CHAPTER 7
Services Marketing: Foster Customer Ownership
What great service leaders know: satisfying customers is not enough.
What great service leaders do: they take steps to develop a core of customers who are owners.
We’ll be up front about it. The purpose of this chapter is to convince you that much of conventional marketing theory and effort is misdirected, especially when applied to the marketing of services. Because such marketing effort is insufficiently focused, it is not just wasteful, but it overlooks the fact that no more than 10 percent of the customers of many, perhaps most, service organizations represent all the profit. They are what we have come to regard as “owners”—customers who are loyal and engaged and who provide referrals, ideas for new services, and suggestions for ways to improve the service encounter. A core of owners, as few as one in 20, can replace most conventional marketing activities.
WHAT HAPPENS WHEN CUSTOMERS BECOME OWNERS
We saw what happens when employees act as owners in chapter 4. Mabel Yu stood her ground and even faced ridicule as she helped her employer, the Vanguard Group, avoid buying exotic, risky investments before the economy crashed in 2008. Customers can also have a significant impact on service cost and value when they act as owners and co-creators of service. They do that at La Villa Gallarati Scotti in northern Italy, one of more than 30 château-style seminar and meetings venues operated by Paris-based Châteauform’. A seminar there in which one of us (Heskett) taught provided a reminder of the power of the customer in creating value in a service.1
A warm welcome to the villa was followed by a tour of the public rooms, the bar, and the restaurant, given by a married couple who were carefully selected to manage the facility and encouraged to think of themselves as owners of the château. Only one thing appeared to be missing during the tour: staff. As it turns out, only a small staff is needed to deliver the service.
Guests were told not to worry about a tab for food, wine, recreational materials, or even the bar. There was no tab. The all-inclusive daily charge was precisely that. Instead, guests were to make themselves at home, fix themselves a drink at the bar, or find themselves a midnight snack from a table set up in the kitchen. In short, it was the kind of place with just the kind of service many people like. But wait a minute. This is do-it-yourself service, in which customers help make it work, contribute labor, and at the same time reduce costs. Why do they do it? Probably because they enjoy the novelty of providing services that are usually performed for them. But they are willing to do it as well because they are invited, along with the married couple managing it, to take responsibility for the property and regard it as their own.
The all-inclusive, do-it-yourself format is just one of a number of practices that align to produce high levels of employee and customer satisfaction and loyalty—as well as good financial results, as we will see in a moment. Together, the practices differentiate Châteauform’ from operators of other executive-development centers, providing important sources of leverage and edge over competitors operating more conventional meeting venues.
At this point, you may be asking yourself what this has to do with marketing. After all, customer participation in co-creating a service or leveraging value over cost mostly concerns operations, not marketing. But it’s what happens next that provides the connection. Châteauform’ relies heavily on satisfied customers to sell the service to newcomers. The attention-getting “headline” in the referral may be the unusual experience—fixing your own drink at La Villa Gallarati Scotti. But the conversation quickly turns to the quality of the overall experience and the results it produces. It helps explain why Châteauform’ realizes more than half of its business through word-of-mouth referrals, added evidence of the power of customer ownership.
The Châteauform’ example sends a strong message that putting customers to work in the co-creation and marketing of a service may be a great source of leverage and competitive edge. Châteauform’ has distinguished itself by developing unusually high proportions of owners among its clientele. These are customers who fall at the extreme end of what we call the “ownership curve.”
THE OWNERSHIP CURVE
The nature of customer ownership is best described in the context of six different types of customers, arrayed on what can be called a customer ownership curve (figure 7-1). It reflects the influence that value, trust, and loyalty (developed by a dedicated workforce of owner employees) have on customer ownership and lifetime value.
Figure 7-1 The Customer Ownership Curve
Source: Adapted from the “satisfaction-loyalty curve” in James L. Heskett, W. Earl Sasser Jr., and Leonard A. Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction, and Value (New York: The Free Press, 1997), at p. 87.
As we move from left to right on the customer ownership scale, and from bottom to top on the loyalty/lifetime value scale, an ownership relationship with customers increases at an increasing rate. Current or potential customers who populate the ownership curve experience various amounts of value (results combined with the quality of the service experience) and react in a variety of ways to what they experience.
First, there is a group of customers who perceive little value from the service encounter and develop little trust in the provider. Clearly, their expectations are not met. Some remain passive, telling no one but vowing not to repeat the experience. Others take action, telling others about their bad experiences and dissuading some from trying the service.2 We used to call them “terrorists,” but events since 9/11 have convinced us that antagonists is a better term. Antagonists can be damaging to the growth of a business. If too many decide to act early in the life of an organization, they can put it out of business. It’s critical that they be identified, perhaps through the complaint process or through listening posts, so that efforts can be made to at least neutralize their feelings. As we see in figure 7-1, antagonists represent negative lifetime value to a service provider.
