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The satisfaction and profit disconnect

“Customer satisfaction is not a surrogate for customer retention. While it may seem intuitive that increasing customer satisfaction will increase retention and therefore profits, the facts are contrary. Between 65% and 85% of customers who defect say they were satisfied or very satisfied with their former
supplier.”

–Frederick Reichheld

Questions asked at listening posts must be designed to find out whether products and services bought by satisfied customers are continuing to meet their needs.

Should existing products be adapted to respond to new needs? Should new services be added to respond to changing lifestyles?

For example, when a leading provider of baked goods saw sales begin to level off, they decided to find out why. By asking questions, they learned that most loyal customers were growing older, and becoming more concerned about fat and cholesterol in their diets. These customers were not dissatisfied with the company's products or delivery. They stopped buying the company's baked goods because the product line did not meet their needs anymore. They discovered that if the firm offered low-fat products, the loyal customers would be happy to buy them. By listening to their most loyal customers, the company determined that they should offer new products, which have become very successful.

Listening posts must be designed and used to measure satisfaction, of course, but they must also be used to measure factors that will gauge the possible defection of satisfied customers.

 

The Ritz

I was standing outside room 1036 of the Ritz-Carlton, just off the Boston Common, equipped with a room service cart with a light meal for two on it, with my trainer, Steve Posner.

I was training for a week to become a room service waiter at the Ritz for the purposes of a Harvard Business Review article I was writing, and was trying to learn how the Ritz achieves what might be called "extreme customer service" on the part of its employees.

I raised my hand to the door, going over the script in my head, pretty frightened as it turned out. I knocked on the door and said, "Good evening, in-room dining." I walked in with my cart, pushing rather than pulling it so that it kind of jiggled and tinkled and almost tipped over as I went into the room, and asked the woman in the room if I could open the bottle of water for her and help her in any way set up her meal.

And then she said, "That would be fine, if you'd like to," and then basically I stood there, hands behind my back, kind of slack-jawed and desperately trying to remember what I was supposed to do next.

Suddenly I remembered, "A-ha! Explain to them what they're receiving tonight." So I lifted off the warming tray and said, "You have a cheeseburger medium rare and a salad and beer and water." And then I stood there again.

Meanwhile my trainer, having basically given up on my ever opening the bottle of water, went over and did just that, and tried to smooth things over for me as we left the room. As we headed down in the elevator, he said, "We've got a little more training to take care of."

This was kind of my maiden voyage as a room service waiter at the Ritz, but the purpose of my going through the training and the process was really to try to find out what makes that hotel chain so successful in providing service to its customers.

They have a lot of rules, they have a very extensive training program, which they offer actually to other companies trying to offer top notch customer service. But my strongest takeaway from the week I spent learning to be a room service waiter was that empathy may be the most important aspect of providing extreme customer service.

The problem with my first trip into that room was I was thinking all about myself and not about my customer, my guest in that hotel. And the challenge over the course of my week was to get outside my own head and to get inside the heads of the people I was serving.

There was one instance where my trainer, Steve, did a wonderful thing. We were taking some champagne and pastries up to a room of a newlywed couple who would be arriving in a couple of hours. He not only was very careful in putting the rose petals around the champagne glasses, crossing the spoon — there was a lot of care given — but he was also at that very moment thinking about his own grandparents' wedding.

And he told me as we were doing this, he said, "On my grandparents' 75th anniversary, they showed pictures of their wedding. And while the pictures were old and kind of funny and from long ago, it meant something to them. And I want this experience to be meaningful to these people as well."

Empathy, getting inside the heads of the people you're trying to serve, was my strongest lesson I had from that experience as a room service waiter.

First-class customer service is all about empathy for the customer.

Observing the customer

There is no substitute for watching your customers while they are using your product or service. Get out into the field with qualified observers, and see how your customers use your product in real life. You'll find out what they like, what they don't like, and ways that they would improve your product or service. You'll be surprised to hear things you never even thought of.

For example, at a major photocopying company, observers in the field found that copy machines were usually placed in storerooms. People frequently stood on the machine to reach the highest shelves. Knowing this, product designers created a copy machine strong enough to support a person's weight.

When you go into the field, bring along observers with different backgrounds and skills. Different perspectives can provide valuable information.

Word of mouth

One of the things we are learning in the media is that the change that we're going through right now is something that is going to extend itself beyond media companies. One of the key elements we're learning in the media is that we have to pay more attention to the consumer.

