Customer Segmentation

The cloud is changing a variety of customer interactions, one of which is the purchase process. We've seen a shift from buying, to renting, and now to subscribing.

Consider movie viewing as an example. Years ago, to watch a movie at home, we bought a VHS or DVD. Shortly thereafter, we went to Blockbuster and rented the movie. Today, many subscribe to Netflix, where they pay a monthly fee and get unlimited rentals. 

This change is happening across many industries, including those providing business-to-business products and services. In the report titled, "Sizing the Cloud," Forrester predicts the "global market for cloud computing will grow from $40.7 billion in 2011 to more than $241 billion in 2020."

This shift is impacting the role of customer strategy consulting. Historically, customer strategy consulting has focused on predicting repeat purchases by identifying which customers are likely (or not likely) to purchase again, when the need arises.

With the cloud, customer strategy consulting is focused on protecting the ongoing and recurring revenue. It is focused on predicting which customers will continue their service versus those who will cancel.

While there are many similarities between the historical role of customer strategy consulting and the role for companies with cloud offerings, consider these differences.

- The switching barriers are minimized for cloud customers, shifting the risk from the customer to the company. To help protect their investment, the company needs to have an intimate understanding of their customer segments, sophisticated analytics to understand and predict renewals within each segment, and systems or business processes that optimize the renewal potential.

- For many cloud-based companies, one sales manager could have many customers. Having a clear line of sight into each customer becomes difficult, if not impossible. Companies need a system that leverages the various sources of customer information to help sales managers prioritize where and how to spend their time.

Add benchmark questions to your survey: Many companies have a couple of questions asking the customer to evaluate a benchmark company. This is an ideal approach for many because it focuses on the perceptions of your customers and allows you to compare what they think about you versus another company.  

Benchmark against yourself: Companies can answer the “good or bad” question by looking at key segments within their business. For this approach, identify the customer segments with high performance scores and use those as the benchmark. The benefit of this approach is the "best-in-class" score is most likely achievable with your existing products/services.

Look at scores over time: As a customer survey research program matures, it is natural to look at changes over time. This becomes a good source for perspective since it will highlight improvements and/or declines. In year one, you create the benchmark and then measure progress against it over time.  

Secondary Research: There are a variety of secondary research options. These secondary sources can be a good benchmark. However, they do have some draw-backs, which are: timing of the program, differences in the respondent profile (e.g., different geographies or customer roles), or different research designs (e.g., scales used or questions asked).

As you prepare to share results from your customer survey research, don't just share the score, add some perspective by using one of these four methods.

Taking action is widely mentioned as the top challenge in a customer listening initiative or voice-of-the-customer strategy. One method to making customer loyalty more actionable is to begin with a good framework.

The Loyalty Matrix is a very practical framework that segments customers into four groups based on their responses to a small battery of questions. The two axes in the matrix represent the two key aspects of loyalty – behavior (what a customer plans to do) and attitude (how they feel about working with your company). This forms the following four quadrants:

TRULY LOYAL – These customers have every intention of continuing to do business with you and they have a positive attitude towards your company. They like working with you and are more likely to increase their spending and recommend your company to others.

ACCESSIBLE – These customers have a good attitude about working with you but do not plan to continue their relationship. Since this is a rather odd combination, it’s not surprising that it is often a very small percentage of customers. It typically means something has changed in their business and they do not need your product or services any longer.

TRAPPED – These customers show every indication of continuing business with you, but they’re not very happy about it. They feel trapped in the relationship. This is common among organizations that are locked into a long-term contract, lack a suitable substitute, or find it too hard to switch. Eventually, trapped customers will find a better option.

HIGH RISK – As the name implies, these customers do not intend to return and don’t really like working with you anyway. Typically, they’re halfway out the door and not only will they no longer be a customer, but will also talk poorly about your company in the marketplace.

Many organizations use this framework and find it to be more versatile, more practical, and much more actionable than satisfaction scores, NPS, or other approaches. Here is a link to a short paper on the Loyalty Matrix if you would like to learn more. 

Patrick Gibbons
Principal/SVP
Walker

• Things about you that everybody knows – your hair color, your eyes, your height, weight, etc. (arena)

• Things that others know about you, but you do not see - annoying habits or shortcomings (blind spot).