Passive customers, whether or not they have had positive or negative service experiences, populate the middle range of the curve. Regardless of their experiences, they don’t tell others and don’t exhibit high loyalty. They make up perhaps the largest proportion of customers on the curve. One particular group of passives can be costly to a service organization. They are the opportunists, who time their purchases to take advantage of promotions, only to return to passive status. For this group price is the primary influence on value. Passives may exhibit a particularly vexing characteristic: they believe and tell researchers that they are going to repurchase, whether or not they do. It’s this behavior, for example, that we think poses a problem for measures such as the popular Net Promoter Score that may rely on false expressions of customers’ intent to repurchase. This behavior has been termed attitudinal loyalty.3
On the right side of the diagram are behavioral loyalists—customers who react to positive service encounters with repeat purchases that can, over time, be a substantial source of profit. They exhibit both attitudinal loyalty (belief that they are loyal) and behavioral loyalty (actual repurchase).4 Like the passives, they only occasionally tell others of their experiences, even though they may respond positively to the question “How likely are you to recommend this service to a friend?” This too presents a problem for the accurate measurement of profitability resulting from loyal customers. Those who do follow through with recommendations to friends are the owners.
One type of customer doesn’t fit on the ownership curve. We call them hostages because we know of no other word to explain why they exhibit high levels of loyalty with lowered levels of lifetime value. These are customers who perceive themselves as trapped in a relationship that they would terminate if it were easy to switch service providers. They complain to anyone who will listen, creating negative value for their service provider. As industries such as cable television and network service providers consolidate, the number of hostages grows.
We’ve purposely drawn the curve in figure 7-1 to suggest that owners are the ones who propel an organization’s performance to new heights. These are loyal customers who not only express a willingness to recommend an organization, but they do it, and they do it with some influence over others. In doing so they become an important arm of the marketing effort for a service organization. This is not all that owners do. They are also most likely to suggest ways of improving the service encounter (if only the service provider will listen, a matter addressed below). It doesn’t stop there. Organizations have tapped into the enthusiasm of owners by involving them in operational decisions. For example, taking a cue from Southwest Airlines, which has been doing it for years, several organizations now invite customer owners to help interview and select some of the frontline people who will be serving them in the future.
Our explorations of the economics of ownership in several organizations in different businesses suggest that the lifetime value of an owner is worth from 80 to 100 passive customers. In fact, owners and loyalists provide more than 100 percent of the operating profit (offsetting losses from the remaining customers) in many service organizations—even though together they may represent no more than 10 percent of the customer base. This was the conclusion we reached when we analyzed the data supplied to us by Caesar’s Entertainment, as described below.5 Curious about whether these ideas apply to other kinds of services, we asked Lanham Napier, former CEO of Rackspace Hosting, a website hosting and management company that relies heavily on customer referrals, to provide us with similar estimates of the value of a customer owner at Rackspace. With a couple of assumptions, a few calculations and little hesitation, he confirmed our notion by concluding that a customer owner at Rackspace is worth about 80 less-engaged customers.
Where the economics of customer ownership are so significant—and we believe the potential is widespread—it is important to know how owners and loyalists are developed from the merely passive middle of the typical base of customers.
DEVELOP CUSTOMERS AS OWNERS
Great service leaders know the organization must take action to either reinforce customer ownership or encourage it. The baseline for this effort is the delivery of excellent service on a consistent basis, the subject of much of this book. Beyond that, it includes efforts to define and track customer owners; put customers to work; provide multiple, personalized service levels; and rethink how the marketing/operating budget is to be allocated.
Create Consistent Value for Targeted Customers and Those Who Serve Them: The Starting Point
The value of results delivered to customers determines their willingness to repurchase; it also potentially determines their loyalty. But it is the consistency with which value is delivered that determines their trust. Trust forms the base of a pyramid of behaviors that encompasses customer engagement (willingness to refer), loyalty (actual repurchases), and ownership (number of referrals of new customers and suggestions for new ways of doing business).
What are the most important elements of value to a customer? Two things are becoming increasingly clear. It is only tangentially about the product or service being acquired. It is only partially about price. And in many cases it doesn’t involve purchases at all.
