Why it makes sense, key research questions and the implications on management
Dr. Nicos Rossides, Group CEO
The importance of building and maintaining healthy customer relationships cannot be overstated. Decades of customer satisfaction research and its more sophisticated successors (customer relationship management, customer commitment or loyalty), have consistently differed on the measurement and management of customer loyalty but not the central rationale: that it pays to understand the needs and wants of customers. Whoever disregards this important dictum does so at their peril. Peter Drucker put it most eloquently when he said: “There is only one valid definition of business purpose: to create a customer. He alone gives employment.”
Loyal customers, (usually defined as those who have a positive behavioural predisposition towards an organisation expressed, inter alia, by recommending a company to friends and family or buying more products or services, are the strongest possible foundation for a business.
Of course, not all customers are created equal: a company should know its customers sufficiently well to distinguish between those who are profitable and those who are not (a far from easy task). However, the general rule is that it is more profitable to keep customers than it is to attract new ones. Indeed, research has demonstrated that customers who are loyal are willing to pay a premium for certain products/services and are less prepared to shop around than those who are disloyal.
The Quest for Customer Centricity
Customer centricity refers to the orientation of a company to the needs and behaviours of its customers, rather than internal objectives such as short-term profit. According to Ranjay Gulati and James B. Oldroyd, the two most important elements in establishing a customer-centric organisation are an enterprise database and a workforce that can both willingly share information and make a willing commitment to customers, rather than to products or organisational fiefdoms. It is a long quest to become - and maintain - a customer-centric organisation, but the result is greater business success.
In contrast to product-centric, a customer-centric firm must be organised around the customer. This means going further than "customer focused" initiatives by redesigning companies accordingly (Jay Galbraith).
From a research perspective, the level of sophistication of the conceptual frameworks deployed has increased considerably from the days of simple satisfaction surveys. Realising that satisfaction as a metric was not enough, the quest shifted to measuring more complex constructs such as commitment, loyalty or engagement that were shown to be better predictors of actual behaviour. Based on such research, organisations now:
- Measure performance levels at each touchpoint;
- Identify the drivers of behaviour by segment;
- Redesign customer interactions and supporting processes;
- Build customer focus into business and strategic objectives;
- Train, motivate, and organise their employees to enhance the customer experience.
Some research-based consultancy work has moved into measuring not only the drivers of loyalty but the readiness of an organisation to deploy such information. To truly become customer centric, organisations have realised that they need to put the customer at the centre of their business strategy and align their internal structures accordingly.
However, the majority of organisations, because of the way that they are structured into silos, still tend to be internally rather than externally focused, concerned with operational efficiencies such as product delivery and cost optimisation. In order to properly focus on the customer, it is necessary to break down these silos and look outwards as opposed to within. One corollary of this is that reward systems tend to be narrowly focused on individual touchpoints as opposed to the total customer experience. For example, the credit card division of a bank will be remunerated only on the performance of credit cards, as opposed to any broader measure of customer satisfaction or engagement.
To overcome this silo mentality and to focus on the total customer experience, there needs to be a realignment of people, resources, technology and product/services, at all levels in the organisation, and there must be ownership of the issue at the very top levels of a company.
Understanding the Customer
However, the quest to understand the customer is not as simple as it sounds. Increasing attention has been recently paid to underlying unconscious motives that influence customer behaviour. Rational factors do indeed play an important role in customer decision making, but they often come second to emotional factors. Those companies that manage to forge deep emotional bonds with customer withstand competitive pressures much more successfully than those which do not. You only have to study the pride that owners have in owning a Harley Davidson, a Lamborghini or even an iPod. Customer loyalty has been developed through the strategic alignment of resources that evoke an emotional response from customers.
But the strategic alignment of a company’s resources is about more than just the product. Products can be commoditised. So how does a company further differentiate itself to its customers? How can touchpoints and technologies be used to engage customers?
One answer is to create an “on-the-ground” experience that is both efficient and emotional. According to Pine and Gilmore, there has been a steady progression of economic value from commodities to goods and services and, more recently, experiences. The ability to differentiate a company’s offerings is enhanced as it moves higher up the value ladder, improving the cost-value ratio. In the case of Starbucks or Apple retail stores, the real value comes from the total experience offered at the outlets which allows them to command a premium in their pricing. Those businesses that remain fixated on the world of goods and services will find themselves increasingly irrelevant.
To avoid this fate, Pine and Gilmore recommend learning the craft of staging rich, compelling experiences. “Work” should be viewed as "theatre" and every business should be viewed as a "stage”, functioning more or less as a theatre company: formulating a script which has both an exciting story line and interesting characters; assigning roles to those who have the appropriate talents; and then conducting rigorous rehearsals. This entertainment orientation, of course, can be taken too far, particularly when quoting Las Vegas and Disney Land as examples of successful “experience design” ( which, of course, they are for a certain type of business). Suggesting that financial institutions (from banks to insurers) can re-engineer their offerings and work processes to emulate that may trivialise the basic point: that there are opportunities in every business to offer “experiences” that are consistent, genuine and underscore superior delivery of their offerings, albeit on a different stage, and using different props.
Differentiation for its own sake though can lead nowhere. Planet Hollywood, the restaurant chain, is going bankrupt (for the second time) - just one example of a company that offered an experience, yet failed to turn it into loyal, repeat customers. The quest for superior customer experience must be grounded in solid basics, not gimmicky attempts at differentiation that are not combined with real customer focus.
Barwise and Meehan (Simply Better: Winning and Keeping Customers by Delivering what Matters Most) advocate a “back to basics” approach that replaces the relentless quest for differentiation with a single minded focus on basic customer needs. They argue that while concepts such as on-time delivery, quality, and good customer service might seem blindingly obvious, most companies have been ignoring these basics for too long, forgetting that customers care much less about “unique” and “different” than they do about fundamental needs. Customers rarely choose a product or service because it offers something unique. Instead, they usually choose the brand which they think will most reliably deliver the basics – the generic category benefits which all the reputable brands provide but which some provide better or more reliably than others.
Using operational excellence as a springboard, organisations need to craft strong emotional connections through compelling experience that create truly loyal customers.
The alignment of a company's resources to effectively manage customer relationships in a manner that is profitable and mutually rewarding is the central tenet of customer centricity. Companies then need to use this knowledge to drive messaging, creative and offer development — and meaningfully segment their customer base according to distinct differences in needs, values and perceptions. Lastly, companies have recognised the importance of making customer engagement a board level issue – one that is championed at the highest level of an organisation.
In short, customer centricity requires that:
- A customer strategy is well articulated both internally and externally and is championed by senior management;
- There is alignment of resources to effectively deliver the customer promise;
- Employees buy into the customer strategy and are themselves fully engaged;
- It is a board-level concern, championed by the CEO.
Peter Drucker, “The Daily Drucker: 366 Days of Insight and Motivation for Getting the Right Things Done”, Collins Business, October 2004.
Ranjay Gulati and James B. Oldroyd, “The Quest for Customer Focus”, Harvard Business Review, April 2005
Jay R. Galbraith, “Designing the Customer-Centric Organisation: A Guide to Strategy, Structure and Processes”, Wiley Default, 2005
B. Joseph Pine III and James H. Gilmore, “The Experience Economy”, Harvard Business School Press, 1999
Patrick Barwise and Seán Meehan, “Simply Better: Winning and Keeping Customers by Delivering what Matters Most”, Harvard Business School Press, August 2004