Customer Loyalty

Why the Service Profit Chain concept is more important now than ever before?

April 13, 2022By Mike Hohnen

Service Business

Check out Google trends, the interest in customer service and customer experience is steadily rising year by year and has been for the past 5 years.

Why?

Because we live in an age of abundance – this is one of my key points when I give live presentations. By abundance I mean that there is too much of everything. There are more hotel rooms, restaurant seats, cars for hire or consultants etc. than the market actually needs. So we are all trying to survive in a hyper-competitive environment.

In a hyper-competitive environment, it is not enough to try and compete on product specifications. Because within a given price bracket, the specifications for most product are more or less identical. So in order to differentiate, we need to look at the experience and that typically means that we add some service components.

On top of that, we are rapidly moving away from products and into services (Just think cars, in a few years when cars become self driving, they will no longer be products but we will see them as a service). So society is moving to service dominant logic. And when products are turned into services, the focus shifts, it is not about the product spec but the customer need.

If we want to compete on experience and service, we need to focus on the interaction between the frontline staff and the guest/customer – what we also call the touch points. That is the critical interface – that interaction can lift what is otherwise just a bland run of the mill experience into a memorable experience. And when that happens, we create loyalty. High customer loyalty is the key profits a growth.

So some companies launch major initiatives around creating loyalty. They see that as their main objective.

But that is only because they are not paying attention to the principles of the Service Profit Chain – in a sense they have got the wrong end of the stick.

There is no shortcut to the profits and growth. You need to take the long haul and that starts with creating an inspiring and engaging workplace, and that is what the concept of the Service Profit Chain can help you do – and that is why understanding this key framework is the best way to survive in a hyper competitive environment.

Check our my course The Service Profit Chain explained!

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This blog post is part of a series of answers to frequent questions that I get around the concept of the Service Profit Chain. In future post, we will continue to explore other key points. If you would like the full concept served up in one go, you will find Mike’s book “Best! No need to be cheap if…” HERE.

The Asymmetric Nature of Services

April 21, 2016By Mike Hohnen

In my previous blogposts, we started looking at this whole concept that we have labeled “The Experience Economy” and why the shift towards a service-dominant logic is raising the bar for everyone involved in service.

So, if we can agree that there is a shift from focusing on goods to focusing on needs, we need to spend some time understanding the concept of needs as seen from the consumer’s perspective.

Many hotels, restaurants, or other traditional service providers forget that they are in the needs business and fall in love with their own products. They mistakenly think that it is the product the consumer is actually interested in and do not understand that the product is just a translation of their needs into something more tangible.

Loving the product and missing the need is also what happens every time a company or industry is disrupted. The needs shift or someone sees a totally different way to fulfil those needs – and titans of industry get washed away. Kodak never believed for one moment that we would ever drop Kodachrome and replace it with pixels.

Services are Asymmetric

So, when we look at the nature of services, it is important to remember that there is this phenomenon of asymmetry – what you sell and what the consumer buys are often two very different things. If you are an airline, you will have a tendency to think of your product as Seat 7A on Flight AB1234. That is what you have sold to that passenger. But the passenger doesn’t think of it that way. What they have purchased is transportation from A to B. That is the need they have.

If you take the restaurant industry, you don’t go to a fine dining restaurant because you are hungry. The restaurant may see itself as providing food and drink…that is its product. But, you are presumably there for something completely different. Something that has to do with atmosphere, occasion, or whatever.

In the hotel industry, they see themselves as providing you a room with certain specifications. But in many cases, you are not in that market for that product specification. You are in the market for a good night’s sleep…that is your need. If the ventilator on the ice machine rattles all night and prevents you from sleeping, then all the beautiful treats and frills in your room are not going to help one iota – you will hate the experience.

So, in that way, traditional service providers also need to make sure that they don’t fall into the trap of seeing themselves as product providers fixated by their own product specifications, to the extent that they forget about what the need is that they are supposed to fulfill.

Now, the problem this surfaces is that needs are deeply personal, subjective, and situational. So, when the travel industry talks about pax – we have 50 pax next week and then 200 pax on that flight – or the restaurant industry talks about covers – we will be doing 145 covers for dinner and then 85 covers for lunch – it is an insult to the individuality of their customers.

What pax and covers implies is that they are all the same – a flock of sheep that all need a standard shearing.

In the next blog post, we will take a closer look at how we can get better at understanding what needs are all about and maybe, more importantly, how to better get a grip on the fact that different people have different needs

– welcome to the age of mass-customization.

The Big Shift – Products to Services

April 13, 2022By Mike Hohnen

This is the second post in a series on the new service economy. You will find the first post here.

Before we start dissecting what it actually means to create fantastic experiences and great services, I think it’s useful to take a step back and try to understand the big picture on how the world that we are operating in, as service providers, is changing quite dramatically.

There is a big shift taking place world-wide, and it is a shift that moves away from a focus on producing stuff to delivering services. It is also described as the move from a goods-dominate logic towards a service-dominate logic.

What that basically means is that for thousands of years, we have been used to creating value by taking something, adding to it, and then exchanging it with somebody else in return for their money. The focus has been on the functionality, the specifications, and the quality of the actual product. The better the specifications, the more money we have been able to obtain for that product.

What is happening now is a gradual shift away from a focus on products towards a focus on needs.

Recently I realized I needed go buy a new power drill in order to put a cupboard up on the wall. My old drill doesn’t work very well anymore because it has been lying at the bottom of my cupboard for the past ten years without being used. So, I decide to go get a better drill. But, do I really have a need for a drill? My next drill is probably also going to lie in the cupboard for a few years before I use it again. What I really need is two holes in a very hard wall. If somebody could provide those holes for me in a faster, easier way that would require less effort, less resources, or less trouble for me, I would grab that opportunity immediately.

If you are in the service industry, you may not have paid attention to this because, in the service industry, one has been, in a certain respect, in the service-dominate logic forever. But what is happening is that a lot of traditional manufacturers and producers are also moving away from their traditional goods-dominate logic, and instead they are thinking about how they can make that shift from product specifications to needs fulfillment.

In a service-dominate logic, the value is not created by a transfer of ownership, value is created in use. When I use your product or service, it brings value to me; and the minute I am not using it, it no longer provides value for me.

A great example of this is Mercedes-Benz, their smart car, and the service they have now created in more than 30 cities called “Car2Go”. You can grab the car off of the street with just your membership card and drive from A to B and then leave the car. Most of us living in big cities don’t need to own a car – in fact, it is a downright nuisance. What we do need is flexible transportation at our fingertips. There are lots of other examples of this new trend if you start looking around.

Why do I think this is important?

Because, what this means for the traditional part of the service industry is that more and more consumers are going to experience higher and higher levels of service. Great service is going to be the new normal.

And, that is going to raise the bar…the level of service expected across the board…is my prediction.

In my next blog post, we will examine the concept of value.

Customer Loyalty – the magic formula

April 21, 2016By Mike Hohnen

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?

April 1, 2013By Mike Hohnen

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”.