I assume, as to you are reading this on CustomerThink.com, that you are interested in customers and the building of long-term relationships with them. You are likely committed to the concept of customer loyalty and have a healthy appreciation for the importance of long-term customer value.
If this is indeed the case, I would like to understand why more firms seem to emphasize such concepts in their public, customer-facing communications and then proceed to behave in an opposite direction. Why do they talk about being customer-centric and committed to the notion of loyalty and then reward their people for producing virtually the opposite?
The problem is an undue focus on short-term financials or, more accurately, the failure to strike a balance between short-term and long-term results.
Many companies that I encounter, particularly large, publicly-traded corporations are driven by what I refer to as the FISH model. They tend to focus almost exclusively on (and reward their employees and executives for their performance against) measures of performance that are:
FINANCIAL (are measured in the local currency)
INTERNAL (rely on internally-generated data)
SHORT-TERM (ask how did we do this quarter, month, week?)
HISTORIC (look at past performance, not at where we are headed)
This is how they measure success in such companies, and customers are typically paid lip-service. Their executives will maintain, of course, that they are customer focused, but their focus tends toward what we can extract from customers this quarter, month, week, so that they can meet quotas and their bonuses. These firms also are most likely to have a sales focus, rather than one that is aimed at building long-term customer loyalty.
Some try to balance the two, but often fall victim to the FISH model as they get near the end of the quarter, and quotas and bonuses hang in the balance. They are under pressure from boards of directors and financial analysts to deliver short-term financial results, period.
Customers notice such an orientation. One of their most damning comments about large companies, in particular, is “they aren’t really interested in me; all they want is to sell me something.” It explains why many customers prefer to deal with smaller, independently-owned, companies whose definition of success is very much different. It also explains why some very large corporations that have struck the balance between short-term performance and long-term loyalty are so successful.
I agree that there is a big gap between customer-centric rhetoric and real practice. It doesn’t surprise me when studies like the Economist Intelligence Unit report that 90% of executives surveyed believe customer relationships are essential to sustainable profits but only 13% believe they have strong relationships with their own customers. There is a gap between perception and strategy. Lacking a well thought out strategy, executive regress to the practices they used to climb the corporate ladder—especially when the pressure is on.
I do agree that customers notice the one-sided agenda inherent in sales-oriented organizations. This might predispose customers to prefer small and independent companies, but these companies also fall into the sales first trap. A more serious problem occurs when customers continue to do business with the company but do so in a predatory manner- buying on price and convenience and exhibit no loyalty. This type of customer takes up resources and strips away at profits. The antidote—engage customers in meaningful experiences that deliver what customers value.
John I. Todor, author of Addicted Customers: How to Get Them Hooked on Your Company (www.AddictedCustomers.com)
John
Most of the companies we are talking about operate in regulated free markets. The kind that you see in the USA, Europe and many other parts of the world. Companies offer their products to potential customers through these markets, and customers are free to choose which ones they want and how much they are willing to pay for them.
With this simple understanding of markets in mind, it is clearly wrong to suggest that customers buying on price but exhibiting no loyalty are behaving in a “predatory manner”. And that such customers “take up resources and strip away at profits”. If companies cannot make money offering a product at a particular price point, either they shouldn’t offer the product so cheaply, or they had better have another strategy to recapture profit through another route.
Graham Hill
As a consultant I have been engaged with a great many companies planning and rewarding in the same manner you describe in your article. Most noticably, the European telecom operators have fallen victim to hit and run sales tactics. For example, most mobile telecom operators sell their subscriptions through direct (online / captive) channels or through vendors. Customers are ‘bought’ with heavily subsidized handsets. Often third party vendors reward the customer with television sets or even cars! In other words, these companies are teaching customers to buy on price (or goodies). No inherent loyalty can be achieved with these types of sales tactics. These companies are spoiling the market. Customer loyalty is only skin-deep at best. As soon as the next ‘great offer’ comes buy, the customer is running for the door.
The real problem is trying to turn this situation around. I have had major debates on abolishing these tactics and reverting back to good old service and personal attention. Being honest and proactive about what is good for the customer. Many management teams are scared to depart from the FISH route and embark on a new, fresh course which will bring them a new type of results. The real issue to many of them is that adopting real customer centric measures may result in short term loss of revenue. Slashing away the ‘bad profits’ (in Frederick Reicheld’s words – http://netpromoter.typepad.com/fred_reichheld/) is scary because the good profits take some time to materialize. How do we get the message across?
