Shaun Smith: Customer experience and the numbers game

21st Jun 2010

If retention and referral behaviour is more important than customer satisfaction measures, how should you reconsider your company's approach to customer experience management?

Peter Simpson, in his articleAnalytics and customer experience: Are you measuring the right thing?’ argued that it is more important to measure the perceptions of customers against their expectations and, importantly, their retention and likely referral behaviour, than it is against internal performance indicators. In this article,  I will continue this theme and discuss some state-of-the-art methods for doing so.

Satisfaction is no longer enough
Traditional measures of customer satisfaction have little to do with customer experience, or financial performance, for that matter. According to research 80% of customers who switch suppliers express satisfaction with their previous supplier. Revenue growth has everything to do with 'advocacy', the extent to which customers or clients prefer a supplier and then refer friends and colleagues to it. For example, First Direct, the UK retail bank, has the highest level of customer satisfaction in the market and is recommended by its customers every five seconds, gaining over one third of all new business from referral. Advocacy translates into increased share of market and higher levels of retention, all of which mean good news for your bottom-line.  
What is customer advocacy?
The dictionary definition of 'advocate' is 'Plead for, defend, champion, recommend, support'. It would be nice to think that our customers would be so satisfied with the products and services we provide that they would be willing to actively recommend our organisation in this way. Some do.
When Steve Jobs, the CEO of Apple introduced the iPad at the annual Apple convention, the reaction of the audience was more akin to a religious meeting than a product launch. There is no doubt that many Apple customers are passionate champions for the brand in a way few other technology users are. In fact, Satmetrix research in the computer hardware industry found that Apple advocates generate revenues of $4,500 each compared with their competitors who earn just $2,600 from their best customers. The difference is due to the emotional connection with the brand: Apple customers are willing to pay more, repurchase more frequently and refer other customers.
So how do you create a customer experience that is so distinctive that customers become your best sales people?
Jill Griffin, in her book ‘Customer Loyalty: How To Earn It, How To Keep It’ suggests a useful ladder of customer relationships which brings clarity to this issue.
  • Stage 1: suspect
    Suspects include everyone who might possibly buy your product or service. We "suspect" they might buy; we do not know enough yet to be sure.
  • Stage 2: prospect
    A prospect is someone who has a need for your product or service and has the ability to buy. Although a prospect has not yet purchased from you, he or she may have heard about you, read about you, or had someone recommend you to him or her.
  • Stage 3: disqualified prospect
    These are prospects about whom you have learned enough to know that they are not the best fit for your products and services and so you may choose not to target them. Choosing not to serve certain customers is an indicator that you have really thought about your brand and customer experience.
  • Stage 4: first time customer
    First-time customers are those who have purchased from you one time. They are customers of yours but are almost certainly still customers of your competitor as well.
  • Stage 5: repeat customer
    They have purchased from you two or more times. They may have bought the same product twice or bought two different products or services on two or more occasions. They will buy from you but will also continue to give their business to competitors. You have share of market; you do not have share of mind of these customers.
  • Stage 6: loyal customer or client
    A loyal customer or client buys from you rather than anyone else. You have a strong, ongoing relationship that makes him or her resistant to the pull of the competition. For professional services firms this is where you begin to make the transition from being a supplier to trusted advisor. You are 'top of mind' and the first firm that a client calls when they need help.
  • Stage 7: advocate
    Like a client, an advocate buys everything you have to sell and purchases regularly. In addition, an advocate encourages others to buy from you. An advocate talks about you, does your marketing for you and brings customers to you. Brands like Virgin, Apple and Zappos all have advocates who are happy to be unpaid sales people for these companies. 
How is loyalty different to satisfaction?
In a survey that we conducted in the telecommunications industry in the UK, we found that over 90% of customers who awarded top scores for satisfaction indicated their intention to be loyal to that organisation. That figure dropped to just 25% for customers who were still satisfied but rated one box lower. We found very similar results when conducting our Customer Experience Management +™ surveys with retailers and hotels.
The reason is that over the past 10 years, organisations have become increasingly aware of the need for customer focus and customer satisfaction. So much so, that it is now the norm and the entry price for any organisation wishing to be successful. As a result, differentiation on the basis of basic customer service has declined, price sensitivity has increased and it now takes a unique customer experience which goes beyond satisfaction and creates real value for the customer in order to regain the competitive edge.
So loyalty is not one and the same as satisfaction, neither is it the same thing as repeat purchase. Until First Direct came along and made it attractive and easy to switch banks, few customers would entertain the inconvenience of closing their account and applying for one elsewhere, yet the retail financial segment has generally low levels of satisfaction among consumers. What kept customers coming back was not loyalty, but 'stickiness' due to the inconvenience of changing accounts. Not any longer. First Direct tells its prospective customers "We can now transfer your standing orders and direct-debits for you, so transferring bank accounts has never been easier". 
Another industry that relied upon 'locking -in' customers was telecommunications. Most mobile phone providers relied more on their contracts than customer satisfaction to avoid churn. O2, the market leader in the UK, offers a SIM only product which means that there is no restriction on the handset you use and customers are not subject to a restrictive contract. In order to keep customers coming back O2 has put enormous emphasis on the customer experience and calls its customers its 'fans'. It even has a 'fandom' measure to track their loyalty.
