Shareholders vs. Customers. Who comes first?
I just watched the documentary ‘The Corporation’ (2005). Interesting film on the history and evolution of the modern day corporation.
Here is a 6 minute segment from the film on YouTube called ‘Monstrous Obligations’:
I kept thinking as I watched the film about a debate my friend Jarvis Cromwell of Reputation Garage introduced me to. Jarvis is a leading authority of the concept of trust and the role it plays as a strategic business driver. The central question is, “Why are corporations in business?” Jarvis outlines the two sides of the argument:
1. Milton Friedman – the sole purpose of a corporation is to drive shareholder value.
“There is one and only one social responsibility of business,” Friedman wrote back in 1970, and that is to “engage in activities designed to increase profits.”
2. Theodore ‘Ted’ Levitt – companies are solely in the business of getting and keeping customers.
“Not so long ago companies assumed the purpose of a business is to make money. But that has proved as vacuous as saying the purpose of life is to eat” Levitt further adds, “The purpose of a business is to create and keep a customer.”
So – what comes first? The customer or the bottom line?
The view of the documentary is that the last 100 years have seen corporation solely focused on the bottom line. The approach has been ‘win at all cost’ with little or no regard on external effects, collateral damage or customer experience. The problem is that only pursuing the bottom line can neglect the customer. This was outlined in an article from HBS by James Allen, Frederick Reicheld and Barney Hamilton:
“Call it the dominance trap: The larger a company’s market share, the greater the risk it will take its customers for granted. As the money flows in, management begins confusing customer profitability with customer loyalty, never realizing that the most lucrative buyers may also be the angriest and most alienated. Worse, traditional market research may lead the firm to view customers as statistics. Managers can become so focused on the data that they stop hearing the real voices of their customers.”
My two cents
My take is that the customer must come first. Customer experience should be priority #1. Stop focusing on ‘the two in the bush’ (prospects) and take care of ‘the one in your hand’ (your customer). You need to focus on two things: value and maintenance. Enter the vm matrix.
Here is my breakdown of both:
Value
- What are tangible and intangible benefits that your service or product provides? (Note: Price factors into value, but only as it relates to the level of benefits and how effective the product or service is.)
- What is the level of design, craftsmanship and service?
- Is the product or service fulfilling its brand promise?
- Does the product or service go ‘above and beyond’ your expectations?
Maintenance
- What was the buying experience like?
- Do you enjoy working with the brand or service provider?
- Do they make things turnkey or simple?
- Are they responsive to problems / issues?
- Do they demonstrate initiative and the ability to go above and beyond for customer satisfaction?
Bottom line and marketing takeaway:
You need to figure out where you land on the value / maintenance matrix. When I say figure it out . . . it’s not your opinion as a brand that counts. It’s customer perception that counts [A study by Bain & Company revealed that 80% of the 300+ companies surveyed believed they delivered a “superior experience”, but when customers about their own perceptions they rated only 8% of those companies as truly delivering a superior experience] . Not only is it important to see where you fall, but to see where you land relative to your competition (see Today’s Lagniappe below). Strive to get into the ‘target zone’ with your customers and profitability will follow.
Today’s Lagniappe (a little something extra) – I’m a big fan of Forrester’s Bruce Temkin. Bruce’s blog ‘Customer Experience Matters’ is a must read. Bruce and his team have a yearly study called the CxPi. Forrester asks more than 4,600 US consumers about their interactions with a variety of companies, gauging the usefulness, ease of use, and enjoyability of those experiences. Based on these consumer responses, they calculate the Customer Experience Index (CxPi) for 133 firms in 14 different industries. Here is a link Bruce’s post on the 2010 CxPi index.
Bruce mentioned in his latest post that his research reports have been downloaded the most of any Forrester analyst. This marks the 13th straight quarter this has occurred. Maybe the title of Bruce’s blog is starting to become a mantra. I sure hope so.
Stan, this is a wonderful post.
And I suppose nobody will be surprised, given that this community is about customer-centric business, that I agree with you that the customer comes first.
The source of revenue and profit is customers, so without customers a company can’t exist.
But on the other hand, without a company eventually earning profits, the customer won’t exist either after the company goes out of business. Not as a customer of that company.
So long-term successful companies figure out how to keep customers first in their strategies and deliver better experiences than competitors — and do so profitably.
So rather than chicken and egg, I prefer to think of it like a dating or partnering relationship. Companies and customers typically don’t get “married” for life, but they can have a long-term partnering relationship so long as both are getting something out of the deal.
Hi Stan,
I agree, and really like your value-maintenance matrix. Where do companies get the bulk of their funding? Stock market … competitors … employees … internal politics … customers? It seems so obvious that customers are the lifeblood of a company. Yet, the focus of so many day-to-day efforts and decisions is dis-connected from customers.
Not all retention efforts will be fruitful, as 20% of customers typically generate 150-300% of a company’s total profits; 60-70% of customers break-even; 10-20% of customers lose 50-200% of total profits. Hence, retention of customers with highest profit stream potential can grow company profit significantly.
