Chapter 2

Doing the Right Things for the Wrong Reasons

Interest in, support of, and resistance to customer focus can come from any number of places in a company. Just looking at the range of inquiries and requests we receive about it, we note that sometimes the interest comes from a CEO, an executive director, or a COO who wants to increase a business’s customer intimacy to grow sales, membership, or gross margin. Other times the interest might come from a senior sales leader (e.g., a sales VP, a sales GM, or a regional sales director) who is concerned about customer retention or account penetration rates, or from a chief marketing officer (CMO) who is trying to advance the organization’s brand or understand and improve its win-loss rates in new customer bids, proposals, and tenders. And yet in other situations, the impetus might come from the head of customer service or customer care, or even from a chief customer experience officer (CXO) who wants to get better traction and broader company-wide involvement in the company’s customer experience campaign.

No matter how they frame their initial questions, or what they describe as their respective reason for thinking about customer focus, the conversation with each of these different players must eventually get back to the same initial fundamental questions: What is the strategic benefit of focusing on the customer? How does this customer focus you’re asking about help you shape, drive, or support your business strategy? You would be surprised at how few of them think in these terms. That’s why the Customer Focus Framework starts with strategic drivers. If you are pursuing customer focus for the sake of happier customers, or because you instinctively feel it is the right thing to do, you’re going to come up short. Here’s an actual example that happens more often than you might think.

Several years ago, we were contacted by a chief commercial officer (CCO) who was very perplexed and frustrated by his company’s performance in its industry’s customer satisfaction rating indices. For three years running, the company’s performance against benchmark peers had been slipping, and it got to the point that competitors were starting to use the survey results to their advantage (and to the disadvantage of this CCO’s company). He wanted us to launch a separate survey process—specifically for his company—that would help identify and resolve customer satisfaction issues before the next industry survey was conducted. The results he ultimately wanted were to see his company rising again in the industry-wide survey.

In one of our early meetings with the CCO and his team, we probed to really understand the business reasons for focusing on this survey. From their responses, it was clear that the survey was quite visible and highly relied on by the major players in his industry. It was also clear that he and his team had been very embarrassed when a customer confronted their CEO about the survey results—even though that particular customer hadn’t responded to the survey. Finally, they knew that some of their key competitors were getting great publicity, and, they assumed, market leverage by having a formal customer focus or customer experience (CE) campaign or process.

We persisted with our questioning. What is your business reason for doing this? What business results do you expect to gain from it? Their answers continued to focus on perceptions, reputation, bragging rights, and other anecdotal or subjective reasons. They even used the term competitive advantage but weren’t able to describe what that looked like for them or how it related to the survey. Finally, we pushed the issue by saying: “So if we are able to get your ratings up in the industry-wide satisfaction survey, but your revenues or profits or market share actually go down, will you be happy?” They ultimately got our point. Customer focus has to be grounded in or explicitly linked to your business or growth strategy goals. Happy customers or better ratings aren’t the end game we’re after. What we’re after is a happiness or better ratings that drive customer actions—actions that have an economic benefit for us (revenue growth, market share growth, margin improvement, etc.).

Addressing the Priority Predicament

One other essential reason why any customer focus effort must be tied to your strategy is something we call, for lack of a better term, the priority predicament. Michael Dell, the founder and CEO of the personal computer giant Dell Inc., once told a group of his managers that one of the hardest parts of strategic planning isn’t choosing the things you’ll do, it’s choosing the things you won’t do. Organizations are usually pretty good at coming up with new initiatives and new priorities. But they aren’t particularly good at killing off initiatives that aren’t progressing as planned or aren’t as important as they once were. The net result is that priorities continue to accumulate to the point where there’s so many that to call any of them a priority would be a serious misnomer.

When it comes to introducing a customer focus initiative or process, the natural reaction is for people to see it as a new priority—a layer of work that is being added on to their already full plates. “I already have my own job keeping me busy 80 hours a week, and now you’re asking me to spend time on this customer program?” You can hear it echoing through the halls right now—in your own organization—can’t you? The point is, customer focus can’t be an added layer of work; instead, it must be an inherent part of everyone’s already existing work. It can’t be something we do in addition to our normal job. It must be our normal job. It must be part of our normal job that we do better, or do differently, to enhance its impact on the customer’s experience. Getting to that point depends on culture to a large extent, a topic we’ll talk about in our Level III discussions. The other part of it is that people must be able to clearly see the customer–strategy connection so they view customer focus not as a new priority, but as a process for aligning and achieving already existing business priorities.