Matthijs
The situation you describe is common in any number of industries; from retail banking, through mobile telecoms, to airlines, all the way to automotive. I did some analysis of one particular UK mobile telco a couple of years ago to look at the customer lifecycle. The telco went through an annual cycle of acquiring new customers and loosing old ones. The replacement cost of the old customers was approx GBP100 million per annum, 70% of the entire customer acquisition budget. All the other UK mobile telcos had similar figures. Non of them intended to change their behaviour.
Is this “spoiling the market”? I do not think so. Instead, it is all part and parcel of normal free market behaviour.
It is a charachteristic of any dynamic free market that there will always be a broad mixture of companies, from those in a growth phase that try to acquire customers by poaching them from others with attractive offers or by growing the market, all the way to declining companies that try to retain their existing customer base at almost any cost. And matching this broad range of company types is an equally broad range of customers, from those that are loyal and stick with the same company, all the way to those that are promiscuous and look for the best offer or look for variety. Sitting between them is a huge range of continuously changing products, or relatively stable outcomes, depending upon whether you take a company or customer view. The strength of free markets is that they provide a platform for different types of customers to seek appropriate offers from different types of companies and vice versa.
Truly dynamic markets provide big incentives for new competitors to enter the market and take advantaghe of market opportunities. In the four industries mentioned earlier, all four have faced new competitors in recent years; from online and social banking, through MVNO and low-cost telecoms, to pure business and low-cost airlines, all the way to lean Toyota! Although many of these new competitors have been lower cost, that doesn’t generally mean they have been lower quality. And a number of new competitors have been more focussed on particular customer groups but at higher cost and significantly higher quality.
Far better to encourage companies to go to market and offer customers a broad range of options and then let them decide, than to try and railroad the companies into adopting a customer-centric business model that is still ‘work in progress’ from an economic perspective. Far too often the companies that most lament the lack of loyalty of their customers are the very same ones with the most to fear from dynamic new competitors.
I believe the term for all this market turmoil is ‘creative destruction’
Graham Hill
Independent CRM Consultant
Interim CRM Manager
I personally believe it will take a serious down turn in our ecomony to change the mind set of business owners. As they fight to stay in the consumer’s eye by slashing prices and giving away incredible ‘gifts’ they will eventually need to get back to basic to weather the storm so to speak. The companies that paid the price early by adopting the customer-centric mentality will eventually come out on top and emerge as the leaders in their industries. This situation has similarities to the tortoise and the hare story, which one wins in the end?
Graham –
I do not agree with your approach. In the race for the customer, too many companies are competing against each other instead of going the extra mile for the customer. More budget is allocated to inventing the better mousetrap, having the larger billboard, or the sexiest ad campaign.
I strongly believe in treating the customer right, instead of truying to make your competitor look wrong. Also in dynamic markets there should be room to create an excellent customer experience while producing and selling at low cost. Even more, its their only chance of survival!
A newcomer to the market should have customer centricity in its DNA rather than having to ‘railroad’ them into a business model that is not viable.
From a CRM point of view: isn’t knowing, understanding and catering to the customer your reason for being?
John
Your numbers from The Economist Intelligence Unit have been borne out in other studies internationally. What’s also interesting is the fact that an even smaller percentage of customers believe they actually have a strong relationship with those firms. It is more likely the case that customers will feel an attachment with smaller firms and will develop stronger loyalties to them. My research suggests that it is largely a result of the fact that there is much greater likelihood of interpersonal connection and communication with smaller firms than with large.
The message here is that there may be some important lessons for larger firms to learn from their smaller counterparts. Where I do see strong relationships with major corporations and brands it is because they have, to some extent, emulated the behavior and attitude of small companies.
Customer loyalty formation is not a difficult phenomenon to understand. Customers know very well what draws them back to certain companies and brands over and over again. What continues to surprise, and the subject of this blog, is why many companies don’t seem to get it; don’t seem to understand that they are actually rewarding their employees and executives for behavior that will interfere with loyalty formation.
Jim Barnes