The missing link...

The missing link to better customer strategy

Tuesday, July 2, 2013

It is common for companies to map customers by profitability and other financial metrics to develop customer strategies.  Such practices are especially crucial in B2B (business to business) companies for retaining key customers by establishing account management teams, among others, to manage sales, operations and overall relationship of their key customers. 

While this practice of single dimension will surely bring about greater visibility and objectivity in developing plans to grow an account, it misses a key component, the second dimension. In developing strategies for an account, how will you know if they will continue to do business with you? Yes, the customer is profitable and contributes significantly to your sales, but for how long? How long will this customer be with you to grow your business?

This missing component of customer loyalty helps you to develop specific customer strategies that are much more resilient than a strategy developed using a financial dimension alone.  Of course many companies do include this component of customer loyalty (or satisfaction or relationship or whatever fancy names that we can call today) into their account planning. 

Such inputs are usually based on the account team’s feedback about their relationship with customers.  But using ‘insider' feedback will not give a complete view of the customer relationship and it is highly unreliable (back to my favorite research, 80% of company executives believe they are providing superior service, but only 8% of their customers agree – Bain & Co, 2008).

What if you have a reliable metric that truly represents how the customer feels about you? With a reliable customer loyalty metric, companies could map each account by profitability and loyalty. With this dual dimension of profitability and loyalty, you would be able to clearly determine what specific actions need to be taken to keep and not keep a customer.

When you plot a bubble chart (bubbles that represent each customers and the size representing, say revenue) between loyalty and profitability axis, you could group these bubbles into four specific quadrants that require different action to grow.

High Profitability, High Loyalty

  Customers falling into this quadrant are the fuel to your growth engine. They are your model customers that you want to breed. They are not only profitable but are also happy and loyal to grow your business. Your strategy for this customer quadrant would be to maintain them and continue to provide with the service to delight them.  Companies that have higher proportion of customers in this quadrant tend to have higher chance of growing organically to greater heights.

Low Profitability, High Loyalty

Customers in this quadrant are customers that are happy with you but are not profitable. These are hidden jewels that may have great potential in growing their profitability with you. Often, it could be a new customer who came on board after experiencing a stellar customer service from you, or a customer that may not be aware of your other product offerings.  

In either case, you would want to understand the customer’s need better to introduce new services that the customer may not have been aware of. In some cases it could even be an over-investment, especially when revenue from the customer has been consistently low. 

Low Profitability, Low Loyalty

These are customers that have no significant contribution to your company and are not happy with you. They don’t buy more from you not because there is no need for expansion, but because they are not happy to do business with you. Chances are that they are trapped in a contract that they would love to exit. These Detractors are also costly to maintain because they tend to drain your resources through complains, product returns and even litigations.  

Sometimes, it is best to let them go for the benefit of both, the customer and you. You may not have the full range of product to support them nor you have any near term plans to develop such a product.  It also reduces your average cost of serving a customer.

High Profitability, Low Loyalty

If any customers that you need to prioritize for action, look no further. Customers from this quadrant are of high value but are at jeopardy of leaving you. You need to work with this set of customers immediately, identify root cause and find a solution quickly to restore their confidence in you. 

Usually, you will not be able to identify these critical (unhappy) customers using the single dimension mapping. They will continue to be unhappy with you and quietly leave you. 

So a combination of the financial metrics and loyalty metrics will aid you in deciding the course of action to be taken with each customer reliably.  Dual dimension mapping help companies unleash key information to optimize customer strategies for profitable growth.

However, there is a caveat. It is almost certain to get reliable financial metrics, but it’s not the same story with loyalty metrics. Business leaders have long lost confidence in loyalty metrics simply because they do not reflect the real health of customer relationship.  At best it is measure of how many customers you have convinced to take the customer satisfaction survey. This is mainly because there has never been a structured way to measure customer loyalty using customer satisfaction surveys.  

Most measures are unreliable and often dubious due to gaming of the results. Gaming in survey perspective is the manipulation of results by various despicable ways of cheating such as cherry picking and answering the survey on behalf of customers.

Netpromoter system® provides a far better measure of loyalty due to its simplicity and a robust method to measure and manage customer loyalty.

Satya Narayanan