International School of Management
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- Customer Acquisition and the Internet
- Target Marketing
- Source: Suzanne Taylor
- Delivering World-Class Customer Service
- Customer Expectations
- Attitude
- Exceptional Service
| Chapter 4
Customer Service, Loyalty, and Retention The first part of this paper concentrated on the “employee satisfaction” element of the Service-Profit Chain. The paper will now consider the elements of “Customer Satisfaction.” Obviously, continued commerce requires a customer in order to maintain a perpetual business cycle. A customer is the conduit between the employee and any profit potential that an organization may realize. It is now widely accepted that profitable customer experiences are no longer transaction based, but rather relationship based. For an organization to maximize the Service-Profit chain strategy, they must not only concentrate on employee satisfaction, but they must also become “customer-centric.” Being truly customer-centric requires that everyone in the organization be aligned to have contact, or the opportunity to affect customers (Mitchell 2003). The topic of customer satisfaction/retention has grown immensely in recent history. It is not enough anymore for an organization to just provide good customer service; they must ensure that they are engendering customer loyalty. At the heart of customer-centricity is the concept of the customer value equation. “This equation suggests that the value of goods and services delivered to customers is equivalent to the results created for them as well as the quality of the processes used to deliver the results, all in relation to the price of a service to the customer and other costs incurred by the customer in the acquiring the service” (Heskett, Sasser, and Schlesinger 1997). This relationship will be the basis for the analysis presented in the next section of this paper. The elements of customer satisfaction, retention, and loyalty will be analyzed comprehensively in order to better understand their impact on employee satisfaction and corporate profitability. Many elements of customer service will be considered, as well as several concepts regarding customer loyalty and retention. Evidence will be presented to support the hypothesis that loyal customers effect employee satisfaction and contribute to corporate profitability. The Customer-Centric Organization Market conditions are driving organizations to become more customer-centric. In order to provide the best possible customer service experience possible and differentiate one’s self from the competition, organizations are beginning to transition from being product-centric to being customer-centric (IBM 2006). Organizations are realizing that the common denominator between product or service delivery and corporate profitability is the customer. Because of this, many organizations are redesigning their current business strategies around the customer-centric philosophy. Organizations are recognizing that just like employees, inventory, or cash, customers are a valuable asset that should be managed accordingly. Not only do customers generate revenue for an organization, what they say and how they feel can influence future revenue. Customer-centric organizations listen to their customers and react accordingly. They view their business strategy from the point of view of the customer, and thus reduce expenditures on unwanted processes, and at the same time create new business opportunities as a result of customer feedback. The definition of a ‘customer-centric’ organization is: an organization that defines, markets and sells its products and services from the customers’ point of view. The term itself has become overused, as many organizations say they are customer-centric, but few really are. It is important for organizations that claim to be customer-centric to deliver on the proclamation or risk alienating customers who rely on the statement. If customers have a reasonable expectation that they will be the focus of the organization, it is imperative that they are. Organizations that fail to deliver on the promise of focusing on the customer, often suffer the consequences in the form of economic loss (Gomolski 2005). Becoming customer-centric involves many of the elements that this paper will now consider such as: branding, marketing, service, measurement, and customer service management (CSM) programs. Actually becoming a customer focused and driven organization requires more than just deciding it is a good idea in order to boost sales. As the analysis in this paper will show, becoming a real customer focused organization requires dedication, time, commitment, and a great deal of effort. In their quests to become customer-centric, organizations must consider that it is not enough just to take care of the customer today, they must think beyond today and plan for what the customer will desire tomorrow. Organizations must do more than anticipate customers’ stated needs. They need to go beyond stated needs and become proficient at anticipating unarticulated needs and desires (Hamel and Prahalad 1994). This is not always an easy thing to do, especially when technology is involved. However, organizations that make the investment required to change their whole way of thinking often find that the process is made easier. At the heart of becoming a true customer-centric organization is the ability to create value for the customer whenever they come into contact with an organization. “What drives this new model is not profit but the creation of value for the customer, a process that lies at the core of all successful enterprises. Value creation generates the energy that holds these businesses together, and their very existence depends on it” (Reichheld 1996). Organization’s that become ‘customer-centric’ understand that their business is no longer about the product or service that they once provided; it is now about the customer that uses the product or service provided by the organization. Customers don’t buy products or services; they buy results. The attitudes and quality of the service provided to customers is an important consideration (Heskett, Sasser, and Schlesinger). Customer-centric organizations ask questions differently. Their values, mission, and organizational structures exist for the customer, not the organization or its owners. Customer Acquisition – Branding & Marketing Customer acquisition and branding are also important elements of the ability of an organization to attract and retain customers. This is important for several reasons that include acquisition expense, the message being sent to potential customers, and the ability of the brand to attract customers. Organization’s need to consider whether they will advertise themselves as lowest cost, highest quality, or having the best possible service available. All of these considerations play into the ability of an organization to attract new customers and then keep them.