We think that loyalty is a misused term. Most organisations think that it is about customers being loyal to them. We believe it should be the other way round. The firm should be loyal to their best customers by offering value that is not generally available to the mass market. True loyalty happens when there is an emotional engagement with the organisation or product. This engagement comes from experiencing the brand or organisation in unique way that creates true value for the customer.
For example, O2 rewards its fans by giving them privileged access to major music acts and concerts at the O2 Arena, now the most successful music venue in the world, and invitations to enjoy a beer with the players in its customer-only area at Twickenham Rugby ground.
Beyond loyalty
For those organisations wishing to increase margins by driving down sales costs whilst driving up revenues, advocacy is the answer. This requires you to know who your most profitable customers are and to consistently deliver a customer experience so as to create a high degree of trust in your brand. Only then will these loyal and highly profitable customers be prepared to recommend your organisation to others.
In his classic HBR article ‘The one number you need to grow’ Frederick Reichheld argued that the only measure of performance that really matters is the ‘Net-Promoter Index’. This is the result of subtracting those customers who are dissatisfied from those who are highly satisfied. Our term for this is the ‘Advocacy Index’ and our CEM+ Survey™ measures this to determine the extent to which your firm will grow organically through attracting and retaining profitable customers through positive word-of-mouth.
Focusing on your most profitable customers
We did research in the mobile phone space and found that the top 5% of customers represented a significant proportion of the profit and were worth several times more than the average customer to the mobile phone providers. Yet there was very little difference in how these customers were treated. In fact in most instances, new customers got better deals than the long standing customers. It was this insight that led O2 to focus on rewarding these valuable customers. O2 established a separate call centre and more highly trained employees for these high value customers. Their loyalty rose significantly as did the profits.
This is still true in financial services, where new customers are routinely offered more attention, deeper discounts and better deals than long established customers. In loyalty terms this is madness. In his book The Loyalty Effect, Frederick Reichheld says that loyal customers are more profitable because the costs of sales are amortised over a longer period, they increase their purchases and percentage of spend with you, cost less to administer, refer others and are willing to pay a premium.
By focusing on delighting highly profitable customers, companies keep them loyal and eventually turn them into advocates who attract others who value the same things and thus in turn become advocates themselves. 
Where do you start?
We have made the case for focusing on and keeping your most profitable customers. The question is where do you begin? The answer is with your own people. Some years ago researchers at Harvard Business School found a statistical relationship between the way in which employees are treated and the way that they treat clients ("Putting The Service - Profit Chain To Work" James L. Heskett, Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr Leonard A. Schlesinger. Harvard Business Review. March-April 1994).
Our own research has found that this correlation is around 85%. There is no doubt that the employee experience is a major driver of the customer experience and, ultimately, business results.
A Gallup survey of 6,000 consumers found that the fifth 'P' of the marketing mix, people, is by far the most important determinant of customer loyalty to brands. In motor retailing, Gallup found that customers who feel their dealer representatives "stand out from all others" were 10-15 times more likely to choose that same make of vehicle for their next purchase. This same ratio held true for the airline industry, while in the banking sector the influence of people is even greater with customers saying they were 10-20 times more likely to repurchase from organisations with outstanding employees. Even in telecommunications, employees are three to four times as important in driving loyalty as other factors Dr. Bill McEwen of Gallup summed this up: "It’s the people, stupid."
Show me the money
Despite all of the research and focus on customer experience the fact remains that many executives remain unconvinced of the potential for their own organisations. We consult with many leading brands in this area and one of the first things we have to do is to convince them that their investment will be returned. The question is how can you do this when customer behaviour lags the change in performance? This is not a new issue as Peppers and Rogers group found:
"A key obstacle cited by many (61%) for measuring the customer experience is the difficulty of monetising the value of investments for improvement- despite the fact that it does make a significant difference."
We believe we have developed a solution to this problem. We took the latest research by Frederick Reichheld, Richard Owens and Laura Brooks of Satmetrix and Dr Paul Marsden of the London School of Economics, as well as our own research, and based on some practical insights offered by Peter Simpson (ex Commercial Director of First Direct Bank) we have developed our CEM+ Calculator™.
This takes real data from client organisations in terms of number of customers, their purchase behaviour and current levels of satisfaction, and then projects the impact on revenues of changing the customer experience. It also allows the costs of the improvement to be factored in allowing the ROI to be calculated. The benefit of this approach is that it allows organisations to estimate to a fairly accurate degree (given the many variables affecting organisational performance)  the impact on their revenues and profits of investing in the customer experience making the decision no different to any other form of capital investment.
In conclusion, we believe that the companies that will thrive in the future are those that create a great experience for their customers. However, executives are often focused on short-term results and more concerned about measuring the financials than improving the experience for their customers or people. We believe that these factors will become increasingly linked and become the way we do business in the future.
Shaun Smith is widely regarded as one of the top business speakers and experts on brand leadership. As well as founder of Smith+co, he is an established author. His first book ‘Uncommon Practice- people who deliver a great brand experience’ investigates how leading brands differentiate, his second book ‘Managing the Customer Experience- turning customers into advocates’ is considered to be a landmark text book on how to create branded customer experiences. His latest book ‘See, Feel, Think, Do – the power of instinct in business’ investigates the role of instinct and innovation in customer experience.

Replies (1)

Please login or register to join the discussion.

By Richard Snow
22nd Jun 2010 10:34
Thanks (0)