• Things you know that others don’t – your habits, your secrets (facade).

• Things you don’t know about yourself and others don’t know – subconscious things that make you do the things you do (unknown).

This is the third part of our ongoing series to understand some of the dynamics that explain how companies in the Walker Index outperform the market by more than six-to-one. In the first two segments, we examined the roles that Relevance and Alignment and Team and Resources play in world-class customer listening and how the Walker Index companies perform on these dimensions. In this entry, we will focus our attention on the area that is most closely associated with customer listening – the Information Gathering process.

Let’s start with a strategic view of the Information Gathering process. Why is this step important? To quote our client, IHS CEO Jerre Stead, “Facts are our friends.” Given the right data, we can make very informed, strategic decisions. For this to be the case, however, there are some conditions that have to be met:

1)      We have to actually gather and use the information – This sounds horribly obvious, but I have seen examples in my career where companies invest considerable funds to gather data only to use a single number (or discount the results altogether).

Moreover, in companies that have an abundance of data, the company can suffer from “analysis paralysis” – that is, they have so much data it becomes debilitating – or, worse, they can be so silo-oriented that they do not know what they have across the entire enterprise, which means they either gather the same data again or make decisions on gut feel alone.

2)      We have to know who the feedback represents – For us to be able to generalize the results of the listening program, we first have to know what the results are representative of. From the perspective of a traditional customer listening program, this means that customer lists have to be complete (no cherry-picking), up-to-date (particularly if you are segmenting by product usage, geographies, etc.), and (if you are using a sampling approach) randomly selected.

This has relevance at the account level as well – as we focus more on taking action and linking results to financial behavior, our core unit of measure is often the company, not the contact within the company. Therefore, it is important that we have a diverse set of informants within a single account so account leaders can have a comprehensive view of the health of the entire account.

3)      It is not just about quantitative data – Statistical models are nice, but, to quote George Box, “all models are wrong, but some are useful.” This essentially means that any statistical model has limitations, so it is important to be able to evaluate the limitations (via R-squared values, for example) and provide additional context. This is where unstructured data come in.

“Unstructured data” is what we used to refer to as verbatim comments, open ends, write-in comments, etc. Unstructured data is important in a number of ways – it can provide context/flavor to the quantitative numbers, it can uncover issues/factors not accounted for in our model, and, increasingly, text analytics are allowing us to converting the unstructured data into concepts that can be incorporated in modeling.

4)      We need to be mindful of other listening posts – I touched on this above; before you start gathering new data, be sure you are fully leveraging the information you have already gathered – it may be good enough to answer your business question.

We counsel our clients to warehouse their customer listening data in a common database application; this makes all the data accessible from within a single platform, it allows us to control how often a customer is solicited for opinion (to minimize customer burnout and keep sound response rates), and it enables us to see how a single customer’s sentiment changes over time (this will be very important when we discuss the step of Validation).

This is also where social media fits in. I have seen three schools of thought emerge as it relates to social media:

a)      Social media will replace traditional research entirely;

b)      Social media has too many limitations to be a viable decision-making tool;

c)       Social media can be used to complement traditional listening tools/approaches;

I tend to agree with the more moderate third approach – clearly, social media has some technical issues (it likely does not represent the entire customer base, the signal-to-noise ratio is lower than we might like, etc.), but it does provide additional context and insight that can help provide clarity on any issues that may exist within the customer experience.

Among the Walker Index companies, there is strong performance on the topics of having structured listening programs with sound sampling/customer list management practices and incorporate unstructured data. Perhaps not surprisingly, the assimilation of unsolicited data (such as social media data) into the results has a low adoption rate at this time. This, however, is changing – as companies take better steps to integrate their data (through CRM installations, for example), the ability to leverage these data increases. It is an area that will continue to improve into the near future.

Many customer listening programs begin – and, unfortunately, end – with the Information Gathering process; therefore, this is probably the area where most programs have alignment. As we know, though, it is not sufficient to just gather the information. In part four of this series, we will focus on the importance and benefits of Communications in the world-class customer listening program.

Companies can enhance their customer retention strategies by combining the solicited feedback from their customer survey programs, complaint management systems, and sponsored communities with the unsolicited feedback that is available through social media.

