it really is all about creating a powerful depth of insight into what motivates customers and their resulting behavior.

Bob Thompson
There are some sort of flavors that I would say sound a bit like one-to-one marketing, so I have to ask: What is different about what you’re talking about from what Peppers and Rogers have been espousing for a decade or more, “one-to-one marketing”? [CRM pioneers Don Peppers and Martha Rogers founded Peppers & Rogers Group, now a division of Carlson Marketing]

Michael Lowenstein
That’s a very good question. I think in a lot of ways, the CRM world can be very grateful to Don and Martha for looking into the potential and also, the mechanics of creating and sustaining customer experiences down to an individual level. That book [The One-to-one Future: Building Business Relationships One Customer at a Time, Judy Piatkus Publishers Ltd] came out in 1994. So now, if you kind of fade out from 1994 and come back to where we are at the end of 2005, what you see is that a relatively small percentage of companies have really been able to do this. And there are still many organizations that have a major challenge consistently trying to address customers and their needs on a one-to-one basis. So what I’ve tried to do in One Customer, Divisible is to look at the sources and the role of customer data in creating customer insight on a micro-segmented level and using this insight to leverage loyalty and advocacy behavior.

20,000 customer segments
In the book, I look at companies that have been able to do it and do it well. Here’s a very good example: Royal Bank of Canada a decade ago was operating with three customer segments. Today, they’re operating with 20,000 segments. And it’s not just the micro-segmentation; it’s what they’ve been able to do with it. They have averaged 25 percent profitability for several years. Part of that is because the marketing programs have become much more efficient. Marketing cycle time, they’ve found, has been reduced by 60 percent. Most of their direct marketing programs average over 50 percent response.

They can get down to, if not quite the individual customer level, very, very small micro-segments and understand them. With this kind of insight, they can create new products and services. They can do that and launch them with much greater speed and efficiency. What they find is that customers are now significantly more responsive to the bank’s promotional efforts and other communications programs.

Bob Thompson
What would a micro-segment look like? Give us some idea.

Michael Lowenstein
A micro-segment might be four or five people—maybe 10 people—with the same set of levels of engagement with the bank.

Bob Thompson
Could this be behavioral-based, like they’re doing certain things in their interactions or demographics or what?

Michael Lowenstein
It’s principally behavioral, but more. In other words, let’s look at a complete profile of the customer. It’s behavioral. It’s psychographic, which, of course, is part of behavioral. It’s full demographic. It’s full product profiles with the bank, and they might be able to break down to five or 10 people who are the same age, making the same income, living in the same kind of location, having the same kinds of financial needs and the same kinds of involvements—very, very small groups. Royal Bank will look at life stage, profitability, potential and other variables such as degree to which a customer uses products. Then, they sub-segment to small groups based on behavior and demographics. It’s almost as close to real personalization as you can get.

For example, the bank has identified a large life stage group called “preservers.” These are customers, usually over 60, who look to maximize retirement income. One of the sub-segments of this group is snowbirds, people who leave Canada for warmer climes every winter. Royal Bank put together a package of specialized, targeted benefits for them, including travel insurance, easy access to Canadian funds, support for getting U.S. mortgages and so on. Further, the bank instituted a neural communication and marketing program designed to build interest in their services among this specific older sub-segment.

In a sense, this kind of approach follows on or builds on what Don and Martha came up with and helps companies execute it down on the ground. What I found with The One-to-One Future is that it was a great template for action, and it was a great guide on how to do it. Actually, executing it requires that you have this detail of data, and very few companies—even though they think it’s important, even critical—have been able to do it. We owe a deep debt of gratitude to Don and Martha just for the concept, in recognizing that this was able to be done now and able to be done irrespective of industry.

Bob Thompson
Let’s dig a little bit into this notion of loyalty and advocacy. I know you make a clear distinction between those two terms, so lay it out for me. What does it mean to be loyal vs. being an advocate, and why is it, I take it, more important to have advocates?

