A study some years ago by Frederick F. Reichheld and W. Earl Sasser presented in the Harvard Business Review found that in a wide range of industries, customer loyalty is a more important determinant of profit than market share. They estimated, for example, that a five percentage point increase in customer loyalty could produce a profit increase from 25 percent to 85 percent in the service industries they studied.[i]
The importance of this finding to the owners of small and medium-sized businesses is hard to overstate. In the customer relationship, where small and medium-sized businesses have a natural advantage, we find the quality of that relationship is a key determinant of profitability!
How ironic that we find many clients spending most of their time looking at top-side revenue growth. They pay little or no attention to customer loyalty or the customer experience that drives it.
To start a conversation about customer/donor loyalty with our clients, we developed a loyalty index. The index is a series of 7 questions about how the company manages the customer experience. Weights to responses, typically ranked 1 to 5 by interviewees, give us insights into how the executives feel about these topics. We average an executive team's collective responses. This number allows us to understand how our client's management team thinks about customer experience and management in general terms.
Here are the questions:
- Does your organization emphasize excellent customer experience? What concrete steps been taken in the past three years to make this happen?
- How well would you say your organization handles customer/member complaints? Does your company have a formal complaint-management process? How is complaint information gathered, tracked, and used?
- How accountable is the organization's management team for customer satisfaction? Do your executives know how satisfied their customers or nonprofit members are? Is customer satisfaction and longevity, something for which the executive team is measured or rewarded?
- If something goes wrong, do members of the leadership team take responsibility? Do they fix the process, or do they find a scapegoat? How do your leadership team members get along? Are executive committee sessions characterized by collaborative problem solving or intractable debates and finger-pointing? Recent examples?
- How does the company respond to challenges from outside the company (e.g., a significant service or product snafu?) Would you say the organization's culture encourages learning and adapting from mistakes? Or is the culture more about damage control?
- Is there an 'us (your employees) versus them (customers/members)' mentality when talking about customers? Are there employees in the organization who see themselves as customer advocates? How much prestige, or what kind of authority do these people have in the organization?
- Would you say that your organization is more transaction or relationship-oriented? Is your organization more focused on making a sale today, or would you say you are more focused on building long-term relationships? What processes do you have in place to build these longer-term relationships?
The Seven Deadly Sins of Customer Loyalty Management
As you might expect, responses to these questions tend to uncover a lot of misconceptions and opportunities for improvement. Quite often, we can tease out what we have identified as the 7 Deadly Sins of customer retention. Deadly sins tend not to be lethal in the short run if addressed quickly.
Each section below identifies the question, provides an analysis of why the measure is essential and advances the related "deadly sin."
Sin 1: The organization does not pay sufficient attention to customer experience, satisfaction, and loyalty.
1. Does your organization emphasize customer experience? Reichheld and Sasser's Harvard Business Review article estimated that the average US Fortune 500 Company loses 50 percent of its customers every five years.[ii] Many companies we work with talk the talk on customer experience but fail to walk the walk. These organizations fail to test their websites, use mystery shoppers, listen to the CSRs on the phone, or ask customers or members how satisfied they are.
Sin 2: The organization does not manage, monitor, or embrace customer/member complaints.
2. How well does your organization handle customer/member complaints? We find that organizations that do not have systems for submitting, tracking, and resolving complaints often spend too much time reacting and cleaning up. They don't spend enough time diagnosing problems and improving. Worse, without proper management, simple issues that companies could fairly routinely turn into major public relations problems and even legal battles. Worst of all, by failing to address customers' issues, companies are failing to take advantage of free consulting from their very best customers.[iii]
Statistics on complaints show that 26 out of 27 people will not complain. However, that does not mean they will go away quietly. [iv] On average, satisfied customers will tell 8 to 10 people about a good experience, while on average, they will tell 17 people of a bad experience. (See chart below.) For every person that did complain, there are additional twenty-some malcontents. They are telling everyone they know about their bad experience![v] With the advent of social media, the power of those unhappy people amplifies geometrically.[vi] (See Table 1 below.) While social media users will pay more for "excellent" service, they are also more likely to not purchase because of a bad experience. The multiplier effect of a bad experience on the part of someone who uses social media is startling. [vii]
Source: See http://about.americanexpress.com/news/pr/2012/gcsb.aspx Citation on 10/22/14.
Sin 3: The leadership team doesn't fix problems as much as it affixes blame.
3. How accountable is the organization's management team? When we begin an engagement, we often visit with the departmental heads of the organization. For example, we will visit with the heads of sales, marketing, technology, operations, and fulfillment. Each of those managers tells us about the problems of the organization from their perspective. While we ask about challenges in their departments, very often executives focus on problems in other departments. There is usually a great deal of truth in these reflections; however, rarely do these same executives mention problems in their part of the organization. By blaming other departments for profitability problems, and refusing to look inwards, these executives don't have to take any action to address their departmental shortcomings. They can argue. In the long term, however, both sides of the argument eventually lose. Often the loss is of their jobs or the control of the company. The path to profitability in most organizations requires the involvement of all departments identifying and addressing problems in their parts of the organization. At the same time, they must work collaboratively with other executives and other departments to get things right. [ix], to G.A. Rummler and A. P. Brache[viii]
Sin 4: When problems occur, leadership routinely blames people, not process.