Doing this can create the following outcomes:

1. Appropriate resource allocation. By relying solely on one type of information the complete picture might not be visible. However, if both solicited and social media discussions are viewed together it will accentuate areas of the business that impact both forms of feedback.

Source: Aon Corporation

In an effort to keep up with the latest news related to mergers and acquisitions, I am continually educating myself by pilfering through a never-ending inventory of content, online and elsewhere. Recently, I have read a number of very good articles and blogs on merger and acquisition strategies, processes, trends, etc., and many of these articles are very articulate in how they advise completing a successful merger or acquisition. 

Most recently, I read an article in Consulting Magazine that mentioned some staggering statistics related to the percentage of CEOs that were interviewed not knowing the clear strategic rationale or the long-term financial contribution that the deal would bring to the company.  The article was well done and went on to talk about the right questions to ask and shared many strong points related to today’s mergers and acquisitions climate.  However, nowhere in the article, or in many other articles on this topic, was there any mention of the need to clearly understand the customer base that is being acquired.  

I realize that many mergers and acquisitions are aligned to a pure financial play or intellectual property or other non customer-related attributes, but for those mergers and acquisitions that have greater strategic implications the goal still remains to impact the multiple or potential market share gain or successful entry into a new market.  So shouldn’t it be of primary importance to include a thorough examination of the customer base? Thorough, meaning a deep, fully representational view crossing segments, geographies, and the population as a whole? I have seen, first hand, the fall-out of completing an acquisition without proper due diligence on the customer base.  Needless to say, it didn’t end well.  This does not have to be the case.  Understanding your customers to create competitive advantages begins before and culminates with the completion of an exit with favorable valuation multiples.

Here is the link to the article from Consulting Magazine – it’s worth a read. 

Michael Good
Vice President, Strategic Account Manager

I have a new baby boy at home, and after a pretty sleepless night, this morning’s HBR “daily stat” about caffeine consumption caught my eye.  A group in the UK studied the effects of caffeine on collaboration, and found some key differences between men and women.  When it comes to collaboration on stressful tasks, they found that caffeine tends to impair men's performance but actually boosts women's ability to work under pressure. 

This is a light-hearted topic, but it does speak to the power of segmentation.  In our daily lives as Voice of the Customer advocates, we can find some interesting and useful applications of the data we work with when we break it apart and look for different behaviors, needs and tendencies across our customer segments.  Last year, my team worked with a client to develop a set of common customer ‘personas’ using segmentation analysis.  In VOC work for large B2B companies, we often only focus on 'A Priori' segments – those that we already know and use in daily business operation, such as region, channel, etc.  In this case, the objective was to take a more empirical approach and let the data tell us how customers tended to group together based on their profiles and their needs.  Many different demographic, firmographic, preference-based, and performance-based metrics were fed into the analysis. 

The outcome was the identification of 4 unique 'customer personas' that were common in this customer base.  We were able to understand the variables that characterized each ‘persona’, the relative size of each within the population, differences in their loyalty, differences in their needs and interests related to training, and how best to communicate with each customer group. 

Great outcomes for the client and their customer strategies... and a little good news about my daily caffeine habit, too.

Krista Roseberry
Vice President, Consulting Services
Walker

This is the sixth and final part of a multi-part series on the trends we are observing among the 1to1 Customer Champions with respect to their efforts to build a customer-focused culture.

Over the course of this blog series, I have examined the themes that we can observe by examining the 2010 1to1 Customer Champions. In the course of the series, we discussed the importance of:

1)      Executive sponsorship/support

2)      Linkage to business outcomes

3)      Taking action on learnings from customer feedback

4)      Engaging employees across the entire enterprise

5)      Using the new (or improving tools) at our disposal to fully leverage customer feedback

Why is being customer-focused so important? At the risk of repeating themes that you will see across all the Walker blogs, we know from our own research and research from academia that:

• Customer-focused companies tend to have a greater share of loyal customers; these customers tend to spend more, purchase more widely across your product/service portfolio, and are more resistant to competitive alternatives;
• Customer-focused companies use the feedback to determine a plan of attack that yields optimal results – that is, it minimizes the cost of implementation while maximizing the financial impact it will have on the organization;

The result includes three outcomes that create a virtuous cycle that benefits both customers and the company in total:

1)      These firms tend to enjoy greater financial success than their less-customer-focused peers.