Michael Lowenstein
I’ll actually take it on three stages, going from satisfaction to loyalty to advocacy. Advocacy happens when customers select a single supplier from all of those they might consider. They give that supplier the highest share of spend possible, and they voluntarily tell others about how positive the relationship is and how much value and benefit they derive from it. Advocacy incorporates opinions from customers’ transactional and other contact experiences, but really, it’s built on a foundation of strategic and positive purchasing and communication behavior.

Bob Thompson
Would you agree that another more colorful way of saying that is these are the so-called “raving fans”? They literally are willing to go out and promote some product or service that they’re really, really, really happy about.

Michael Lowenstein
Absolutely. And I think that, beyond being enthusiastic or being an evangelist, what’s important to clients, or any company, is that degree of advocacy can be determined through research; and it monetizes at a very, very high level. In other words, when you identify intensity of advocacy, this is consistent with things like levels of word of mouth, share of spend, frequency of use—all of the key metrics that we look at when we try to understand customer behavior. It is very different than other metrics. When you compare it, for example, to satisfaction, satisfaction looks at attitudes; looks at recent transactions; tends to be passive; tends to be reactive. It doesn’t correlate very well with long-term relationships or key monetary measures like share of spend.

Loyalty is a notch up. It recognizes longer-term relationships and more active purchasing, usually from fewer suppliers or even a single supplier, but it doesn’t take into account the power and influence of peer-to-peer communication. Advocacy not only considers the likelihood of having an exclusive purchasing relationship, but it also incorporates strong emotional kinship and active, positive and voluntary communication about the supplier.

Bob Thompson
So you see this as three levels. So satisfaction’s not a bad place to start but not the end point. And loyalty and advocacy are kind of the next rungs up the ladder of the relationship. Can you share any statistics about what it means, financially, to a company to have somebody in, say, the advocate category, instead of just being loyal?

Michael Lowenstein
The people who are next down the line are committed. In other words, they have an emotional bond, or connection, with the supplier, but they probably aren’t communicating very much.

Bob Thompson
They keep it to themselves?

Michael Lowenstein
Yes, the silent loyalists, if you like.

Bob Thompson
OK.

Michael Lowenstein
And then you have groups that are even lower, which we call fulfilled. These are people who used to be referred to as “delighted” customers. They were probably happy with the most recent transaction, but it’s not a long-term or a longitudinal kind of involvement. And then you have people who are indifferent or less. Those are people who are using a lot of different suppliers and they might easily switch. By the way, when you track this out, exactly to your question, you can see very strong changes as you go from indifferent or less to fulfilled to committed all the way up to active advocates, particularly in key monetary metrics like share of spend. Every time I have done research on this, I’ve seen a very, very steep slope, going from indifferent (or disaffected, if the level of engagement is even lower) all the way up to active advocates. What happens with active advocates, at least the way that I define it for clients, is that it’s almost a de facto indexing device for seeing how well you are dialing up, leveraging and engaging your most valuable customers.

Bob Thompson
But I think everyone would agree that they want loyal customers or even advocates.

Michael Lowenstein
Advocacy should be the ongoing goal for every company.

Bob Thompson
It’s like motherhood.

Michael Lowenstein
But it monetizes. It monetizes, and that’s the key thing.

The details

Bob Thompson
People always say in our surveys, “Yes, we want that. We want to invest in loyalty programs. Generally, we recognize loyal customers are more valuable.” But it seems like the breakdown is in how you actually do it. Maybe you could share with us a perspective on that. All right, you’ve got lots of customers. And some are in different stages. As a company, you’re trying to move a customer base along, which means moving individual customers within that base, where you can move it along the spectrum from being just satisfied to being raving fans or so forth, right?

Michael Lowenstein
Exactly.

Bob Thompson
How do you do that?

Michael Lowenstein
Well, in most research, the devil is in the details. The details in this case are looking at the diagnostics, those elements of performance that are both functional and emotional or relationship-based; things even having to do with trust, integrity, information, brand image; and of course, customer service. All aspects of customer service tend to be more relationship than anything else. We understand the functional, or tangible, things, of course: the price, the accuracy, the delivery time, the completeness. All of those are important, but it’s the relationship and interaction with the company that drives advocacy.