My twist on the V-M concept is a customer value quotient, measuring customers’ perspectives of value-add versus perceived costs.
Coincidentally I was just quoted in a customer experience management article saying: “Engagement of employees and customers go hand-in-hand, but it’s not a chicken-or-the-egg issue. Always start with a clear identification of your target market and a thorough understanding of its world, and then determine the required competencies of employees to hire, and their intrinsic motivators. Nurture customer-centricity by keeping employees continually aware of developments in the customer’s world, and by maintaining a customer-first mindset in all internal discussions, decisions and activities.”
And similarly, you may be interested in my take on Bruce Temkin’s January blog post about Obstacles to Customer Experience, where he reported that only 11% of executives say they have a very disciplined approach to customer experience management. Forrester says the biggest gain among CEM competencies in 2009 was awareness among employees of what their brand means. My article expounds on the remaining customer experience competencies.
Thanks for your thoughtful post — I hope it helps some executives re-set their priorities and move their organizations to stronger customer-centricity.
-Lynn
Lynn Hunsaker helps companies improve customer data ROI, customer-centricity and customer experience innovation. She is author of 3 handbooks. See ClearAction.biz, Twitter.com/ClearAction, Facebook.dj/customerexperience.
Stan,
Great post. Love your questions about the customer experience. I think the delivery of this experience goes unoticed way too often, and yet that experience has the biggest impact on the customers perception, retention, and growth – ultimately profits. Value-maintenance matrix is a solid too.
Hi Stan,
Your commentary on “value” and “maintenance” reminded me of a recent comment by Chip Bell, founder of the Chip Bell Group, at an executive-panel discussion during a Convergys client symposium on the customer experience.
Chip remarked “more and more we’re finding that price or product will bring them in, but it is the experience you create that keeps them and brings them back. So price is in an important strategy for finding customers, but solid growth is driven by what it is like to deal with your company after the customer makes a purchase.”
His comments dovetail insights we’ve captured in our recently executed 2010 Consumer Research on the customer experience. For today’s consumer, the key to a superior customer service experience in 2010 can be summed up in one word: value. More often than not, customers are looking for this value in the service experience. In our 2010 survey, respondents chose “good value for the money” as the second most important customer service attribute, a significant jump from 2008 when it came in sixth on the list; and 33 percent rated “reliable service” as more important than price in how they defined “good value for the money.”
There are other great insights from this study. For additional details and findings, including recorded webinars, industry-specific statistics, white papers, videos, podcasts and highlights, visit http://www.convergys.com/research.
Stan,
This is classic Ying/Yang. Businesses will not exist without customers and businesses will not exist (long term) without profitability too. In this sense the two are in tension with each other and any solution to the equation must balance both inputs.
No question that consumers’ expectations continue to rise and companies must respond, but spending recklessly will not lead to paradise. Investments in customer experience must be made with a firm grasp of costs and the associated return.
Ultimately if a company cannot invest to exceed customer expectations AND simultaneously be profitable, they are no longer a viable business.
greg
Thanks Bob. Glad you liked the article. I like your analogy of partnering. Kind of like the theme song from ‘Married with Children’. As the song goes, ‘You can’t have one without the other’. Both shareholders and customers need to get something in the bargain.
I should have given the whole quote by Levitt:
“Not so long ago companies assumed the purpose of a business is to make money. But that has proved as vacuous as saying the purpose of life is to eat…
The purpose of a business is to create and keep a customer
To do that you have to produce and deliver goods and services that people want and value
To continue to do that a company must produce revenues in excess of costs in quantities and with enough regularity to attract and hold investors
No enterprise can do this by accident or instinct, it must clarify its purposes, strategies and plans
There must be a system of rewards, audits and controls to make sure what’s intended gets properly done, and when not, quickly rectified.” -Theodore Levitt
Thanks Jim. Love your thoughts on value. Totally agree. Here is a post that expanded on the idea that value is the new black for today’s consumer. http://www.marketinglagniappe.com/blog/2009/11/30/value-is-the-new-black/
I look forward to checking out the research at convergys.
Best,
Stan
@9inchmarketing
A good article Stan, thanks. I won’t repeat others comments other than to give Richard Bransons comments, or as best I can remember them! He say’s “I put Customers first, my employees second and then profit and shareholder value will take care of it’s self”. Unsurprisingly he is so successful then.
If you listen to Sasser in the book the Service Profit chain, you could argue that focussing on employees should be first, and Customers second, but I have to say that goes against my instinct.
Colin Shaw
International Author. Lastest book “The DNA of Customer Experience”
Follow me on Twitter:
ColinShaw_CX
Thanks Colin. Branson gets it. He understands the importance of customer experience.
Employees are certainly a huge part of the equation. Walt Disney echoed that sentiment.
Having flown Virgin I’ve found that the airline adds a number of little extras to reinforce the importance of the customer experience. I think the idea of ‘marketing lagniappe’ is key.
Stan
@9inchmarketing