One of the major changes in marketing for customer acquisition in recent years has been the proliferation of the Internet. Many customers only shop online, and the numbers are growing exponentially every year. For this reason, customer acquisition and marketing via the Internet deserves a more in-depth analysis. Once a company makes the decision to enter into an e-commerce strategy, the implementation of this strategy is only the first step. When an organization does decide to attract customers online, it must take the steps necessary to identify whom it is they will conduct business with online, how they will attract that business, identify who their customers are, and identify ways to keep their customers. In short, the Company must develop an Online Marketing strategy. Sometimes attracting customers in an online environment can be more difficult than drawing them into a traditional customer – business interaction. However, there is now a much larger pool of potential customers from which to draw. Once a definitive marketing strategy has been developed, the organization will be able to better identify, attract and keep the new customers they attract to their website. Internet marketing is not just comprised of a website presence online; it is a discipline that requires several steps in order to be successful. As organization’s attempt to develop marketing strategies, they must consider the intended audience that they are seeking to have as customers. Being able to identify and understand potential customers is a very important consideration for Internet marketing (Warholic 2005). Even though the Internet can seem like an endless number of customer prospects, it is just as important to identify who the target customer is as it is in a traditional marketing environment. Firms must understand that e-commerce isn’t strictly a numbers game; it’s a people-serving activity. “To be successful at e-commerce marketing you need to see the vast number of people on the Internet as real individuals, each with needs, desires, and preferences” (ISM 2006). It is important and invaluable to understand the customer in order to be an effective marketer. It is also important to target the customer. Without this understanding and failing to have a targeted marketing plan geared toward the customer, the probability of failure exists in an online environment. Business-to-business (B2B) e-commerce – the area that encompasses electronic buying and selling transactions between organizations, has become central to doing business effectively. If B2B strategies are well developed and executed, they can provide an organization with improvements in productivity and cost savings (Neef 2001). According to the latest statistics compiled by the U.S. Department of Commerce, B2B activity accounted for the majority of all e-commerce (93%). Customer acquisition, sales, brand awareness, and customer retention will need to be a major focus of the firm’s marketing plan. B2B marketing must be concise and task specific to the potential customer. Efficiency and speed must be highlighted as benefits of using a specific organization’s B2B platform, rather than that of a competitor. Targeting B2B customers means that an organization is marketing to the busy employees of other companies. It is important not to inundate them with elaborate messages and flashy branding graphics (McHale 2002). Effective B2B marketing messages should resonate a feeling of ease, expediency, choice, and security. In the end, it is the relevance of a site’s content to its business audience that drives adoption and usage from that audience. The more a company can offer to a potential business customer, the more attractive the product or service. Once a relationship is established, both companies can benefit from shared information and economies of scale. Many business-to-business relationships evolve into strategic partnerships between organizations. These relationships entail very high levels of information sharing, strategic planning, and unprecedented communication (Greenberg and Greenberg 2006). The relationship often evolves into strategic alliances between business partners. Before this can happen, the potential business customer must be able to see the advantages of doing business with an online platform. In order to be effective and relevant to the business audience, B2B marketing efforts should be targeted. A major factor to the success of B2B commerce solutions is the ability of an organization to understand fully to whom they are marketing, and what it is they are able to provide in terms of added value for the customer (Horn 2005). This highlights the importance of an effective online marketing strategy that will accurately depict and describe the B2B solutions that an organization has to offer. Business-to-consumer (B2C) electronic commerce is a form of electronic commerce in which products or services are sold from a firm to a consumer, as opposed to a business. An organization’s goal should be to grow its online business