2)      As a result of the greater financial success, these firms’ executives are more likely to be “true believers,” which means they will not only continue to invest in customer-centric strategies, but also “walk the talk.”

3)      Customers benefit from the level of focus placed on them by the company, and they reward this with greater spend levels and/or lower likelihood of defection.

How can companies ensure that they are perceived to be Customer-Focused companies? Here are some suggestions based on our work with clients:

a)      Develop a rigorous feedback gathering method – Use proven sampling techniques to ensure that feedback is being gathered in a fashion representative of your customer population.

b)      Have a plan for follow-up – Commit to doing something with the information; if you cannot commit, then do not waste your customers’ time.

c)       Look for immediate service recovery opportunities – Scour the real-time results for clues to where services or products are not living up to customer expectations and create a closed-loop process (including set time-bound service level agreements) for your front-line associates to follow-up.

d)      Use driver analysis to prioritize effectively – Using a structured feedback approach offers the opportunity to create models that provide insight on where to focus – skipping this step (or focusing solely on raw performance scores) may result in suboptimal improvement efforts.

e)      Integrate internal metrics into your analytic plan – Linking behavioral metrics (such as financial data or other performance metrics) will not only bring clarity to what you need to do (particularly important for associates who are not customer-facing), but also how to track your success.

f)       Utilize customer feedback in account planning – As sales teams are preparing forecasts, be sure to integrate customer feedback as another data source to consider when looking at which products and services to promote with a specific customer. Walker’s Value Mapping process can be an effective means of providing broad strategies for segmenting accounts that can have great utility in the account-planning process.

g)      Communicate what you are doing – The trap that some companies fall into is that they are Customer-Focused Companies that are perceived by their customers as being Lip-Service Companies. The solution? It sounds too simple, but it is true – do not forget to communicate what you learned in the process (and what you are doing about it). This can take a variety of approaches, ranging from a broad-based communication to all customers from the CEO to more tailored messaging to a specific customer account.

It is not easy to become a customer-focused company – if it were, everyone would do it, which would diminish (if not eliminate) its value as a competitive differentiator. If you keep in mind the five themes we see among the 1to1 Customer Champions and leverage the recommendations put forward in this entry, your firm will greatly increase its odds of being a successful, customer-focused, and financially rewarded company.

I hope this series has been of value to you – I would love to hear your own success stories.

This is the fifth part of a multi-part series on the trends we are observing among the 1to1 Customer Champions with respect to their efforts to build a customer-focused culture.

Part four of this series focused on how to leverage our employees in the action-taking process. Taking action is critical because it provides an ROI to your customers for the time investment they made to share their feelings and perceptions with you. It is also important, as taking action is the only way that we can trace the impact of our actions from a financial perspective.

The challenge that most organizations have – particularly in this challenging economic environment – is that resources are more scarce than usual. This means that firms are more likely to be short-staffed, so adding work to an already full list is a recipe to have our efforts to take action fall flat.

The key? We have to make the insights from customers relevant, easy-to-understand, and linked to the day-to-day work of all associates. How can customer loyalty practitioners manage this? This brings us to the next trend we are seeing among the 1to1 Customer Champions.

Trend #5: New (or Enhanced) Tools are Available

The 1to1 Customer Champions remind us of the tools that are available for us to leverage in our customer-focus efforts; some of these are new, while others represent the latest version/evolution of tried-and-true tools:

a)      CRM integration – The investments that firms have made over the last decade or so in the area of CRM are starting to show payoff – from a customer knowledge perspective, being able to link customer demographics/profiling information and actual behavior data to survey metrics creates the opportunity for more robust customer intelligence.

The impact of CRM integration is twofold – first, it provides a data infrastructure into which program findings can be warehoused; second, it can provide a myriad of other data that can be used in segmentation exercises. This provides a more credible framework within which to articulate ROI (for example, by using actual customer purchase behavior in lieu of a survey-based question around intended behavior).

b)      More powerful predictive modeling – The ability to integrate other data streams into customer survey data would be for naught without the ability to build sophisticated models. The computing technology available today means that analytic approaches that were either highly theoretical or too mathematically challenging even ten years ago are now accessible.

c)       Social media and text analytics – The newest tools that are emerging include data from social media sources coupled with the rapidly-advancing discipline of text analytics. The ability to harness these non-structured data sources is beginning to add incremental value to our customer analysis efforts; there is clearly more to come on this front.