Here is an exercise (see Figure 2.1) we often use when helping management teams better understand this connection. The left column lists 20 common reasons (factors) for having a formal or structured customer focus. The middle column has participants check those economic outcomes impacted by the 20 common reasons. (The items listed in each of these two columns are the ones we use most frequently, but they can be changed to better suit the unique goals or challenges of a given company). And the last column asks them to rank how important each of the 20 reasons is to the organization’s strategy or business goals. (Similarly, any number of different ranking scales can be used.) Access the Customer Strategy Connection online at www.ANTICIPATEtheExperience.com/strategy or scan the QR code.

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Figure 2.1 Customer–Strategy Connection Exercise

Sometimes we use it as a questionnaire for managers or leaders to complete and compare results with one another. Other times, we use it as a discussion guide and facilitate a rigorous group conversation about it. There are no right or wrong answers per se. The understanding comes more from the related dialogue and debate. Whether or not the participants agree on every factor doesn’t matter. By the time the discussion is over, most participants will see or appreciate the connection between the customer focus and the company’s business goals.

Note: Periodically, we’ll add a Column IV to the above worksheet, which we label as Strategic Initiatives, or we’ll replace Strategy Importance in Column III with Strategic Initiatives. We also provide the participants with a list of the company’s current strategic initiatives—each one designated by a unique identifier tag or code. Then we ask participants to identify which Strategic Initiatives are directly impacted by each factor in Column I.

The Customer–Strategy Connection Exercise can be very revealing and very important in your early efforts to help people understand the business drivers behind your customer focus. It forces people to think more deeply about the tangible impact of an initiative they might otherwise consider to be soft, intangible, or unnecessary. This is a common and significant perception gap in many organizations, and it most likely exists in yours although it might not feel that way to you just yet. But in the many surveys, assessments, and focus groups we conduct in various companies, it’s clear that the vast majority of managers and employees don’t know anything about the following:

• The average cost of a customer complaint
• The average revenue of a lost customer
• The top five reasons why customers defect
• The average sales costs of acquiring a new customer
• The average annual revenue and/or profit per customer
• The lifetime value of an average customer
• The company’s win–loss ratio on new prospect bids and proposals
• The top five reasons behind those wins and losses

Can your managers or employees answer the above questions for your organization? Do they care about those questions or answers? Without this basic grounding in the customer-driven income and expense variables, it can be difficult getting people to see the economic, more tangible aspects of focusing on the customer.

Differentiating Customer Behavior, Satisfaction, and Loyalty

Another important aspect of this customer–strategy connection challenge is recognizing the difference between customer behavior, satisfaction, and loyalty, and how each one impacts the company’s top and bottom lines. Those differences and impacts will also be key to understanding the customer focus journey using the roadmap of the Customer Focus Maturity Model (CFMM), which we’ll be describing later. Here’s a relatable personal story that nicely illustrates the difference.

Just a mile down the road from my house is a drugstore. It’s the only drugstore in our area that has a drive-through prescription window that is open late at night—even on weekends: a truly great feature if you just can’t get to the drugstore during normal business hours, or you have a sick child and need a prescription filled late at night. It’s also good because you don’t have to get out of the car in bad weather—which is when most of the prescriptions in our house seem to run out and need to be filled.

However, all other features of this particular store are not so appealing. The store shelves and all of the products on those shelves usually have a year’s worth of dust on them. And that proverbial “spill in aisle nine” we often hear about on TV commercials . . . well, it’s still there. And this store’s clerks are about as friendly and approachable as . . . okay, you get the picture. The point? When we need a late night prescription run—it’s the place we always go. But it’s the last place we’ll go if we need anything else. In fact, we’ll drive miles out of our way or go without something before we’ll subject ourselves to the unpleasant experience of visiting that particular store.

In this example (Figure 2.2), our behavior as a customer, given that we might go there several times a year, would lead one to believe we are a satisfied customer—because we keep coming back for more. And when someone in our neighborhood or someone visiting us asks where they can get an after-hours prescription filled, we quickly refer them to you-know-where. We give that drugstore repeat business, and we give them referral business. Does that make us a satisfied, maybe even loyal, customer? Not at all. The way a customer behaves is not necessarily an indicator of how satisfied they are, or whether they’ll increase their spending with you, or promote your brand to others, or how likely they are to not buy from your competitors. Behavior, satisfaction, and loyalty are very different concepts with very different impacts on revenue and profits. Let’s look at these general differences and implications.

Figure 2.2 Comparing Customer Behavior, Satisfaction, and Loyalty

Typical customers recognize little, if any, differentiation from one supplier to another. Despite differences in quality, service, reliability, or other variables, their buying decisions tend to be driven by price (the cheapest) or convenience (the quickest). Beyond price or convenience, typical customer behavior doesn’t consider or respond to much more than that—it’s simply a transaction they need or want to complete as painlessly as possible. Even the fact that they may have had a particularly bad experience with you won’t necessarily stop them from buying from you again. Conversely, even if they’ve had a particularly great experience with you, it doesn’t mean they won’t buy the cheapest or closest solution they can find—from someone else.