You put these together and you start looking at not only how you performed—which is what I had described—but also the reasons for high or low performance. If you’re not getting high ratings, we want to know why. In other words, we want to know the factors, particularly behind low performance, that are contributing to indifference.

Bob Thompson
Is there a common breakdown where somebody’s indifferent because of some problem?

Michael Lowenstein
Typically, it is service and relationship issues that dominate. Now, that doesn’t mean it’s the whole answer.

Bob Thompson
OK, but give me an example. A service issue would be what? Just not being responsive?

Michael Lowenstein
Not being responsive or considerate; not providing a complete answer; not being proactive when I require some information. Maybe I have to go to two or three or four people. Maybe it takes too long to get the information. One of the things that I regard as particularly important and recommend for clients is the proactive solicitation of complaints, for example. Most complaints exist below the surface, and they have to be unearthed. And typically, the complaints that you receive are not the ones that leverage behavior. Often customers won’t tell a supplier what’s really bothering them. They just go to another supplier.

Bob Thompson
So, if I could paraphrase, you need a research process to go figure out what the real issues are. And then, once you know what they are, then—

Michael Lowenstein
Yes, go and fix them. Make them more customer-focused.

Bob Thompson
Right. Your customers are telling you that your service is slow, surly and unresponsive. Maybe you ought to put a program together to fix that.

Michael Lowenstein
We can tell, specifically, how much it’s leveraging this indifferent perception of value. You put your finger right on it. It’s what I call bootstrapping—when you start at the low end of performance and you can see what you’re doing at the high end, which works with some customers, and you’re trying to replicate that with the rest of the customer base. What you’re endeavoring to do is to bootstrap your performance with the rest of the customer base so that it is the way that strong customers want it.

Bob Thompson
You mean, go look at relationships that are working well and try to—

Michael Lowenstein
Emulate that.

Bob Thompson
—replicate that elsewhere.

Michael Lowenstein
Yes. Absolutely.

Bob Thompson
Do you have an example of a company that you feel has done a particularly stellar job of moving their customer base higher up this ladder of loyalty to more advocacy?

Big and small organizations

Michael Lowenstein
There are several that I’ve covered in the book and several that I know very well. One of the interesting things about this is that it scales extremely well. One of them that I start with and I mention in the book is Price Automotive Group. This is a group of seven or eight dealerships that’s based in New Castle, Delaware. Every process in the customer life cycle is closely managed, beginning with when a prospect walks into a showroom. Seventy-five percent of their customers complete the purchase transaction in under two hours.

Of all of those people who complete that transaction in under two hours, 100 percent of them plan to repurchase or refer. Sixty-seven percent of this company’s business is repeat or referral. Their salespeople are very loyal. They have a very, very strong employee base. The average salesperson sells 50 percent more vehicles than their counterparts at other dealerships. Ninety-seven percent of their customers are A & B credit-scored. What that means is that they can give very attractive loan rates to their customers, as a result of attracting only the best customers. If you get larger, you can look at Commerce Bank, a rapidly growing mid-Atlantic player, where they’ve taken differentiated customer convenience and service to levels that are almost an art form.

Bob Thompson
Hang on a second. In the example you just gave, you painted the picture of the end-result—

Michael Lowenstein
Yes.

Bob Thompson
Very successful. Can you share an example of something Price did or a practice you feel has contributed to this wonderful success?

Michael Lowenstein
We all know how long it takes to purchase a car and how painful it is, whether we’re buying outright or leasing.

Bob Thompson
It’s right up there with going to the dentist for most people.

Michael Lowenstein
Oh boy, right in there. Painful, right? It’s long. It’s horrible. It’s drawn out. People don’t like to negotiate. Price Automotive Group uses a one-price, extremely high-value approach to selling cars. It’s very, very personal. One of the things that they understand is that, in leasing or buying a vehicle, time equates to trust. The longer it takes to go through the transaction process, the less trust you have as a customer. So if it’s over two hours, you can watch trust diminish.