platform and be able to offer expanded products and services to its customers via the Internet. The average online customer today is not what they used to be. They are more educated, savvy, and searching for pertinent information. “To succeed in this environment, companies must recognize that the growth of the channel is coming from the mainstream consumer, and that this shopper has different expectations and priorities than the early adopter” (Levitan 2001). An effective online marketing strategy must emphasize the ability to respond and adapt to rapidly shifting consumer expectations. Successful consumer focused e-commerce requires that attention still be focused on the service aspect of the transaction. Although the transaction may take place in an online environment, the individual consumer will still require that a level of perceived service be delivered. Conventional as well as B2C services face challenges of maintaining high service quality. A McKinsey study of best practices of successful e-business firms (2001) found that successful companies consciously or unconsciously saw themselves as service companies and took pains to find out and deliver what their customers wanted (Dholakia and Pandya 2002). A prerequisite for attracting potential customers to an organization’s website is having an effective communication strategy in place to attract potential customers to the site (Chaffey 2002). The two different techniques used to accomplish this can be characterized as traditional offline marketing communications or new online communications. Offline marketing is attracting potential customers to the website using means other than online advertising or marketing. This is typically achieved through using traditional print, radio, and television media for the purpose of driving offline business online. Online communication strategies can take many different forms and be delivered differently. Many online advertising strategies incorporate some or all of the following in order to attract customers: Internet market research, e-mail marketing, promotion and e-business advertising, banner ads, and search engines. This is by no means a comprehensive list, but a compilation of the most frequently used. Target Marketing Customer acquisition is only the first step to customer retention and loyalty, but an obviously important step for the customer relationship with an organization on the whole (Fig 11). Figure 11: Customer Acquisition/Experience Model 
Source: Suzanne Taylor Targeted marketing is a critical component of any marketing success. Attracting and retaining profitable customers and turning potential customers into actual customers can prove to be a huge challenge. “By understanding the demographic characteristics, lifestyle behaviors and purchase preferences that drive your audience’s, you can successfully tailor your marketing strategies to reach those most likely to purchase your product or service, increase your customer loyalty and improve customer profitability” (Claritas 2006). The marketing concept teaches us that we’re all in the business of acquiring new customers and retaining existing ones, and that success in business is largely the measure of our ability to carry out these functions effectively. Every organization should develop a marketing mission with the end goal of acquiring and retaining new customers (Falkson 2004). As a result, the marketing of a company’s product or service is imperative to new customer acquisition, and subsequent customer retention. Adding to the practice of treating potential customers as being more than just one-time events is the consideration of the customer’s life cycle. Customers are rightfully regarded as markets. But this is a gross definition. A more appropriate definition may be to consider the customers’ life-cycle events as the markets themselves. This is where the opportunity to grow customers will be found (Hanan 1987). An organization should begin by developing a strategy for both the customer base and the potential target market segment to identify the highest value customer segments and best customer acquisition opportunities. The link between internal data and marketplace indicators provides powerful information in regard to possible purchasing preferences. The result of the information derived from this link helps to reveal which products and services certain customers are likely to want (Claritas 2006). To better illustrate the importance of understanding the value of a potential customer’s purchasing behavior, consider the following example: In 2003, the annual expenditure of an average new customer was $250.00. That same customer spent $500 in 2004 and $1,000 in 2005. Therefore, the life-cycle value (assuming a 3 year retention rate) would have been $1,750.00 per customer. Assuming an organization had 1,000 new customers in 2003, and a life-cycle value of $1,750 per customer, this translates into $1,750,000 in sales over the three years. As previously identified, the key to effective customer acquisition