Satisfied customers are somewhat better, though in our view not much! They still tend to respond mostly to price or convenience, and while they might not be as quick to buy cheap, they will make some effort to compare prices or fees to see if they can do better (i.e., cheaper) than you. Satisfied customers represent a real blind spot for many companies who conduct customer satisfaction surveys of any type. Lulled into a false sense of comfort by seemingly high satisfaction ratings, these blind-sided companies are often shocked when a “satisfied” customer goes elsewhere. In fact, some research shows that 60–80 percent of defecting customers claim to be satisfied or very satisfied on surveys completed just prior to defecting.1 In essence, when a customer is satisfied, it simply suggests an absence of negatives in their experience with you. It does not suggest any presence of positives or factors that will consistently drive them your way.

That’s why we believe loyalty must be the ultimate goal of any customer experience or customer focus effort. When we say “loyalty,” we’re not talking about frequent flyer, bonus awards, or other perks customers get for giving a company their repeat business or referring other customers to them. By loyal, we mean the customer sees unique value in the product or service they get from you. This value is so important to them that they are less sensitive to price and convenience, and still buy from you even though you may not be the cheapest or quickest solution around. The loyal customers we seek are the kind of customers who:

• Come exclusively to you to buy a given product or service.
• Are receptive to new product/service releases from you based on their prior experience with you.
• Are quick to refer other prospective customers to you.
• Actively promote (talk positively about) your brand in the marketplace.
• Value their relationship with you and view you as a partner, not just as a supplier or vendor.
• Forgive you for making a mistake or two, rather than abandoning you for a competitor.
• Won’t consider a competitor unless forced to and will likely give you a “last look” before making a decision to go to a competitor.

That loyalty is what we seek in Level III, and we will discuss it again later. Figure 2.3 points to some other benefits a company gains by shifting its focus from behavior to satisfaction to loyalty.

Figure 2.3 Benefits of Loyal Customer Response

At least from a qualitative perspective, the impact of having a customer who is unsatisfied, satisfied, or loyal is easy to see. But there are quantitative impacts as well. This book is not meant to present an economic argument in support of customer focus, as there are myriad other resources available that address that. (See sidebar titled Why Loyal Customers Are More Profitable.) But based on our experience and a number of other respected works on the subject, there are clear economic differences between satisfied and loyal customers, which are presented in Figure 2.4.

Figure 2.4 Satisfaction versus Loyalty

Why Loyal Customers Are More Profitable

Frederick F. Reichheld, author of The Loyalty Effect, found that the economic benefits of customer loyalty compound over time. While the loss of one or more customers may not have a significant or persuasive impact on the current year’s profits, even small changes in customer retention (loyalty) can permeate a business system and multiply as years accumulate. Figure 2.5 illustrates the incremental gains that mount over time as a customer stays with a supplier year after year.

Figure 2.5 Benefits of Customer Loyalty Accrue over Time

Frederick F. Reichheld, The Loyalty Effect: The Hidden Fact Behind Growth, Profits, and Lasting Value (Boston: Harvard Business Review Publishing, 2001).

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Basic explanations of the terms used in Figure 2.5 are below.

• Acquisition Cost: In general the one-time cost of attracting and closing on a new customer, which may include advertising, sales commissions or incentives, sales force overhead, and so forth.
• Base Profit: The price customers pay in addition to the company’s cost is the base profit. The base profit on basic purchases generally is not affected by time, loyalty, efficiency, or other factors.
• Revenue Growth: In most businesses, customer spending tends to accelerate over time as the result of the customer’s repeat business, using competitors less, and being more receptive to new product/service introductions.
• Cost Savings: Relationships become more efficient over time, as each side learns how to most effectively do business with the other. Existing relationships require less sales effort (and costs).
• Referrals: The more consistently customers are satisfied by a given supplier, the more likely they are to refer other prospects to that supplier; and customer referrals tend to be prequalified prospects.
• Price Premiums: Longer-term customers usually don’t need special deals and discounts to stay with a supplier the way new prospects do to go with a supplier. In general, the more value a customer receives over time, the less sensitive they are to general price increases or value-based pricing.

