Service Profit Chain
Customer Loyalty – the magic formula
Most of us experience a market situation that can best be described as hyper-competition. Supply out strips demand in virtually any category you can think of.
When that plays out advertising becomes less and less useful because there is already so much of it that few people, if any pay attention to it.
So the name of the game is customer loyalty – trying to draw customers closer to us in such a way that they are less tempted to switch to the competitions latest bargain offer.
Many companies use a variety of sophisticated marketing tools and tricks to do this from simple punchcards that give you your 10Th coffee for free to more elaborate loyalty clubs like what many Air Lines have developed.
But I don’t think that bribing customers to come back is what really counts. It may produce some form of customer renetion but there is no emotional loyalty.
What is loyalty then if not retention or what is the difference you may ask?
Well, there are two reasons we need customer loyalty. One is the obvious, that it is much cheaper to sell to an existing customer than it is to acquire a new one.That is the Customer retention part.
But more importantly loyal customers tell their friends – in fact the more loyal they are the more they talk about it – and that is what makes the all important difference between mechanicaly loyal and emotionally loyal.
When you have positive emotional feelings about a product or a brand you become an ambassador or what Fred Reicheld calls a ‘promoter’.(Here is a quick overview of the Net Promotor Score system)
Obviously in order for customers to become loyal they must first of all be satisfied to some degree. Customer satisfaction is the prerequisite for customer loyalty. But how much customer satisfaction does it take to create lasting loyalty?
From deeply dissatisfied to relatively happy, nothing much happens. Then, as satisfaction becomes more than just satisfaction and turns into enthusiasm, loyalty increases sharply.
But notice that when we deliver the right service/product at the right price, at the right time, and to the agreed-upon specifications, we score a 3 or possibly a 3.5 if we are lucky.
“Hey! But that is not fair,” you might be thinking, “we are doing everything perfectly and just as agreed, and all we get is lukewarm feedback!”
Doing everything perfectly and as agreed upon is exactly the problem. When clients read your marketing material or listen to your sales pitch, they learn that you will do this, this, and this for them at this price and on such and such terms.
So, who will be impressed when you actually deliver on what you said you would deliver?
You are performing exactly as expected. If you do less, they will be annoyed. If you do more, they will be en route to enthusiasm. If what you do far exceeds their expectations, they will be ecstatic.
But what can we do more than delivering everything we said we would?
We can establish an emotional connection. And because so few companies get it, it is still unexpected. When we touch our customers emotionally we exceed their wildest expectations.
Just think of a wonderful service experience you have had at some point. What made it exceptional? The mechanical stuff or was it because some one touched you at an emotional level some how?
Nine times out of ten you will find that what creates enthusiasm and loyalty is an emotional connection.
So forget the punch cards and the bonus points – what you need to work on is your team.
It is the attitude and loyalty of your team to your business that drives true customer loyalty. ( see my previous post on Employee loyalty here)
Loyal employees create loyal customers – that is the magic formula and that is also at the heart of the Service Profit Chain
Enthusiastic or Just Satisfied?
Most people intuitively understand that if you are delivering a product or a service, you will not earn money if you have unhappy customers. There is a basic understanding that we need to keep an eye on customer satisfaction. And there is nothing wrong with that. But it is just not enough.
A basic misconception is that customer satisfaction as such will lead to prosperity. This is clearly not the case.
Mere satisfaction does not lead to growth and prosperity.
Satisfaction may just be enough to keep you in the game. In fact, Fred Reichheld and his research team have shown that 60–80% of customers who defect from companies scored “satisfied” or “very satisfied” in customer surveys immediately prior to their dumping a given supplier.
So what does it take to really drive profit and growth? According to the original SPC research, customer loyalty is the key. A strong link exists between high customer loyalty and profit. The reason for this is twofold. The “traditional” explanation is that it is much cheaper and easier to sell to existing customers. If you have a large, loyal following, you do not need to spend as much on advertising or PR to acquire new business. This still holds true, but the main reason that loyalty is a key driver of profit has to do with the ambassador effect. Loyal customers tell their friends.
