Retention is Not the Same Thing as Satisfaction

March 21, 2010

Last year I posted about the research Dennis Campbell and I did in financial services where we found the surprising result that self-service can increase costs (the article was just published in Management Science.)  Dennis and I have been working with Ryan Buell, a fantastic doctoral student at HBS, on additional research about self-service.  This new research shows, unsurprisingly, that online customers have higher retention than customers who are exclusively offline.  The goal was to determine whether the increased retention is due to greater satisfaction (customers love being in control and using all those convenient online tools) or greater inertia (it’s too painful to re-enter all those billpay addresses).

The winner? Greater inertia — the aggravation of switching  is just too high for online customers.  Even more troubling, it turns out that online customers are less satisfied than offline customers.  So even though online customers stick around longer, they’re not at all happy about it.  Why is this a problem?  Because these customers are a ticking time bomb for banks.  Once a competitor figures out how to reduce the pain of jumping ship, they’ll be first to exit.

It’s tempting in any competitive environment to conclude that “loyal” customers must be satisfied ones.  But we’ve found that even when customers keep giving you their money, they still might be miserable.  All those familiar faces may not be placing a particularly high value on your products and services — rather, they may simply be placing a higher value on the time and energy it would take to leave you.  My advice is to start scanning the horizon for competitors who can give your customers a better experience without exacting a high price for the privilege.  Or better yet, play it safe and become that competitor yourself.


Are Acquisitions Making You Soft?

February 20, 2010

Are you buying your customers or truly winning them over?  Whether you grow organically or by acquisition can matter a great deal to long-term performance.  This is not always obvious in the way we evaluate managers — growth is growth inside the culture of many organizations, and so managers on a buying spree often experience a false sense of achievement.  And if you look closely at service businesses on an acquisition binge, a clear pattern emerges:  many are delivering an increasingly inconsistent service experience.  It turns out you can get lazy if you don’t have to earn the business of individual customers.

Acquiring another company can make a lot of strategic sense, but it doesn’t mean that you’re performing better.  I’ve watched the confidence of executives soar as they manage larger and larger companies (not to mention personal wealth, which often reinforces this confidence).  That confidence should be a narrow reflection of deal-making ability, but I rarely see confidence parsed in that way.  Instead, unearned operating confidence gets in the way of realizing that service is actually deteriorating.  And this can spell real trouble when you run out of companies to buy.

Oh, and add this to the challenge — executives with a taste for consumption also tend to leave once a company runs out of acquisition targets.  This can make diagnosing and fixing a service model even harder.

In my experience, organizations fare much better when they think carefully about the impact of acquisitions on their core customer experience.  Acquired customers often have different needs from existing customers.  It’s important to understand these differences,  along with the service model that was built to address these needs.  And then some difficult choices must be made.  Will you operate two service models?  Will you pick one model (typically your own) and hope the adjustment isn’t too unpleasant for your newly acquired customers?  They used to be #1 in the hearts of their service provider, and now they have to compete for the company’s attention. This transition is rarely seamless.  Acquisitions have a reputation for being painful for customers, which can often be traced back to neglect.  This is almost never a deliberate choice, but rather a lack of careful planning and choice-making on the part of management.

My advice?  Don’t wait too long to win over your new customers.  There is only so much they’re willing to endure.  At some point, even though they look like they’re still your customers, they’re really waiting for the chance to jump to a company that will retain them the old-fashioned way:  by earning their business.


Illusions of Customer Loyalty

October 3, 2009

As I read a WSJ article on the European grocer Asda’s new customer loyalty program, I was impressed to be learning about an actual loyalty program.   Most organizations create customer retention programs and then mistakenly call them loyalty programs.  This wouldn’t be a big deal, except that a mislabeled loyalty program can prevent a company from creating a real one.

Let me explain.  When companies pay customers to try out their products and services, it’s part of a customer acquisition program.  When companies pay customers to remain customers, it’s part of a customer retention program.  When companies invest in activities that increase customers’ willingness to pay, they have a customer loyalty program.  When a loyalty program works, it increases the chance that your customers will choose you over a lower-priced competitor.

European grocers have been touting their “loyalty” cards for years, with Tesco claiming the largest one.  These are effectively retention programs, where customers earn future discounts based on their current purchase behavior.  Companies like Tesco are bribing their customers to remain customers.  This is a classic retention tactic.

I was struck by the following quote in the article, which revealed that Asda might really be going after a loyalty and not retention program:

Making a dig at rivals’ customer-loyalty programs, Asda Chief Executive and President Andy Bond said he thought customer loyalty couldn’t be bought with plastic points or discount vouchers.

Asda is experimenting with a very different set of activities then its competitors.  Instead of offering discounts, it’s involving its loyal customers in strategic decisions such as which products to offer and how they should be arranged in the store.  Some customers will be given early access to products so that their opinions will have more influence.  Good customers will effectively earn the right to be a part of the company’s choice-making process. They will earn the right to co-create the value they eventually consume.

I’m intrigued by this idea because of the shared benefits of greater customer involvement — Asda’s customers make the service better, and become more devoted to the brand along the way.  Everybody wins.  And if customers turn out to be very helpful, Asda will compensate them accordingly:

…starting early next year, Asda also will reward customers who come up with the “brightest idea” that saves the business money. If the suggestion is implemented and saves Asda £2 million, a customer could be in line to receive a check for £100,000, or 5% of the first year’s saving.

Again, that line between customers and employees blurs.