First, customers tell us that a primary goal is to realize results or solutions, regardless of whether that requires products and services or not. That knowledge was the cornerstone of the effort to transform IBM from a product-oriented mainframe computer company to one delivering turnkey information-processing solutions to clients on a global basis, regardless of whether IBM products were mobilized to do it. In many cases, the solution allows a client to avoid acquiring hardware, software, and related services altogether, instead renting a capability provided by IBM. As mentioned earlier, the management of Pitney-Bowes similarly transformed the company from a manufacturer and seller of mailroom equipment to an operator of mail rooms for other businesses.
Second, customers care about how results are achieved, as well as the quality of the experience. It has led several to conclude that we indeed live increasingly in an “experience economy.”6 If results are the baseline requirement for value for customers, the quality of the experience is often the differentiating factor that determines whether a customer will return or recommend a vendor to someone else.
Together, results and the quality of the customer experience are at the core of a customer’s decision to repurchase a service. But none of this has much business value unless efforts are made to track customers who exhibit ownership behaviors in order to reinforce relations with them. It’s well worth the effort.
Define and Track Customer Owners
Increasingly, information systems are being designed to track customer behaviors. But tracking is not enough. Someone has to be able to use the information to craft individual “conversations” with customers intended to make owners feel special.
At Victoria’s Secret, the retailer devoted to creating memorable experiences for its customers for lingerie, each of a thousand stores now has access to a current database of the purchases of its loyal customers. A new “bra launch” is the occasion for the preparation of individual invitations to attend an after-hours reception, product introduction, and fitting for loyal customers. The company’s sister organization, Bath & Body Works, lacks such detailed information about purchasers of its lower-value beauty products, and instead relies on the judgment of its store managers and employees to distribute free samples of new products to their better customers. While both approaches have proved effective, the future of successful service delivery will clearly depend more and more heavily on the effective tracking of customer owners.
Put Your Best Customers to Work
We’re convinced that the overwhelming majority of customer loyalists (using terms from figure 7-1) want to serve as owners if given a chance. Unfortunately, too many marketing organizations ignore this, preferring instead to listen to admonishments by their sales arm not to disturb loyal customers with requests for referrals and suggestions. Research we conducted at Caesar’s Entertainment suggests just how wrongheaded this is.7
Caesar’s Entertainment, one of the world’s largest operators of gaming casinos, under the leadership of one of our former colleagues, Gary Loveman, developed what is arguably the world’s largest customer loyalty program. As a reminder, it’s called Total Rewards, and it is based on the concept of the lifetime value of each member to Caesar’s.
For our study of customer ownership, we were able to access more than 4,000 of Caesar’s customers. We asked them the standard Net Promoter Score question (“Based on your experiences, would you be willing to recommend Caesar’s to others?”). But we also asked them questions indicating actual ownership behaviors over the previous 12 months, as well as other things they might be willing to do to help Caesar’s improve its operation. What we found is remarkable.
First, we found that the company’s most valuable customers (Seven Stars and Diamonds) referred 20 percent more Total Rewards members to Caesar’s on a per capita basis than its less valuable (Platinum and Gold) customers, even though the two groups registered roughly the same “willingness to recommend.” What they did was more important (and accurate) than what they said they would do if given the chance. Their recommendations also carried more weight, producing 32 percent more new recruits than lower-value Platinums and Golds. As you might guess, more Seven Stars and Diamonds were recommended by people just like them than by Platinums and Golds. The result was that their recommendations in total yielded new members with a 73 percent greater estimated lifetime value than members referred by Platinums and Golds.
There is more. Sixteen percent more of these high-value, busy, wealthy, probably high-ego Seven Stars and Diamonds were actually willing to attend a meeting to discuss new service ideas for Caesar’s to improve its business than their lower-value fellow members. But most surprising of all, in response to our question, 39 percent more of them indicated that they would be willing to take time off to help Caesar’s in the interviewing and selection of its frontline employees. Adding up the contributions of the relatively small number of Seven Stars and Diamonds in our sample (roughly 5 percent of the total), we concluded that during just the year that we studied them, the total came to more than the collective lifetime value of those making up the other 95 percent of our sample. Even allowing for overreporting, the differences were dramatic. Each Seven Star and Diamond member was easily worth more than 80 Platinum and Gold Total Rewards members. This program helps explain why the organization was purchased by two private-equity organizations in 2006 for a price three times the company’s market value just five years earlier.
Results of this research led us to the conclusion that when loyal customers are asked to provide referrals to potential customers, their loyalty is not diminished. It suggests that one of the highest priorities of a successful service organization is to convert loyalists to owners. In some of the most successful service organizations, marketing management appears to play a facilitating role. Customers themselves supply much of the selling effort.