They have been able to set up their purchase process so that it’s under two hours. When you go into a finance and insurance office, that’s usually an hour—hour and a half—before you get out of there. Purchasers are concerned about being pressured to get expensive warranties. Price has simplified the F&I process so that it’s only 25 minutes on average. Their people are specially trained to guide customers through the transaction quickly and efficiently. Both sides see the value. There is customer lifetime benefit. It begins before the sale, continues through the purchase process, the delivery process and post-delivery service and communication. And you’re working with a team, by the way. There’s employee continuity because Price staff is engaged and loyal, with very little turnover.

Bob Thompson
Now how about a quick example of a big firm, a well-known brand, if you have one?

Michael Lowenstein
Sure. Let’s talk about Tesco.

Bob Thompson
You feel that they have a higher than average number of advocates in their customer base?

Michael Lowenstein
Tesco does, and look at what they’ve been able to do, Bob. They’ve developed and manage their customer loyalty program to really customize and target offers. They’ve created specialty programs like their Baby Club and their New Mothers’ Club, and the Kids’ Club. They’ve now become, as a result of really being able to leverage data and pinpoint customer services and offers, one of the largest banks in the United Kingdom.

Bob Thompson
What’s the secret sauce there?

Michael Lowenstein
The secret sauce is, if you read Scoring Points, Clive Humby’s book [Scoring Points: How Tesco Is Winning Customer Loyalty by Clive Humby, Terry Hunt and Tim Phillips, Kogan Page, Feb. 1, 2004] or talk with Clive, as you and I have both done, what you understand is that they have really focused on optimizing store processes. But more than that, they have spent a lot of time and effort finding, gathering, sharing, leveraging and applying the right kinds of customer data, so experiences can be optimized on a situation-by-situation basis. This, in other words, is customer divisibility. Through the data they have, Tesco can make something personalized and customized for each individual. They can make each purchase situation customized, and they can offer benefits and values that are good for the customer and good for Tesco.

Bob Thompson
And they seem to have done a wonderful job of really creating this term that’s easy to say but not so easy to get called “customer insight.”

Michael Lowenstein
You got it.

Bob Thompson
They really understand customers at a very detailed level that is quite amazing.

Michael Lowenstein
I think so.

Bob Thompson
And that wonderful point that you’re making is that, without this insight, which is founded on having detailed information, is it really possible to manage the process, to increase loyal and more advocate-like customers?

Michael Lowenstein
Here’s the challenge. A lot of companies have data. We all come across companies with lots of data in file drawers, in boxes and in databases. The question is: How is it leveraged? How is it collated, shared and applied to create value? That’s why I wrote One Customer, Divisible. Companies that

do this well are going to be very successful. They have to stay at it. They have to be disciplined. They have to be strategic. The companies that do this well really succeed. Like I said, it’s not a matter of scale. We’ve been talking about Tesco, which is the world’s largest supermarket chain. I can go back down to a single supermarket in Upstate New York called Green Hills Farms, which is run by a guy who happens to be a database expert. His name is Gary Hawkins. But Gary does the same thing as Tesco. He efficiently manages the customer lifecycle. He understands the value of customer insight for creating targeted value. It doesn’t matter whether it’s a single supermarket or the world’s largest supermarket chain. Anybody and any company can do it. And it doesn’t matter the industry, really.

Bob Thompson
Let’s close by talking a little bit about one of the thorny issues in CRM in general and, I think, in this area. How do you measure this stuff? One of the loyalty experts, Frederick Reichheld, has stated that people make the measurement process too complicated. I’m paraphrasing, but I think that’s his key issue. He said through his research that there’s one question that in most industries is the single best indicator of true loyalty. That is: Would you recommend this company or this product or service to your friends and business associates? It’s the willingness to give a referral, which I think gets at some of this advocacy-type behavior that you’re talking about. Do you agree that that is the question? What else would you do?

Michael Lowenstein
There are flaws, inconsistencies, contradictions and challenges with the thesis. Businesses really need to be asking, “Look, is increasing recommendation the best way to drive business success? Is it going to be more impactful than reducing customer loss? Is it more powerful than increasing customer volume, cross-sale, share purchased? Is it the best way to go?” Recommendations are important, but are they the main thing? I think those of us who are involved in customer management research as a profession argue that you need to do a good deal more.