They become brand ambassadors or, in Reichheld’s terms, promoters. As discussed in the first chapter, in an oversupplied world, traditional advertising becomes less and less effective. Just as we know from the bazaar, everybody is trying to shout louder than the guys in the stall next door.
3000 messages a day
Urban dwellers are subjected to around 3,000 messages a day from companies trying to influence their behaviour in one way or another. Sounds like a big number? Just run a typical day through your head and consider the inputs you are subjected to during that period from the radio, television, Internet banners, pop-up windows, newspapers, billboards, the sides of buses, sugar sachets, and toilet doors. The creativity that goes into thinking up new ways to stick messages in front of potential buyers is impressive.
But as marketing guru and author Seth Godin has pointed out again and again, this is interruption marketing.
We are disturbed by messages, 99% of which do not concern or interest us one bit. To the extent that we notice them, they may even produce the opposite effect – they annoy us. As a consequence, we develop a kind of message immunity and simply ignore such messages. Add to that, that the trust level that consumers have related to what they hear from advertisers has been steadily dropping for a long time now. Even if the product per se interests us, we do not trust the message from the vendor.
So whom do we trust?
Think about it. When faced with an important purchasing decision, what do you do? One option is to thoroughly research the products yourself, comparing performance, price, reliability, and service. Or maybe you consult consumer research magazines and Web sites. You too live in a world with ever more things to do and less and less time to do them in. So if you are like most of us, you go for a short cut, which is nearly always to ask someone you trust for an opinion.
In my case, I would not dream of entering into an agreement with a new training venue without checking with a few of my trusted colleagues. Maybe I will first do some research on the Web and discover an interesting venue that markets itself as the “Trainer’s Paradise”, state-of-the-art facilities, great food, and service. Sounds like just what I need. But I’ll then call my friend and trainer colleague Peter and ask him, “Have you been there? What do you think?” He may say, “Yes, the facilities are great, but the receptionists are just so pretentious.”
Well, that’s the end of that. There is no shortage of training venues, so why take a chance? I continue my search on the Web for something else. But, unfortunately, that is not the whole story. It gets worse. My friend Louise calls me the following week and asks me about the “Trainer’s Paradise”. “I am considering booking the ‘Trainer’s Paradise’ next month. Do you know it?” Chances are that I will reply, “I have not been there myself, but I have heard from others that it is lousy; can’t remember what the problem was, but if I were you, I would try and find something else.” Is that fair? No, it is not. My friend Peter may just have had a bad day; he may have been totally unreasonable, whatever. But I don’t have the time to investigate that further and I don’t need to; in an overcrowded market there is plenty of choice.
As a consequence, anyone delivering a service product lives on a knife’s edge every hour and minute of the day.
Every transaction you enter into with a client is potentially a marketing move that will promote or discourage future business. The good news is that this is also the only marketing you will ever need – apart from a Web presence – and you can save a lot of money if you get it right. In the service business, marketing is what we do on a daily basis. The way we meet and greet, the way we deliver what we do, the way we say goodbye – that is marketing. Don’t squander your money on trying to make more noise than your neighbour.
Nobody is listening anyway.
The above post is an excerpt from my book ” Best! No need to be cheap if you are..” you can find it here
“This book is addressed to individual managers who work in all aspect of the service industry, this volume is aimed at helping them first, to understand how the industry has changed, and changed dramatically, over the past few years.
With that basis, Mike Hohnen explains why and describes how such managers can focus their efforts in order to stand out in the marketplace, while avoiding, getting caught in the trap of unproductive and detrimental responses. Additionally, he explains how managers can get their people involved in the crucial task of turning customers into ambassadors, allowing word of mouth to work to their advantage.
Mike’s approach is rooted in the principles of the Service-Profit Chain described by Heskett, et al. in their book published by Harvard in the 1990’s and widely recognized as the foundational academic research on the subject”.