Provide Multiple Service Levels
In order to make Total Rewards work well, Caesar’s has to be able to deliver more than one level of service—and that is not easy. It is assisted not only by information technology that makes available up-to-date information on each Total Rewards member but also by the servicescape in its casinos and the way its network of casinos and the information they generate is managed. As we saw in chapter 6, support systems can play a large role in facilitating service differentiation, even when it is difficult for humans to do so. But support systems can’t do everything. Employees have to be hired and trained not only to deliver differentiated service levels but also to sell the benefits of loyalty to customers who may complain that they are being discriminated against.
Questions have been raised about policies that provide multiple service levels. They include issues of fairness and whether or not they repel as many customers as they encourage. What researchers have found is that varying service levels are accepted by customers who understand what people have to do to qualify for each level of service. What really irks customers is the same service provided at highly varying prices, such as in the airline business.
Differentiated services associated with frequent-flyer programs in the airline business establish high loyalty levels that are negatively affected only through changes in scheduled departure times or customer lifestyles (apart from poor service).8 Airline passengers’ loyalty is explained in part by the relatively poor treatment they receive when they fly on airlines they don’t normally patronize—airlines on which their frequent-flyer status is low. The experience reinforces their preferences for the service on the airlines they fly frequently. It also reminds them that not everyone experiences the level of service they have come to expect on their “home airline.”
This type of passenger experience illustrates the inept way in which many airlines use their passenger information today. In a world of better management, information showing a reservation by a first-time (or infrequent) passenger, particularly in business class, would trigger extra one-time perks by an airline in an effort to demonstrate its best service level and the benefits of customer loyalty. This could be an equally effective way of putting information to work in using multiple service levels as a means of marketing the service. But it requires that management be willing to scan and put to use already-available information, as well as frontline cabin attendants who are willing and able to welcome a first-time passenger and potential customer owner to a new flying experience.
Rethink How the Marketing/Operating Budget Is Allocated
There is room for debate about the allocation of funds designed to change the shape of the ownership curve. The question is, what kind of attention should be given—and with what priority—to each customer type as part of the process of creating budgets for service operations and marketing? We have insufficient research and little public data on which to base a conclusion; priorities may be influenced by individual circumstances. But at the very least, it appears that you should give high priority, first, to neutralizing antagonists who can do great harm to an organization’s reputation and brand. Second, you can gain particularly high payoffs from catering to existing owners as well as efforts to convert loyalists to owners. Further down the list of priorities, recognizing how lack of choice can represent negative value, you might make an effort to free the hostage customers by offering them alternatives or quality services. It is less clear how much money should be spent trying to convert passives to loyalists; surprisingly little research has been done on what should be an important question for marketers.
This brings us to the potentially high return on investment that is often ignored: converting other organizations’ owners and loyalists. Some industries offer greater opportunity for converting competitors’ customers than others. The airline industry, for example, offers numerous opportunities for it. The nature of the business is that it is hard to meet or exceed customers’ expectations every time. Service is slow. Facilities are crowded during peak times. Flights are cancelled due to mechanical problems. These are perfect opportunities for efforts to convert loyalists from one competitor to another. A restaurant operator with whom we are familiar regularly carried coupons offering a free meal when visiting competitors’ establishments. Whenever he observed or overheard a customer registering dissatisfaction with the service or the food, he would produce a coupon and invite the dissatisfied customer to his restaurant for a free meal, often with the comment that “no one should have to put up with the service you just received.”
CUSTOMER LIFETIME VALUE: TRANSFORMING MARKETING EFFORT
Châteauform’ employees are rewarded for the loyalty of their clientele. In addition, they naturally benefit from the referrals that satisfied clients at all of the company’s châteaus make to potential new clients. Customer loyalty and referrals are the two most important sources of what has come to be known as customer lifetime value—the true measure of the value of a customer. There are other sources, of course, such as higher margins on added purchases and reduced costs of marketing. Together, these contributors to customer lifetime value can add up to surprisingly high levels of economic success.
Lifetime Value by the Numbers: Supporting Research
Work by one of us (Sasser) and one of his former MBA students, Fred Reichheld, is widely credited with provoking a renewed interest in customer lifetime value.9 Based on an examination of nine companies in nine different service businesses, they concluded that, in addition to an initial purchase, customer loyalty produces a stream of revenue from (1) added purchases of the same product, (2) purchases of new products, (3) added profit from price premiums that loyal customers are willing to pay for new products, and (4) reductions in the costs of serving loyal customers. As customer and supplier become more familiar with each other, customers even begin to contribute to the quality of the experience for themselves and others by helping provide the service and training of new customers.10 The list of benefits also includes increased profits from purchases by new customers referred by loyal customers, termed the “loyalty ripple effect” by Dwayne Gremler and Stephen Brown,11and increased profits from ideas for new processes or products suggested by loyal customers who act like owners. Reichheld and Sasser found that customer profitability is invariably greatest in the year before a loyal customer ultimately defects. As a result, in the nine businesses they studied, they calculated that by extending a relationship with a customer from five to six years, companies in the sample could increase lifetime profits from customer relationships by up to 85 percent.