Bob Thompson
So maybe it’s not the right question in all cases?

Michael Lowenstein
It is one of the questions to ask, but there’s much more to know about customers.

Bob Thompson
Isn’t there another issue that’s even more fundamental, which is—

Michael Lowenstein
Is it enough?

Bob Thompson
Is it enough? Yeah. What if they said, “Well, no, I wouldn’t recommend”? You’d want to know—

Michael Lowenstein
Why they wouldn’t.

Bob Thompson
More about why. Absolutely. In any case, you’re going to need to do the research to figure out what’s really going on.

Michael Lowenstein
I think one of the things that you need to do is look at history. Recommendation is an outcome of loyalty, and Fred himself used to argue that. I mean, that was a position that he took in his earlier work, in his early presentations. And where we’ve come now is that he seems to be saying that recommendation is an indicator of the construct itself. Realize that it’s possible, for example, to incentivize customers, and they will refer. If you do that—and it can easily be done—what happens to the value of the metric? It’s very, very strongly compromised.

So, you really have to understand what brands and products customers would consider, what they’re currently using, what their level of favorability is, what their likelihood of saying positive and negative things about the product is. And, if you then build recommendation into that kind of construct, you’ll have something, I think, that’s more actionable. It’s very, very revealing.

Bottom line, it would be attractive to have a single metric. But I tend to come out in agreement with those who believe that it’s appealing, but it’s dangerous. I’m one who wants to know more. I would need to understand why, not just what, on as sub-segmented a basis as possible. Like I said, recommendation is an outcome of loyalty, not just an end goal in and of itself.

Bob Thompson
Right. Now just as a quick wrap-up here. This is a complicated topic and there are no silver bullets, I realize. But if an executive were intrigued with this notion of building more loyal customers or those who are going to be advocates, what’s the first step you would recommend?

Michael Lowenstein
I think they kind of have to circle the wagons. They have to look at what’s contributing to it. They have to look at the employee contribution in engagements. They have to understand the messages and processes that are needed to—what I call—”dial up” their most valuable customers. Principally, as we’ve been talking about, they have to understand why things are working and why they are not, leading to what prescriptives are going to be applied.

So it ends up being that, when you can look at the “whats” and the “whys,” it’s not any kind of an over-simplification to say that advocacy is absolutely essential to customer management. And when companies have created active advocates, they will have done several things. They will have succeeded in capturing the hearts, the minds, the wallets and even the vocal chords of this group. These are people who will leverage active purchase behavior, both among other customers and among non-customers. So my thesis is that every company should look at an ultimate goal of making every customer an active advocate while at the same time, bootstrapping or eliminating or reducing the amount of indifference that they have.

And, as we said at the outset, there’s proven strong financial linkage between customer behavior and employee interaction and loyalty. Beyond just understanding employee satisfaction and what employees value and desire in their jobs, it is essential that companies have a research and analysis method which correlates staff performance to customer actions so that they can hire, train, recognize and reward employees for how they contribute to customer value. Employees are at least as important as other aspects of customer management in optimizing benefits for customers, and they frequently represent the difference between positive experiences or negative experiences, and whether customers stay or go.

As research into this effect concludes with regularity, employee attitudes and actions, especially around customer commitment and engagement, and championing a company’s products or services, can’t be separated from the effective delivery of customer value. My own studies into the impact of delightful and disappointing experiences have shown that disappointing experiences will lead directly to indifference in customer relationship and engagement with a supplier. As customers become increasingly positive with their supplier experiences, this also has a direct correlation with advocacy levels. In fact, it’s impressive that the rate of correlation between type of experience and degree of customer advocacy is almost 100 percent.

Bob Thompson
Let’s wrap up on that note. By the way, congratulations on getting the book out: One Customer, Divisible. It’s got some great insight on, as you say in the sub-head, “linking customer insights to loyalty and advocacy behavior.” Michael, thank you very much for being on our program.

Michael Lowenstein
Thank you for asking me to participate. I enjoyed it.


Download a chapter and the Afterword from One Customer, Divisible.

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