These tools represent, in my opinion, a “data enhancer” rather than a wholesale replacement to current data streams – that is, they provide additional insight that can bring further clarity to the more traditional quantitative analysis.

What are the common threads of these tools? First, they leverage the latest technology; many of these tools and techniques were simply pipedreams a few years ago. Second, they recognize that data from disparate sources can and should be leveraged in a variety of ways. Finally, they offer to streamline processes that historically have been challenging (I can recall, for example, a time in my career when it was not uncommon for a customer list to be written on a sheet of paper vs. having a consolidated file of data). Streamlining these processes creates capacity for practitioners - for example, by eliminating time spent data-entering customer records and managing multiple customer data sources, we can work on more strategic initiatives - such as making customer information relevant, easy to understand and integrated into the everyday workflow process of all employees.

In my final blog of this series, I will discuss what outcomes that the 1to1 Champions will enjoy as a result of their efforts and will provide some recommendations on what steps you can take to ensure that your firm is seen as a customer-focused organization.

Remembering back to my last post, the amount of data kept on a customer is increasing within organizations and tying this data to customer survey data could help us gain better insights into the customer experience. 

Potentially fulfilling every researcher's dream, using this data could open the door to massive amounts of data to analyze while answering business questions.   However, with that we can’t lose sight of the quality of the data. In other words, more bad data isn’t necessarily better. So keeping that in mind, before we use this data to help aid us in understanding our customers, we need to evaluate the data itself.

The first thing to do here is look to see what data you have available. This will help you gain a better understanding of where/how this data could enhance your understanding of the customer experience. For example, if only product information is kept for customers, then it would be logical to look at this data alongside a customer’s product ratings. This could help explain trends you are seeing in the data, as well as gain a profile of the type of customers that use particular products. A few examples of things to consider are…

·         Type of data?

o   Is it sales history? Customer demographics? Account Information (ex. size, tenure, etc)?

o   Do we have information for individual contacts within an account or simply account level information?

- How easily can this be linked to customer survey data? Are there common fields, such as customer ID, which can be used to link the data?

o   Is data tied to an individual/account or is it tied to departments within your company (ex. call center, agent)?

o    If there are metrics in the data (ex. Issue Resolution Days), how is it calculated by your company?

·         Location of data?

o   Is all this data stored in a central database? Spread out among different parts of the organization?

o   Is this data available for you to access? Format you can use?

The second thing to assess is the quality of the data to ensure that it is giving us accurate information about our customers. We don’t want to use customer data that has never been updated or doesn’t reflect the current customer’s situation. Instead we want this data to accurately reflect our customer as they are today so this information can be paired with their current perceptions of your company. A few examples of things to consider are…

·         Who owns this data?

o   How is it populated?

o   How often is it updated? 

·         Is there a lot of missing data?

o   Do we have data just for select segments of customers or for all customers?

This assessment will give us a better understanding of what the data is telling you, where it may be best used in the analysis, how best to link the data, how easy it will be to obtain and then any cautions/limitations that could be kept in mind with the use of this data. More to come next week on linking and benefits of using the data…

Becca Lewis

Director, Marketing Sciences

In a recent article for BusinessWeek, Mark Johnson discusses mergers and acquisitions and how to increase the probability of success. Johnson points out the familiar statistic that 80% of acquisitions fail to create value for the acquiring company; the reason, Johnson hypothesizes, is that firms fail to realize what they are buying. In Johnson’s words:

“When one company buys another, what it's really purchasing is the target company's business model—its customer value proposition, its profit formula, its resources, and its processes.”[i]

Johnson outlines that two types of acquisitions can occur:

1)      Acquisition of resources – The acquiring firm is essentially purchasing technology, capabilities, etc., that are then integrated into the acquiring firm’s existing business model. Cisco Systems (a Walker client) is noted as following this path.
 

2)      Acquisition of a business model – The acquiring firm is purchasing the business model of the target; in this case, the acquisition is generally kept separate from the acquiring firm. Resources (capital, for example) of the acquirer are leveraged to help jettison the growth of the purchased firm. Best Buy’s purchase of Geek Squad is given as an example.