Why Estimate Customer Lifetime Value?
Anyone who subscribes to the findings of this research has to give serious thought to the possibility that new business, at least in the short run, is less profitable than repeat business. This leads to a conclusion that marketing budgets should include ample funds for the retention of existing customers, even if it means reducing budgets for the generation of new business. In the absence of measures of customer lifetime value, this can be a hard proposition to sell. Thus, efforts to estimate customer lifetime value constitute more than an academic exercise. The process is especially useful if it is used as a way of underlining for senior managers the importance of what they do in serving existing customers. It is anything but academic at Caesar’s Entertainment, where focusing on customer lifetime value is a way of life.
The act of estimating customer lifetime value sensitizes marketing and other managers to the importance of positive customer experiences. More importantly, it is a way of convincing top managers that significant investments can be justified to improve customer service, something that is not always obvious to them. Client lifetime value is not a useful day-to-day measure of success. Rather, it is a number that, if estimated occasionally, alerts people at all levels of an organization to the importance of achieving the right level of customer service as part of a marketing strategy.
The Estimating Process
Calculating comprehensive customer lifetime value requires a number of pieces of information. They include the following for each major category of customer: (1) average length of relationship with the customer, (2) the customer acquisition cost, (3) year-to-year sale of (basic and related) products or services over the length of the relationship, (4) the margin of operating profit on sales, (5) the increase in margin or operating profit attributable to the development of improved practices and better knowledge during the relationship with the customer, (6) the flow of operating profit associated with new product or service ideas provided by the customer, (7) the number of new-business referrals per year attributed to the customer, and (8) the flow of operating profit from new referrals (repeating steps 1 through 6 for each piece of referred business).
Because much of this information is not normally tracked, the process often requires assumptions on the part of those estimating a lifetime value. This has the benefit of personalizing the estimate—making sure employees “own” it.
Putting Customer Lifetime Value to Work in Marketing Services
We mentioned earlier that Caesar’s Entertainment’s Total Rewards program is based on member lifetime value. Information gained from members of the company’s Total Rewards customer-retention program is used in its operations to provide differentiated, customized services that recognize customer loyalty at its casinos. But the information is also used for marketing.
Total Rewards is the foundation for Caesar’s Entertainment’s marketing efforts to its existing customers. Depending on each member’s profile and preferences, the company fashions various complementary packages designed to recognize patronage and preferences as well as encourage ownership behaviors. And it works, as they say, in spades.
Much of the success of any effort to build customer ownership starts with enlisting employees as owners. This is particularly true where the service encounter between customer and employee is personal and face-to-face. In a companion survey to the study we described at Caesar’s Entertainment, we found that 54 percent of the organization’s employees had recommended their company as a place to work to two or more of their friends.12
MAXIMIZE BENEFITS FROM LISTENING POSTS
Breakthrough service organizations make use of every available opportunity to listen to customers, as well as their own employees. In the past, this included survey data, complaint letters and phone calls, and requests for information or assistance. Today’s technology has made available an added array of methods such as websites, social networks, feedback services, and polling devices for doing this. At Amazon, for example, the channel is simple and direct. An e-mail to [email protected] puts a customer in direct contact with Jeff Bezos, CEO. If the e-mail is sufficiently provocative, the escalation process begins with the appropriate executive. As Jeff Wilke, senior vice president for North American Retail at Amazon, put it, “Every anecdote from a customer matters. . . . We research each of them because they tell us something about our processes. It’s an audit that is done for us by our customers. We treat them as precious sources of information.”13
Employees are at the heart of a strategy of developing organizational listening posts to detect shifting customer interests and needs. Most often this includes personnel at customer-service centers (don’t think of them as merely “call centers”), who are valued for their abilities to identify needs for new products and services, as well as resolve customer problems. Unfortunately, too many organizations assign minimum-wage personnel or, worse yet, outsourced organizations to handle customer requests and concerns. The result is the loss of information of incalculable value to those designing new products and services. Consider what one of us (Heskett) experienced recently.
