Drew's Note: As I try to do every Friday, I'm pleased to bring you a guest post. Meet two thought leaders who shares their insights via the blogosphere. So without further ado…Timothy Keiningham and Lerzan Aksoy. Again. Enjoy!
Managers are typically taught to things that can be easily quantified and reported on a balance sheet. Stop for a moment to answer this fundamental question: "What is the purpose of any business?” On the face of it, this question seems pretty easy to answer. Most managers would answer: "To make a profit."
But that's the wrong answer. Profits are an outcome. They only tell us if our business strategy and execution are viable.
Peter Drucker, widely considered the father of modern management, argued that the common belief that creating profits was purpose of a business was not only wrong, but harmful. It causes us to make bad business decisions and lose sight of those things that delight customers. He summed up the actual purpose of business this way: "There is only one valid definition of business purpose: to create a customer."
The mark of success for a firm, and therefore the ultimate objective of its strategy, is to satisfy customer needs and wants at a sustainable profit. Whatever strategy and tactics we employ to gain competitive advantage must ultimately be based upon our profitably providing a better solution for customers.
Managing Customers as Assets
Customers are the ultimate asset for all profit-making organizations. They provide all of a company's real value. Paradoxically, customers are one of the few aspects of a business that are not managed as an investment. This oversight negatively impacts profits in multiple ways, including inefficient resource allocation (via suboptimal company-customer interactions); product design and launch failures (via poor fit with customer needs); and unstable cash flows (via increased customer defections and price sensitivity).
Therefore, if customers are the primary asset, the ultimate aim of any business strategy should be to maximize the net present value (NPV) of customers to the firm. While on its face such a statement may seem academic, this is much more than a theoretical maxim. Researchers consistently find firms that adopt a customer lifetime value framework for customer selection and resource allocation strategy significantly outperform their competitors in profits and shareholder value.
But this doesn't just happen. It requires the successful integration of all areas of management — accounting, finance, marketing, operations, and human resources — in profitably addressing the needs of customers. Below is a good place for us to begin.
Accounting. Analyze the profitability of your customers. Research conducted by the Harvard Business School finds that most customers for most firms do not produce an acceptable rate of return (i.e., they are not profitable). In fact, for most companies, the top 20 percent of customers in terms of profitability produce all of a company's profits, the middle 60 percent break even, and the bottom 20 percent lose the company money. Paradoxically, revenue is a terrible predictor of customer profitability. The highest revenue customers tend to be the most profitable or the least profitable.
Managers need this information to effectively run their businesses. They need to know who their profitable customers are and what behaviors are associated with profitability.
Finance. Incorporate customer metrics in your financial models when making investment decisions. When prioritizing investment decisions, pay attention to the projected impact on the future value of customers to the business. Analysts cannot consistently beat (or even meet) the market — in the language of finance, they don't add alpha. Research finds that this is because intangibles that reflect the strength of the company-customer relationship are excluded.
For example, analysts are generally skeptical of the impact that customer satisfaction has on a company's market value. Analysts tend to view customer satisfaction information as "soft" data because they don't understand how satisfaction data links to a company's bottom line. Because it is intangible, they frequently regard it as a money drain.
Our own research found that incorporating customer satisfaction into standard models used in investment finance significantly improved the ability to pick winners versus losers. And the winners dramatically outperformed the market by 2 to 1.
Marketing. Put more focus on current customers. Marketing activity has largely focused on persuasion — the ability of the company to change someone's attitudes or behavior. And while that is a critical role of marketing, too often this gets translated into simply persuading someone to try something for the first time. An old saying goes, "A good salesman can sell anything once. The trick is getting them to buy again."
But it is not as simple as focusing on customer retention either (i.e., getting them to come back). Today, customers buy competing products from multiple companies with seemingly no real loyalty. In other words, customers divide their wallets among competitors.
Consequently, one of the most important elements in improving financial performance is getting customers to allocate a larger share of their wallets to the firm. A McKinsey study found that focusing on share of wallet had a 10 times greater impact than focusing on retention alone. Research demonstrates that the strongest driver of share of wallet is customer loyalty.
Therefore, the primary goal of marketing must be the creation of loyal, long-term customers out of first-time or occasional buyers. Accomplishing this requires a clear understanding of what makes customers want to be loyal. Gathering and understanding customer needs is the job of marketing.