Don’t Measure What You Can—Measure What Matters

One remaining aspect of the strategy-customer connection we want to discuss is metrics. There are two key points we want to make in this section about the metrics companies use to track, prioritize, and manage their customer focus efforts. The first point relates back to our chief commercial officer (CCO) mentioned in Chapter 1 who wanted his own customer satisfaction measurement (CSM) survey process to augment or refute the broader industry-wide survey that had been hurting his company in the marketplace. As you’ll recall, we had to push him and his senior management team to think about what they were really after with this survey, and what measures were most important to them. As the old adage goes: You can’t manage what you don’t measure. But we have found another related concept to be equally true: You’ll only get what you DO measure. In the case of our CCO, it meant that even if the company sought an improved customer satisfaction measurement (CSM) score, they really wouldn’t be happy if it didn’t translate into measurable top-line or bottom-line improvements.

We see many customer focus efforts lose their momentum, credibility, or support because they only monitor and talk about what we view as intermediate measures. Metrics like customer satisfaction measures, loyalty indexes, net promoter scores, customer referral numbers, brand strength or awareness metrics, retention rates, win–loss ratios, and the like are all very important for evaluating the progress you’re making and determining where adjustments are needed. And while C-level leaders intuitively understand the importance of them, the metrics don’t always influence these executives. They are more influenced by ultimate measures like revenues, profits, market share, and return on investments (ROI). That’s why, as much as possible, companies try to calculate, demonstrate, or at least articulate the linkage between those customer focus intermediate measures and ultimate financial measures. For example:

• Knowing that the customer turnover rate is 15 percent isn’t quite as compelling as combining that with the fact that each customer account lost last year was worth an average of $80,000 per year.
• Knowing that each customer complaint hurts our brand and increases customer turnover risks isn’t as compelling as knowing we spend an average of $6,000 following up on each type AA complaint and for every 10 class AA complaints—we lose one customer.
• Knowing that it’s easier to sell to an existing customer than it is to acquire a new customer is a given. But knowing that it costs an average of $30,000 to win a new account versus $7,500 to sell more business to an existing account is far more persuasive.
• Knowing that our new bid win–loss ratio is 4:1 is important. However, it’s even more meaningful to know that the average amount of each bid won was $65,000, and the average amount of each lost bid was $90,000.
• Knowing the average profit per customer isn’t as meaningful as also knowing what the average profit per customer segment is.

Customer focus measures are important. They’re even more important when they are considered and discussed in conjunction with the ultimate financial indicators they affect.

The second key point about using metrics that matter relates to what the customer views as important. We are often called in to a client situation to evaluate, improve, or totally rebuild their customer satisfaction or loyalty measurement process. One of the first questions we typically ask is: What role did your customers play in helping you to develop your current survey process? This question generates a blank stare more often than one might think. So the next question we ask is: How do you know you’re surveying your customers about factors they view as important? More blank stares! The truth is that many companies assume they know what is important to their customers. They assume they know what the customer views as a minor glitch, versus a troubling concern, versus a deal breaker. But too many times the company’s assumptions are inaccurate.

In one particular case, a company had a survey process that had been in place for about four years. While managers were seeing incremental improvement in the company’s satisfaction scores, they weren’t seeing any real improvements in margin growth per account, new product/service penetration of existing accounts, or customer retention and referral results. The current CSM survey tool, which was concise and easy to complete, asked customers for their views in five key areas (see Figure 2.6).

Figure 2.6 One Company’s Satisfaction Metrics

We made two small changes to their existing CSM tool. First, we added a sixth line for the customer to write in any other (up to three more) factors that were important to them in addition to the five already listed. Second, we added a column for the customer to also rank how important each of the five existing factors were to them, as well as a rank for any write-in factors they added. The results were very insightful.

These three new factors were added by a significant number of responding customers:

As for the rankings of importance, billing accuracy and delivery reliability were seldom among the top five in importance in the customers’ views. They were viewed as givens or nonnegotiables. The customers did not view them as differentiators. The customers felt that if bills weren’t accurate or deliveries weren’t provided as promised, they wouldn’t be doing business with the company at all. Billing accuracy and delivery reliability were binary factors. Either you do them well or you don’t—no grades or shades in between. Good to know!

To further compound this disconnect, many times companies get a survey process in place and then, to ensure they have some continuity on the survey tool that makes year-to-year comparisons possible, they leave the survey tool untouched for several years in a row. The reality is that what was most important to a customer three years ago may well have changed since then. But the survey tool a company uses does not necessarily change. So it’s very important to engage a sampling of customers before designing a survey tool, and then to recalibrate them periodically to ensure the survey still measures the things most important to them. We’ll talk a bit more about survey tools and processes in our Level I discussions.

1 Frederick F. Reichheld, The Loyalty Effect: The Hidden Fact Behind Growth, Profits, and Lasting Value (Boston: Harvard Business Review Publishing, 2001), 237.