The problem involved the operation of a cable television service provided by Comcast. At the outset of the phone call to a service representative, the caller was asked if he would participate in a survey after the call. As an advocate of listening, of course Heskett said he would. The call went miserably. After 30 minutes of confusing conversation with the Comcast representative, the caller was rushed to the end of the conversation. Obviously, the representative was facing some kind of limit on the length of the call. A somewhat puzzled, frustrated caller was then asked for his feedback. At the outset, a voice on the automatic polling device thanked Heskett for his cooperation in what would be a two-minute poll. The first question was “On a scale of 1 to 5, with 5 being the most favorable, how would you rate your recent service experience?” The caller responded with a “1,” whereupon the polling device thanked him for his cooperation and hung up, leaving the caller to ponder why Comcast had taken the trouble to sponsor the survey at all. In the process, a useful listening opportunity was lost, and a bad-service story was created for telling and retelling (and writing about).
A good listening strategy includes methods of ensuring that the results of frontline listening reach those who are responsible for new product and service development. One of the most effective of these is the requirement that those responsible for marketing research and product development periodically take calls from customers.
Build an Organization around Listening: The Case of Intuit
Intuit, the largest provider of personal financial software in the world, was literally built on listening posts. From its earliest days, Intuit’s co-founders, Scott Cook and Tom Proulx, followed a strategy typical of the software industry: putting good but imperfect, 1.0 software on the market, then relying on users to identify bugs and ways of improving it. The strategy required mechanisms to be set up to solicit feedback; people, who had to be hired and trained, who could interpret the feedback; and an organization that could hand off suggestions fielded by frontline personnel to those designing later versions of the same software.
This strategy has yielded successful annual updates of existing software packages such as Quicken (for personal finance) and QuickBooks (for small business management), producing a stream of sales over several years and thereby enhancing the lifetime value of Intuit’s customers. The success of the strategy requires that users of the imperfect software don’t defect to competitors. That, in turn, makes it important that the updates are of acceptable quality and contain the new ideas suggested by users.
Intuit ensured the success of this strategy by organizing itself as one big listening post. From the very outset, it hired people with skills and interests in interacting with customers, then provided them with product knowledge and training—not only in the use of the software, but also in the laws and regulations related to problem areas users might encounter. Most importantly, these people were trained and paid well for their listening skills. Working out of customer-support centers, they have always been regarded as sources of ideas, product development, and marketing effort, rather than merely a necessary cost.
Ideas are also collected at another listening post staffed by marketing research personnel. Users are brought to Intuit’s offices and given new software to install on company computers while Intuit’s marketing research executives watch, asking questions about why users did something a certain way. In addition, they engage in “follow-me-home sessions,” where researchers actually accompany purchasers of Intuit’s software back to the home or business, observing everything, from unwrapping the product to installing and using the software.
The flow of ideas from customer-support centers and marketing research listening posts then extends to a group of software engineers who are hired to make the product simple for users. In an occupation where engineers typically want to work on complex software and applications, those who are driven to make things simple are a rare breed. They also have to be willing to take over the phones at the customer-support center to listen personally to customers’ ideas.
That’s the core of a simple organization comprising customer support, marketing research, and software engineering. With this kind of organization and listening, the company doesn’t have much need for sales. Satisfied customers provide the sales effort through word-of-mouth recommendations. And product manufacturing is outsourced. All of this makes for an organization that has grown into a profitable business with a $20 billion valuation—one of the few that has successfully outcompeted giant Microsoft over the years, at least in the field of personal finance software. Intuit is proof that a strategy built on listening posts can work and work well.
Decide How to Track Results
A number of measures have been developed to assist listening by tracking such things as employee and customer satisfaction, loyalty, and ownership.14 Whether an organization gauges results through use of a Net Promoter Score or some other metric is not of huge importance to us. We’re also less concerned about what is measured than the fact that measures be employed consistently (using the same question) and frequently. Any measure has some value in tracking important dimensions of service performance over long periods. Measures are likely to have the most value if they reflect the kind of listening that triggers useful change in policies and practices.
Develop Listening Capability
Developing listening capability requires that organizations (1) hire frontline people with the capability to listen and learn; (2) create listening posts, opportunities for the organization to hear about new ideas from customers, employees, suppliers, and others; (3) provide training in how to listen and incentives for employees to serve effectively as listening posts; (4) develop ways of organizing the information collected; (5) create incentives for communicating the information to those who can do something about it; and (6) organize and take other steps to ensure that those on the receiving end use it. This is how Intuit and great service organizations like it ensure that they stay ahead of competitors—who either don’t listen, or just as bad, who listen but don’t hear.
REDUCE CUSTOMERS’ PERCEIVED RISK: THE SERVICE GUARANTEE
Earlier, we discussed the use of service guarantees to engage customers in efforts to control quality. The guarantees serve a second important purpose as well in helping to market novel services or those involving perceived risk.