This premise is interesting and makes sense; we would offer some additional observations to add to the analysis:

1)      What about customers? Critical to understanding the aspects of the business model as addressed by Johnson (i.e., customer value proposition, profit formula, resources, processes) is how customers fit into that model. For example:

a.      How loyal are the customers to the organization? We have found customer loyalty (that is, the likelihood for the customer to continue to purchase coupled with the level of commitment of the customer toward the firm) to be a strong predictor of future business success. Understanding the extent to which customers are loyal to the acquisition target is key to understanding the long-term viability of the firm’s profit model (and, therefore, the valuation of the firm at large).
 

b.      What revenue flight risks exist within the organization? Suppose you are interested in acquiring a firm that has an excellent product; if the firm has had some service issues of late that has caused some level of degradation of customer loyalty, should you proceed with the purchase? There is no one-size-fits-all answer. For example - if the product is unique (that is, few competitive alternatives exist), customers are likely trapped in the short run, which means that the purchasing firm will likely have to invest aggressively from the onset; moreover, this approach carries risk – if a new entrant comes into the market, there could be great revenue flight. At a minimum, this could have a significant impact on the price of the acquisition.

If, on the other hand, plenty of competitive alternatives exist, it may make more sense to not complete the acquisition. Regardless of the outcome, the acquiring firm cannot make an informed decision without knowing the level of loyalty among the customer base and how the firm’s revenue aligns with the loyalty profiles.

c.       How distinct are the customers relative to the acquiring firm’s customer base? Is the product or service provided by the acquired firm designed to offer new offerings to your existing customers, bring distinct (and new) customer segments to the firm, or some combination of the two? Consider the Walker Growth Matrix:

Simply put, this matrix decomposes four growth strategies into customer type and product/service offering components. This matrix can be helpful in identifying what type of growth we can expect the acquired company to provide.

Understanding this can help in the valuation of the acquisition, as it tells us how much wholly new revenue vs. incremental revenue to expect. In order to reliably estimate this, you need to understand your current customers as well as what needs (met and unmet) exist among the target firm’s customer base.

 

2)      How complementary are the cultures? Johnson does make that case that understanding the culture is key to understanding the extent to which the two businesses can be effectively integrated – for example, an entrepreneurial culture will likely be suffocated if the acquiring firm is more structured/disciplined (the difference between being “disciplined” and “staid” is often in the eyes of the beholder).

 

Understanding the culture, combined with an understanding of the loyalty of the employee base of the acquired firm, will help to determine whether to fully integrate the acquired company or to keep it as a stand-alone entity. In addition, understanding the employee loyalty will also provide insight as to the likelihood that the firm will be able to continue to generate success – if the firm has been successful but the employee loyalty is low, then there is a heightened likelihood that the best days may be behind it due to the probability of post-acquisition employee defections. While that isn’t necessarily a reason to not consummate the deal, it again would likely have some influence on the tangible value of the firm. Do you see a theme emerging here?

 

Tying all this together, the advice we would offer on the topic of mergers and acquisitions to customer-focused firms is fairly straightforward:

 

1)      Don’t lose your sense of self – If you are a customer-focused firm, seek to acquire like-minded companies. While it is possible to successfully acquire a firm that is not customer-focused, the effort to achieve successful integration will be immense, and failure could have adverse impact on how customer-focused your current customers perceive your organization.
 

2)      Remember what you are buying – If the customer base of the target is a key aspect of the acquisition (and it absolutely is unless you are acquiring a specific technology that has not yet been introduced to the market), then take the time and make the necessary investment to optimally understand how loyal those customers are.
 

3)      To integrate or not? – Examining the culture of the acquired firm (including the loyalty of its employees) can provide effective cues to whether or not an absorption acquisition model should be preferred over a stand-alone entity model.
 

4)      Loop back after the acquisition – Regardless of which integration model you pursue, don’t forget to loop back after a reasonable period of time to see how customers and employees are feeling about the success of the acquisition. Use this information to quickly address any problem areas and to reinforce the importance that both customers and employees play in the long-term success of the firm.

Considering these aspects, in conjunction with the excellent guidance provided by Mark Johnson, will help increase your overall probability of a successful acquisition.