4. If something goes wrong, do members of the leadership team take responsibility? A corollary to finger-pointing is to blame people, not process routinely. Management gurus from W. E. Deming have said that it is usually problems with the process, not employees when things go awry. Indeed, it is unusual to find employees who don't want to do a good job. Most employees, and especially those who have been in their jobs for a while, are eager to improve. Indeed, quite often, they can provide valuable insights on how to do so. All too often, when things go wrong, it is because that good employee did not have the knowledge, tools, resources, or authority to get it right. While it is always tempting to ask, 'Why the heck did he or she do that,' it is more productive to ask, 'How can we fix the process so that it doesn't happen again?' Ask why five times[x], and get to the bottom of the problem. You may find that it is a bad process (of management's design), which led to the issue in the first place! Top management thinkers say that between 80 and 96 percent of failures lie in the system and the process and NOT the people. In our experience, the root cause of our clients' problems is almost always a bad process, not a rogue employee!
Sin 5: The organization allows its limitations to define it.
5. How does the company respond to challenges from outside the company? Far too often, we find clients who have allowed perceived limitations to define how they manage their business. They may have, for example, too little capital, too small a distribution network, or they may not have the scale economies that their competitors do. Or they think they are too big. Does your team say, "We already tried that?" "We can't afford that?" Or do they say, "our customers are different from that," about too many initiatives? Here is what Comcast CEO Brian Roberts had to say about the company's customer service challenges in an interview after the Ryan Block video went viral.
"What unfortunately happens is we have approximately … Three hundred fifty million interactions with consumers a year, between phone calls and truck calls. It may be over 400 million, and that doesn't count any online interactions, which I think is over a billion. You get one-tenth of one-percent bad experience, that's a lot of people – unacceptable. We have to be the best service provider, or in the end, this company won't be what I want it to be."[xi]
Sin 6: The voice of the customer is weak (or mute) in the organization.
6. Is there an 'us (your employees) versus them (customers/members)' mentality among the employees? We find that another critical barometer for the health of an organization's customer-facing culture is how employees think about and talk about their customers. The Saturday Night Live skit with Roseann Barr appearing below does a great job of highlighting these issues. (You may need to adjust the volume on the video player below.)
How is information about the customer experience (good, bad, or ugly) shaped before its delivery? Is it delivered to the CEO or Executive Director's desk? The answer to this question often dictates the service culture of the organization. It also helps determine which steps are (and are not) taken to address customer retention-related issues. In sum, leadership must make Voice of Customer concerns a priority. It should use the Voice of Customer team as a window into the customer experience rather than a layer of insulation between themselves and a complaining customer base.
Sin 7: The organization focuses on transactions, not relationships with its customers or members.
7. Would you say that your organization is more transaction or relationship-oriented? Too often, we find the organization thinks in terms of near-term transactional values, not in terms of longer-term relation or lifetime values. Customer lifetime value (CLV) is a measure of the present value of all the income from a customer relationship minus the current value of all acquisition and servicing costs for that customer.[xii] By using CLV and managing to it, clients can identify those segments which are paying the bills over the long-term, and those segments which may be losing the company money. Sound too theoretical? Don't be put off by the Greek letters in the article cited above. The point of the analysis is to identify which relationships are the most valuable to your organization. CLV is a long term metric measured over several years. With this information in hand, your organization can nurture its profitable relationships with people, systems, and processes that address the needs of the most valuable portions of your customer base. This knowledge can also help managers identify which segments are losing money, how they can find more of the very profitable customers or donors.
The responses to these Loyalty Index questions tell us much about an organization and its organizational culture. We have also found that our index can be an excellent predictor of future profitability and long-term organizational health.
How would you say your company would fare in answering the questions above?
[i] Heskett, James L.; Sasser, W. Earl (1997-04-10). Service Profit Chain (Kindle Locations, 530-532). Simon & Schuster, Inc. Kindle Edition.
[ii] Reichheld, Robert F., Harvard Business Review, Cambridge, MA, 1996. Adapted from The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, written with Thomas Teal (Harvard Business School Press, March 1996).
[iii] See Barlow, Janelle; Moller, Claus, "A Complaint Is A Gift," Barrett-Koller Publishers, San Francisco, 1996, Chapter 2 pp. 19-36.
[iv] Technical Assistance Research Programs (TARP), Consumer Complaint Handling In America: Final Report, White House Office of Customer Affairs, 1980.
[v] Alan R. Andreasen, "Consumer Complaints and Redress: What We Know and What We Do Not Know," The Frontier of Research in Consumer Interest, Ed E. Schott Maynes, et al. (Columbia, MO: American Council on Consumer Interests, 1988), p 708.
[vi] See http://about.americanexpress.com/news/pr/2012/gcsb.aspx Citation on 10/22/14.
[viii] Deming, W.E. Out of the Crisis. MIT, Cambridge, 1982
[ix] Rummler, G.A., and Brache, A.P. Improving Performance: How to manage the white space on the organization chart. Jossey-Bass Publishers, San Francisco, 1990.
[x] For more on this read about the 5 Why's technique initially developed by Sakichi Toyoda and was used within the Toyota Motor Corporation during the development of its manufacturing methodologies. See Taiichi Ohno; foreword by Norman Bodek (1988). Toyota production system: beyond large-scale production. Portland, OR: Productivity Press.
[xi] See http://www.marketplace.org/topics/business/corner-office/comcast-ceo-we-reinvent-ourselves-every-couple-years. Citation on 10/22/14.
For an excellent article on the topic of Customer Lifetime Value see: http://www.anderson.ucla.edu/faculty/dominique.hanssens/content/JSR2006.pdf[xii]