Service guarantees for marketing purposes are distant cousins of entrepreneur Josiah Wedgwood’s satisfaction-or-your-money-back guarantee on his pottery in the United Kingdom in the 18th century, as well as Richard Sears’s money-back mail order assurances in the United States in the 19th century. They are related to the warranties that were first introduced by automobile dealers early in the 20th century. Warranties were the dealer’s way of assuring people buying their first automobile ever that their new purchase would serve them well for the period of the warranty—something of real value at a time when new automobiles broke down frequently. Service guarantees serve the same purpose for high-risk service purchases—they are the warranties of the service world.
In helping managers decide whether or not to offer a service guarantee, Christopher Hart has posed several questions: (1) Is the proposed guarantee substantial enough to be meaningful to customers? (2) Is it meaningful to the one offering it; for example, is it potentially so costly that its invocation by customers could put the company out of business? (3) Is the guarantee unconditional; that is, can it be invoked on the say-so of the customer alone? (4) Is the guarantee easy for the customer and service provider to understand, invoke, and collect on?15
Service guarantees may be explicit or implicit, depending on their purpose. For example, if the objective is to provide outstanding service recovery or information for quality-control purposes, the decision may be to employ an implicit guarantee. Ritz-Carlton, for example, does not advertise the fact that its housekeepers have the authority to spend up to $2,000 correcting concerns that may be raised by guests. Even its most loyal guests probably don’t know about it.
However, if the purpose of a guarantee is largely marketing, an explicit guarantee may serve the purpose best. For example, Scott Cook and Tom Proulx at Intuit decided to take an audacious tack by offering their first product, Quicken, to users with an unconditional service guarantee. They decided that they had to do it to induce customers to try an unknown product with no credibility.
If customers didn’t like Quicken for any reason, they could get their money back, whether or not they returned the software. It required confidence in the product on their part. It placed a heavy burden on them to ensure the quality of their product. Not only didn’t the product come back, but neither did requests for refunds. Instead, satisfied users who might have never tried Quicken began telling their friends to order the software. Intuit’s star was launched on the back of a service guarantee that could literally have put its co-founders out of business. Guarantees have also been successfully employed to market services to people who have had poor experiences with competitors. What better time to tap into the opportunity that competitors offer along with their inferior service?
A service guarantee, combined with highly effective listening devices, created a large cadre of customer owners among users of Intuit’s software products. As a result, Intuit is a company built on the recommendations of its customer owners to potential buyers, rather than on extensive advertising or a large sales force. In a sense, it calls into question some traditional marketing concepts, illustrating the power of new approaches to marketing that will characterize future service organizations.
REAP THE ULTIMATE BENEFIT OF LISTENING: NEW STRATEGIC DIRECTIONS
Customer ownership can literally save a business. We’ve seen it happen more than once. For example, the leadership of Rackspace Hosting steered the company out of near bankruptcy on the advice of a customer.16 At a time when the company was about to fail, offering website design and management services with declining margins to a wide range of clients, one of its better clients suggested that Rackspace focus on the increasingly complex problems faced by companies relying primarily on their websites. As a result, the company developed a premium service, staffed by “customer fanatics,” who provide 24/7 support so good that it is able to command premium prices.
Much the same thing happened to Diane Hessan, the founder and CEO of a struggling start-up, Communispace, in 1999.17 Hessan founded her company based on software that enabled members of large organizations to share ideas, converse with one another, and develop best practices via internal online “communities,” hence the name of the company. It was an interesting idea, except that people in organizations adopting Communispace software didn’t seem to want to share, at least not in the way that Hessan had envisioned. A customer saved her from an almost certain fate.
Tom Brailsford, a market research director for Hallmark Cards, concluded that the Communispace service wasn’t going to work for his Gold Crown (greeting card) store managers either. And Hessan listened to him as he suggested to her that instead of creating employee “communities,” her software could be used to create online consumer focus groups, designed to provide faster, less expensive answers to questions facing marketing managers than they could realize by more traditional means. As a result, Communispace created its first online focus group—150 women with young children—for Hallmark. It was so successful that Hessan completely rethought her business model, creating what she refers to as a “consumer collaboration agency.” Now employing more than 500 people around the world, Communispace has created more than 600 online communities for 200 clients, with a higher than 90 percent client retention rate.