Mark A. Ratekin
Senior Vice President, Consulting Services & Resource Management

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[i] Johnson, M. W. (2010, May 26). How to Succeed at M&A. Retrieved June 7, 2010, from Bloomberg Businessweek: http://www.businessweek.com/innovate/content/may2010/id20100525_156769.htm?link_position=link16

 

1. Senior management factors
   1. Committed to and take action on being customer-focused
   2. Willingness to take risks and tolerance of some failure
   3. Positive attitude toward change
   4. Marketing leaders are trusted by other senior management
2. Interdepartmental dynamics
   1. Interdepartmental cooperation
   2. Formal and informal connections between departments
   3. Openness to ideas from other departments
3. Organizational systems
   1. A balanced approach to organization structure (this is a complicated topic but generally you want some hierarchical departmentalization, but not too much of it).
   2. Market-based incentive structures with a focus on long-term organizational health (another complex topic I've blogged about a few times)
   3. Low incidence of "office politics"

1. Re-centering on customer centricity
2. A broader orientation for being customer-focused
3. Characteristics of a customer-focused company
4. The focus of customer-focused companies
5. The moderation of customer focus

1. Intensifying pressures to improve marketing productivity: E.g., the continual drive toward cost-effective "one-to-one" marketing.
2. Increasing market diversity: You can't treat all customers or potential customers the same. Customer segments are becoming more numerous and more specialized in what they demand.
3. Intensifying competition: The barriers of entry are quite low in many markets and the ability to create vastly differentiated products is becoming harder.
4. Well-informed, demanding customers: Just look at how you shop for consumer electronics now versus 10 years ago.
5. Advances in technology: I believe this trend is actually increasing the importance of each of the previous trends. 

1. Change the culture. Create a culture where and all employees are "customer advocates" and believe true success comes from knowing the customer and gaining customers' loyalty. Anyone who has tried to change a culture knows how difficult this can be. So here are a few practical tips:
   
   1. Remember that cultural change follows from behavioral change
   2. Get senior management commitment to do things differently, not just a verbal commitment to the concept. Seeing senior management spending time with customers is a powerful signal to the company.
   3. Be persistent. The change won't happen over night. Don't let the initiative fall by the wayside as another corporate fad.
   4. Communicate intensely to overcome initial skepticism.
2. Create a horizontal organizational structure organized around customers instead of products. An initial step involves restructuring core functions like marketing, strategy, and human resources but should quickly move into key or strategic account management functions to have a more noticeable impact on customers.
3. Create a centralized repository for customer intelligence.
4. Focus processes on sustaining customer relationships instead of just efficient execution of transactions. This was a big learning for many companies when they begin moving customer support centers off-shore.
5. Include at least two or three key customer metrics in your corporate KPIs. I believe each of these metrics should either be stated in financial terms (like customer lifetime value) or have proven financial implications. These metrics are harder to get but are necessary to a customer-focused company.
6. Focus on continuous learning and improvement. Having a forum for sharing customer insights and success stories will continuously fuel your company's efforts to become more customer focused.

I think it is interesting that creating a Customer Experience Competency Center can help an organization accomplish nearly all of these strategies, and it definitely signals senior leaders' commitment to the transformation.

I hope this review has helped center some of you on this topic. There have been interesting new thoughts on these topics in recent years - like balanced centricity - and I hope to bring some of them to this forum in the near future.

Troy Powell, Ph.D.
VP, Statistical Solutions

Reference: Shah, Rust, Parasuraman, Staelin, and Day (2006). "The Path to Customer Centricity," Journal of Service Research. 9(2):113-124.
 
List of all posts in this series:

1. Re-centering on customer centricity
2. A broader orientation for being customer-focused
3. Characteristics of a customer-focused company
4. The focus of customer-focused companies
5. The moderation of customer focus

As Christmas approaches many people begin to reminisce on what has happened over the past year as well as past holiday seasons. I am no different and recently have gotten into multiple conversations about what Christmas Day was like growing up and how that is different for the routines for this year. As kids, one of the most important things about Christmas was the gifts – we just couldn’t wait to see what new toy was under the tree. But as you grow up, the focus shifts away from the toys – even though there is still an element of excitement for what new gadget might be under the tree – and onto other things, such as time with family, a few days off of work, or just a little relaxation.