is having a defined market for an organization’s product or service. A problem that many organizations encounter is a market that is too broadly defined. In this case, the organization will realize higher advertising and marketing costs which result in lost opportunities that even a fully integrated marketing campaign can’t rectify (Gartner 2005). The key for an organization is to properly define the potential customer, then market to them with the long-term benefits in mind. The importance of measuring the long-term effects of marketing has been emphasized by managers and academics alike. Managers should refrain from the propensity to focus on short-term profitability initiatives at the expense of long-term profitability (Villanueva et al. 2006). It is imperative that organizations overcome this tendency when marketing for customer acquisition. The process of customer acquisition is an important step in cultivating a loyal customer base. It is also an expensive business function that must show a payback in the form of added revenues for an organization. Marketing investments need to show demonstrable impact on revenue. This has caused marketing professionals to seek new ways to grow their customer bases that include lead acquisition, message communication, and appropriate target market identification (Sutker 2006). Despite the costs of doing so, acquiring new customers is the lifeblood of any organization or business. An organization should ensure that this initiative is part of their current marketing plan and ensure that it is a primary initiative. Keeping an eye on new customer acquisition trends is essential for keeping an organization’s finger on the pulse of its business. This is important because customer acquisition initiatives are the most expensive part of an organization’s marketing efforts. (Waugh 2000). Successful organizations are rethinking the way they advertise and market to their potential customer base. Instead of viewing a customer as a one-time transaction, they are instead taking the long-term outlook and viewing the potential customer as a lifelong event. Service-profit chain management is changing the face of marketing. “Market share quality, defined primarily in terms of the share of loyal customers served, is becoming the primary goal instead of simply having the largest market share” (Heskett, Sasser and Schlesinger 1997). Delivering World-Class Customer Service Once an organization has been able to acquire a customer, they must do whatever it takes to keep them as a repetitive customer. Because so many products have become commodities, and because competition has become so fierce globally, companies need a way to set themselves apart from the competition. The best way to accomplish this is through delivering great and memorable customer service. Most customers exhibit similar traits and qualities – they are self-absorbed, they expect organizations to meet their needs immediately, and to attend to their every need with a smile. Customers do not care about other priorities employees may have. They expect to be the employee’s priority and be attended to when they are ready (Evenson 2000). Because customer service is such an integral part of customer retention and loyalty, this paper will devote a great deal of time and analysis to the topic. Providing superior customer service is just good business, and may be the only thing that sets an organization apart from the competition. The lack of appropriate service is one of the most common complaints of all consumers. The simple fact is that most of our service businesses don’t serve very well. Many businesses are renowned for their lack of service, although they are in service providing businesses. Some examples include airlines that are constantly overbooked and lose luggage, restaurants that employ poorly trained people, and hospitals that employ nurses too overworked to provide attentive service. Because these situations are so commonplace, many consumers do not even recognize these lapses in proper service delivery when they happen (Senge 1990). Customer service is one of those often-talked about and promoted issues, but rarely delivered in a consistent fashion. “Successful organizations have one common central focus: customers. It doesn’t matter if it’s a business, a professional practice, a hospital, or a government agency, success comes to those, and only those, who are obsessed with looking after customers”(Blanchard and Bowles 1993). Walls throughout corporate America are plastered with mission, vision, and values statements that state how important customer service is. It is not enough to talk about customer service; it must be delivered time and time again. Customer Expectations Customers everywhere have some common expectations when they are engaged in a purchasing situation. The following list is by no means comprehensive, but yet has universal applicability: Value “I want to know that what I am buying is at a fair price, and will be supported throughout the length of my ownership.”