Operations. Make certain that company-defined quality and customer-perceived quality are aligned. Because operations are often focused on the creation and distribution of products and services, there is a natural tendency for managers to focus on meeting technical specifications.
While the quality movement of the 1980s has done a great deal to establish standards of technical excellence, we have a long way to go to achieve user-defined excellence. It matters little if a firm is meeting its internal guidelines if these are disconnected from the customer.
We must always remember that the customer did not design the process, and they don't care that the system we have designed makes our lives easier. It needs to make customers' lives easier. So when designing and implementing any process, we need to experience the offering as customers do (i.e., shop our own stores).
Human Resources. Establish a climate for service in the organization. By service climate, we mean the procedures and behaviors that get rewarded and supported within the company with regard to customer service . Research consistently demonstrates that service climate is positively linked with lower turnover, higher customer satisfaction, and improved financial performance.
While we all pay lip service to the importance of employees in serving customers, too often we manage in terms of their operational productivity at the exclusion of all else. How many employee evaluations actually include customer metrics as part of the formal criteria? The reality is that most employees are rewarded for completing tasks. Few, however, are rewarded for making customers happy.
A Holistic Strategy
Too often we as managers think about strategy in terms of our own functional area: marketing strategy, operations strategy, finance strategy, etc. But each of these strategies should exist as part of a holistic company strategy. A winning strategy focuses everyone in the organization to come together for one cause: to profitably create and keep a customer.
Timothy Keiningham is a world-renowned authority in the field of loyalty measurement and management, and Global Chief Strategy Officer and Executive Vice President for Ipsos Loyalty, one of the world’s largest business research organizations.
Lerzan Aksoy is an acclaimed expert in the science of loyal management, and Associate Professor of Marketing at Fordham University. They are coauthors of a new book, with Luke Williams, entitled Why Loyalty Matters and creators of LoyaltyAdvisor, a web-based tool that analyzes your loyalty across multiple dimensions proven to link to your success. LoyaltyAdvisor is the product of a global effort, the most comprehensive study of loyalty ever conducted.
Every Friday is "grab the mic" day. Want to grab the mic and be a guest blogger on Drew's Marketing Minute? Shoot me an e-mail.
Photo courtesy of Shutterstock.com
Thanks for the guest post…excellent insights. The bottom line, as is the case with most endeavors, is a holistic approach to providing customers with an end-to-end, consistently positive experience.
Nice post. The break down into each section of business and how they can help with customer profitability was insightful and a good reminder of what the focus really needs to be on. Thanks.
It’s great to see such concrete advice on how to focus on customers. I work with a lot of local retail businesses, where customer service is probably their only way to compete with large national retailers, and far too many don’t really get this.
The single most important thing a local business can do in this regard is to cultivate the right attitudes in their staff, but that’s not the only way to forge customer relationships and create an impression in their minds.
A weekly email to your customer list can also have a major impact, if you think outside the box and treat it as something more than an advertising vehicle. Sure, a good offer in an email will motivate customers to act, but it can do far more than that. We’ve found that customers love it when the email includes interesting information and advice, and maybe even tries to entertain a bit.
The way we explain it to our clients is your email should have the same tone and message as your face to face interactions with your customers. If you have the kind of business where you are chatty and friendly, make your emails that way. If you are professional and businesslike, write that way. But whatever you do, give them more than promotions in your email. The non-promotional content of your email is an extension to your customer service effort, and it will get noticed.
One of our most enthusiastic clients has been sending a weekly email for several years, and they tell us that hardly a day goes by without a customer giving unsolicited feedback in the store about how much they love the emails they get. This email is NOT written by a professional copywriter – it is written by one of the principals, and reads like a chatty personal note. No Madison Avenue formatting, just text with some digital photos and coupons.
The lesson is to consider all channels when building customer relationships.
Why Loyalty Matters authors Timothy Keiningham and Lerzan Aksoy will be my guests on News Talk Online on Paltalk.com Thursday July 16 at 5 PM New York time.
Please visit my blog at http://www.garybaumgarten.com to join in the conversation.
Referral promotion campaigns are a great way to reward your existing clients. Large companies have used promotion campaigns forever. i.e. CitiBank – If a colleague signs up for an account we’ll give you both $100″
Of course you need to do something that makes sense. But something as simple as a $5 gift card to Starbucks can have a tremendous growth.
There’s nothing better than your loyal clients giving you positive Word of Mouth.
Your trusted referral network
thanks for d word of wisdom