What happened at Rackspace Hosting and Communispace is especially remarkable for several reasons. First, it required leaders who were willing to listen (not a common trait for many in leadership positions). Second, it required that leaders suspend belief regarding the strategic direction of their respective organizations. This is hard to do. They had given a great deal of thought to the directions their organizations should take. They could easily have lost objectivity on the subject. In fact, many have, ultimately riding an idea into oblivion. They could have let their egos, their pride of authorship, get in the way of common sense. Instead, they listened to their customers, and found a way to please their employees and investors—a win-win-win.
THE CHANGING FACE OF SERVICES MARKETING
Organizations like Châteauform’ spend little or nothing for advertising. They don’t have to because their clients do their marketing for them. Customers “own” the properties while they visit them. And they act like owners. As we mentioned earlier, they account for substantially more than half of the company’s business, both through return visits and recommendations to other organizations. The future will see a growing number of organizations relying on similar strategies. The reason is evolutionary: they will be the survivors. They are great places to work, offer real value to customers, and provide high returns to investors—again, win-win-win. Other organizations will seek to emulate their business models.
This raises the question of the role traditional marketing will have in service organizations in the future. It will be a world in which highly loyal customers co-create service experiences with employees while taking primary responsibility for business development activities—typically the province of marketing. In this environment the primary tasks of marketing will be to allocate effort and budgets toward current and potential owners while using more conventional marketing techniques to maintain a brand’s recognition and credibility. Further, marketing management will have to cooperate with peers from operations and human resources in this effort, sometimes even playing a secondary role. All of this suggests a quite different role for marketing than that studied traditionally by aspirants to marketing management jobs.
Before we get too deeply into this view of the future, however, we must note that others see the idea of customer loyalty, at least as currently understood, as largely a thing of the past. According to this view, for years consumers have been guided in their purchase decisions by brands, recommendations from personal friends and family members, and their own experiences. This guidance has enabled them to choose based on a perception of the value of a product or service relative to alternatives. In the future, however, they will be able to navigate through the thicket of information by means of search devices, smartphone apps, customer reviews, Internet feedback sites, and advice gleaned from social networks. As a result, they will be better informed and more willing to switch brands and products than in the past.18 By extension, the phenomenon will significantly reduce the value of brands, customer retention, and customer lifetime value.
This thesis represents an extreme view, one that assumes that customers will take valuable time not only to “shop” many of their purchases but also to periodically update themselves with the latest shopping apps and other technologies. It also downplays the importance of past experience on customer loyalty, which is of much greater importance for services than for products. It gives greater credence to the advice of unknown reviewers on Internet sites of unknown degrees of objectivity than to that of trusted acquaintances. While it is useful in suggesting trends in behaviors, we don’t believe this view of the impact of technologies on customer loyalty (and others predicting the impact of technologies on consumers) will play out to the degree its authors predict. However, it may provide an added incentive for organizations to adopt the concepts for building employee and customer loyalty that we’ve discussed throughout this book.
A LOOK TO THE FUTURE
Customer ownership is one concept that will transform marketing efforts in the future. Three others discussed in this chapter, shown with asterisks in figure 7-2, will continue to contribute to the transformation. They include a laser-like focus on customer lifetime value to drive differentiated service offerings, a high priority on the creation and maintenance of listening posts, and the creation of service guarantees that help reduce customers’ perceived risks.
Together, these changes suggest that the marketing of services in the future will bear little resemblance to conventional efforts of the past. As organizations place greater reliance on customers as owners who assume much of the responsibility for both co-creating and marketing services, traditional field selling and advertising will make up a smaller portion of the marketing budget. Traditional selling and advertising will be aimed primarily at maintaining an organization’s brand recognition and credibility. As a result services marketing jobs will potentially involve more interesting efforts to engage loyal customers to become owners. The task will be shared with those who are responsible for assembling and deploying the resources critical to the service—operations and human resource management. Success will require that these functions be closely coordinated in the effort.
Figure 7-2 Services Marketing in the Future
Conventional Marketing Strategy Emphasis |
Future Marketing Strategy Emphasis |
Product |
Results + Quality of Experience Service Guarantees/Risk Reduction* |
Customer Trial and Repurchase |
Customer Ownership* |
Price |
Value |
Place |
Service Encounter/Servicescape |
Marketing Research |
Listening Posts* |
Market Segmentation |
Customer Lifetime Value* |
* Concepts discussed in this chapter.
Clearly, the world of services is a rapidly changing and expanding one. Just as successful services marketing will require the merging of organizational boundaries, so too will it obscure the clear lines between customer and supplier, partnering organizations, and even competitors that have marked the limits of an organization in the past.
Our great service leaders understand this. But what kinds of responses will these shape-shifting changes require? And what role will leadership play in these changes? These are the questions we address in our final chapter.