“Let me know what I need to know, when I need to know it.” Attitude “Happy, eager, willing… prepared to meet my needs.” Reliability “Consistent… be there when I need you.” Tangibility “Quality of product and performance… professional image Assurance “Deliver when you promised… total product knowledge.” Empathy “Understand me and my needs. Give me your commitment.” Exceptional Service “I vote with my money, and an election is held every time I want to re-order or tell a friend” (Gitomer, 1998). This paper has already discussed the fact that consistency is the key to building a repeat customer base that will provide economic benefit to an organization into the future. Consistency is especially important for organizations with more than one location. Standardization of service has become an expectation of customers. Multisite services likely to be accessed at more than one location present a strong case for standardization, especially in the quality of products and services delivered. This is especially true for personal services. For example, the Holiday Inn chain of hotels has used standardization as a major theme in its marketing programs to frequent travelers who appreciate consistency away from home (Heskett, Sasser, and Schlesinger 1997). Some customers may forgive inconsistent service, but most will not. Many times customer expectations are set by the organization, not the customer. This is done through advertising and marketing certain promises or results. The key for an organization is to promise reality and refrain from instilling unrealistic expectations in customers. The messages that are contained in advertising communications are almost always crafted with the objective of driving customers to a business – and most often they’re targeted toward new customers. But these communications can sometimes do long-term damage if they set unrealistic or inappropriate expectations. These messages may serve to attract customers to the business, but in doing so, they may serve to disappoint and undermine the ability of the organization to meet the customer’s expectations (Colombo 2003). Most customers do not expect perfection anyway; they are quite satisfied with goods and services that perform adequately. Yet there is now an advertising campaign from a hotel company promising that a stay with them will be ‘perfect.’ This establishes an unrealistic expectation in the customer’s mind for a level of service that in the long run is impossible to attain (Francese 2002). Advances in technology and a recent focus by organizations on customer service have led to ever increasing customer expectations. Successful service efforts of the past contribute to customers’ attitudes, raising their expectations with each new technology, and each new approach. Customers’ expectations continue to rise as every business strives to surprise and delight their customers. As a result, customers are predisposed to look for bigger and better service delivery from organizations. If these ever-rising expectations are not met, customers then defect to a competitor (Colombo 2003). This is a difficult situation for organizations to manage, as often it is out of their direct control. Expectations are constantly evolving because improvements in service shift customer demands. While customers initially appreciate better services, they quickly get used to, expect and demand them. This does not mean that companies should slow their attempt to deliver ever better service that leads to rising customer expectations. Customers judge customer service levels and service delivery by comparing different experiences at different organizations, not just one (Cleveland 2003). Unfortunately, customer expectations are often not set based on your organization, but are judged against the best organizations in the world. Customers do not do this on purpose, with high expectations in mind, but rather because they have been conditioned to do this based on their many associated experiences (Hitt 2003). This is where understanding the customer can lead to a set of realistic customer service expectations. When a customer is engaged in your organization, it is imperative to completely understand his/her wants, needs and expectations. This will better allow you to deliver the expected product or service in a manner consistent with the expectations of the customer. The “Internet” effect has been discussed in this paper on several occasions. Even so, it must be discussed here again because of the overwhelming effect that the Internet has had on customer expectations and service. As new technologies and channels for communication become established, distance is eliminated or minimized, and information is often available immediately. Today’s consumers are the beneficiaries (and sometimes victims) of the information explosion. There are volumes of information available to consumers on the Internet and it is able to be delivered at warp speed (Duncan-Poitier 2001). This speed and access to technology has created an expectation in consumers that all of their transactions be completed in record time and with minimal complication. Evolving customer expectations present an enormous opportunity for organizations to differentiate services. The uncertain economy and incessant customer demands have put the spotlight on what organizations everywhere must deliver. Rather than being a negative, this can provide tremendous opportunities for organizations with adept leadership and solid management (Cleveland 2003). Managing customer expectations is as much an internal marketing matter as an external one; although there is no doubt that external pressures exist. “Fostering an internal culture of constant incremental improvement almost guarantees that the level of customer satisfaction will rise. The idea is to set and achieve some measure of