After dinner with a friend where we talked about our Christmas routines as kids and then for next Friday, I went home and was doing some analysis on customer loyalty. So that got me thinking about how in any relationship that lasts over time, there are going to be shifts in what is most important, even business relationships. So what does that mean for companies that collect feedback from customers?

A lot of companies solicit feedback in order to understand how to make their customers more loyal. After they have looked at the results they come up with a way to implement the drivers of loyalty in the customer experience, but they don’t factor in the fact that there are shifts in what is important to a customer. In fact, a lot of companies treat customers the same regardless of how long they have been working with the company.

Not surprisingly, research supports the idea that the drivers of customer loyalty differ when you segment the data by customer tenure. In the beginning of a relationship, customers tend to focus on satisfaction and price; however, as time goes on, trust as well as the relationship aspects (such as account teams, etc) become more important and have a greater impact on customer loyalty. This implies that depending on how new a customer is to your organization there may be different things that the account managers/contacts should be focusing on.

While this does not mean that you should never look at customer data in total, it does suggest that organizations should have a way to identify customer tenure and should use some time analyzing if there are differences between various customer tenures. The results may shed light on ways to improve relationships for different tenure classifications or help explain why changes impact customers differently.

Becca Lewis

Statistical Analyst

In my last entry, I discussed ways that we conduct analysis that links customer loyalty to firm financial performance at a customer/account level. In this entry, I will discuss the linkage between customer loyalty and market performance.

A growing base of research has quantified the linkage between stock price, stock returns and customer loyalty (see, for example, Aksoy, Cooil, Groening, Keiningham & Yalcin (2008) and Fornell, Johnson, Mithas, & Krishnan (2006)). Much of the literature has focused on the connection between customer loyalty and stock price – that is, is there a link between customer sentiment (as measured by traditional customer satisfaction/loyalty metrics) and how much value a share of the company’s stock carries? As it turns out, there is a connection, and it follows intuitive reasoning – the more satisfied a company’s customer base, the more favorable the stock price.

But stock price is only one factor to consider – the other factor to consider is volatility. Volatility refers to the ups and downs a stock price experiences, and it is a measure of risk – the more risk in a stock, the greater the volatility. When we refer to volatility in a stock, we are generally referring to the composite of two broad types of risk – first, there is systematic risk – this is the risk that is associated with the market at large, best characterized by the John F. Kennedy quote that “a rising tide lifts all boats.” The other type of risk is idiosyncratic risk – this is the risk associated with actions of the firm. For example, management decisions regarding products, pricing, customer segments, etc. have an impact on idiosyncratic risk.[1]

To date, the literature on the connection between stock risk and customer loyalty has been pretty sparse. Moreover, the available literature has focused exclusively on the topic of systematic risk – in other words, they have focused on how stock prices move relative to the total market, not the company-based idiosyncratic risk.

In the November, 2009 Journal of Marketing, Kapil Tuli and Sundar Bharadwaj add significantly to the literature in their paper “Customer Satisfaction and Stock Returns Risk” by focusing on both sources of risk – systematic as well as idiosyncratic. They find that customer satisfaction scores “insulate a firm’s stock returns from market movements (overall and downside systematic risk) and lower the volatility of its stock returns (overall and downside idiosyncratic risk).”[2] That is, the greater the satisfaction/loyalty of a customer base, the less volatility that is exhibited by the stock.

So, the bottom line is this - companies with strong customer loyalty enjoy not only better stock returns, but they are also less susceptible to volatility in their stock price. We have independently corroborated these findings with our Walker Index - a composite stock index  of Walker clients that has outperformed the broader market indices by a factor of 5 to 6 times since its inception. The Walker Index also has less volatility than the broader market indices, as measured by beta as well as upside and downside capture ratios.

In these first two entries, we have discussed how loyalty metrics and financial performance are linked from an internal/micro perspective (i.e., at the customer/account level) as well as at an external/macro perspective (i.e., at the market performance level). What are the implications of these findings? I’ll address that in the third (and final) entry of this series.

In the meantime, what do you think? How can we leverage this information to more effectively run our businesses?

Mark Ratekin
Sr. Vice President, Consulting Services & Resource Management