service quality internally before promising it to customers” (Francese 2002). Customer expectations should be addressed in an organization’s strategic business plan, and should include and be driven by business goals that allows them to be more responsive to customer expectations. A comprehensive customer service strategy should include metrics that proactively address the issue of customer expectations, to include an ongoing review of their effectiveness. To be successful today, organizations must go beyond just meeting customer expectations and work to exceed expectations. Organizations that take an approach to exceeding customer expectations focus on defining and executing very specific, proactive customer service strategies. Organizations that exhibit customer responsiveness focus on service metrics that are driven by business goals (Tambellini and Liu 2005). Exceeding customer expectations requires extensive planning and implementation of customer service strategies across all levels of the organization. An organization that is able to constantly and accurately identify customer expectations will be in a more competitive position to gain and retain customers. No matter what the business is, customer’s expectations will rise over time. The expected speed at which products will be delivered, for example, is much shorter today than it was ten years ago. In order to stay competitive, organizations must understand and keep up with customer expectations. However, organizations walk a fine line in trying not to get too far out in front of what customers expect (Francese 2002). Successful organizations will have to become adept at coping with change. Effective organizations are flexible and able to evolve as necessary. These organizations are able to interface with customers differently, manage customer relationships more dynamically, and adjust staffing as needed for the purpose of meeting changing customer expectations (Colombo 2006). An organization does not have to rely on intuition alone, as there are ways to elicit customer expectations directly from the customer. There are many ways to do this that include: customer surveys, focus groups, polling, and secret shopper programs. Employee customer training, that is the focus of the next section of this paper, can be used to effectively help employees understand and identify customer expectations. Spending money and time on employee training is always a good investment, but it becomes an even better investment when it is combined with an ongoing program that measures how an organization’s customer’s level of satisfaction has improved, if it has. One of the better tools to assess whether or not an organization is meeting or exceeding its customers’ expectations is the customer survey (Francese 2002). Organizations need to assure that if they are using customer satisfaction surveys they are worded correctly and elicit an actionable response from the customer. An issue to be considered when using customer satisfaction surveys is that there may not be a direct correlation to the results shown on the surveys and actual effects on customer service. Satisfaction surveys are a far less accurate test of satisfaction than behavior. “In business after business, research has shown that 60 to 80 percent of customers who defected from an organization had said on a survey just prior to defecting that they were satisfied or very satisfied” (Reichheld 1996). This has caused many organizations to respond with different, more highly technological approaches to gauging customer expectations and satisfaction. Although many organizations have invested a great deal of time and money in more technologically advanced customer feedback systems, the results are still rather dismal in reality. A good example of this exists within the auto industry. Although 90 percent of automobile customers claim to be satisfied, only 40 percent come back for another purchase. The obvious goal of an organization is to receive valuable and actionable feedback from the customer so that expectations can be met in the future. Another way that this can be accomplished is when a customer complains about an element of service or the experience they are dissatisfied with. This is not as easy as it may seem either because of the psychology of the customer that is at play. A study of customer behavior conducted by the Technical Assistance Research Programs Institute (TARP) for the U.S. Office of Consumer Affairs has been quoted so often that its impact has been blown out of proportion to the research and its findings. The results of the TARP researchers concluded, that in many cases, customers don’t register their dissatisfaction with products or services because it requires too much effort for too little potential payoff (Heskett, Sasser and Schlesinger 1997). In order to overcome this type of thinking, organizations must create an easy to use, welcoming method for customers to express their dissatisfaction with the products or services provided by the organization. Although customer satisfaction polling has its flaws, it is still a large industry and a very widely used technique by many organizations around the world. Customer satisfaction surveys have now become one of the most active areas for market research firms, with current billings of nearly $200 million and annual growth of 25%. These specialized services may consist of elements concerned with consumer psychology, market research, statistical data, and interviewing techniques (Kaplan and Norton 1996). As long as organizations are able to translate the results of customer satisfaction surveys into measurable results and customer retention, they should continue to use customer satisfaction surveys to measure, at least to some degree, customer expectations. 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