The consumer has got much, much more control of the relationship than they used to and that's really going to be true in almost every business from now on. And that's one of the things digital platforms do; they match buyers with sellers — it's the reason eBay works so well, or Amazon.

You can find something you're looking for in a much easier way than you used to be able to. Any company has to worry about the fact that consumers can find information wherever they want and has to understand what that consumer wants and go after the consumer, and build a relationship with the consumer to keep them, to make them understand why they should stay with their product.

So a great example of that is a company called "Nespresso." They built a business where, 15 years ago when they started to build this business, you had to buy the coffee directly from them. They treasured that and they stayed after the consumer, wanted the consumer to have a good experience.So the consumer would call in and order the coffee by phone, even though they could get the machine at any number of stores. This phone call was the first connection the company would have one-on-one with the customer and they encouraged customers to call in and to order. And they would do what they could to get them all their canisters. But they used the opportunity to speak to them.An interesting thing happened: the Web came along and they also opened up some stores — they could have personal contact in stores. They actually built a Web site where you could order the coffee from. And a huge percentage of people moved to the Web to order the coffee. The interesting thing was they didn't stop calling though. They liked the calling experience so much that, even though they weren't buying from the phone bank, they were actually calling and asking questions about the coffee and doing stuff.

And the company, instead of cutting back on the call center and firing people and laying them off or trying to shorten the length of calls, went the other way. Invested more in it, added more people, and created what is an old fashioned social network, but the ultimate social network.You're actually talking to your consumers and customers and learn so much on a continuing basis that they encouraged their people, on the phone, to stay on the phone with customers — to talk to them more, to chat them up about new coffees that are coming and to explain how the company does everything it does.

And the business has grown dramatically. They're extremely happy with it. They have more and more customers every month. They've cut way back on traditional advertising. They believe word of mouth is what matters in that business and that social networking and all of the things that are at the heart of a consumer relationship are the heart of their business.Adapt your service strategy to the unique needs of your consumer. In the case of Nespresso, phone conversations provided the personal touch that their customers craved.

A wedge of lime

There's an interesting thing about Corona beer that a lot of people don't know about. A lot of people realize that Corona uses, in their advertising and, in fact, the way the beer is served, they use a wedge of lime in the bottle. Now, here's the story. It turns out that when this was initially being done, it was being done by people, consumers, who were consuming and drinking the beer. The people at Corona, the company — actually a Mexican company called Grupo Modelo — didn't like this.

And the reason they didn't like this is because they recycle their bottles. And this meant that every time there was a wedge in a bottle, it had to be taken out when the bottle had to be cleaned, to be reused. So they tried to initially discourage this.

And then they realized that consumers really like this ritual of putting the lime in the bottle. Since then, it's become part of the way that Corona beer gets marketed, to the point that they put it in all of their advertising.

To me, this is a wonderful example of how you learn from your customers, from your consumers, what's important to them. See, a lot of brands don't understand that a brand is more than just a logo, it's a relationship with a customer. And the customer co-creates this relationship with all kinds of rituals — in this particular case, something as simple as a wedge of lime in the bottle.

That today has made Corona beer iconic. When you see a clear glass bottle of beer with a wedge of lime, you almost don't have to see the brand name on it, you know that it's Corona.

So, great example of how you can use a consumer ritual as part of your brand, a ritual that the consumer has initiated.

When companies embrace consumer rituals as part of their brand, the customer relationship thrives

Get customer feedback

"All the smiles in the world aren't going to help you if your product or service is not what the customer wants."

–Carl Sewell and Paul Brown

The successful company is the one that meets and exceeds the expectations of its target customers. To accomplish this, it listens continually to its target customers to find out what products and services they want to meet their needs, and the way in which they want the products or services delivered. But customers are moving targets—their expectations are constantly changing. For this reason, organizations need as many opportunities to hear and respond to customer feedback as they can find. Every organization has listening posts, places where employees hear customer feedback. Organizations can create both formal and informal ways to find out how they're doing.

Communication is key

The relationship between the loyal customer and the successful organization is a dynamic, ongoing process based on constant two-way communication and responsiveness.

The difference between average and excellent organizations is how effectively management generates feedback, listens to it, communicates the information internally, and acts on it. Instead of "telling" through constant advertising and hard-sell pitches, companies must focus on "listening." Every organization already has built-in mechanisms for getting feedback, but they are not necessarily used well.

Select for attitude, train for skills

Skills can be taught, but it's difficult to train someone to have the right attitude. The most successful service organizations hire first for attitude and only secondly for skills. They train new hires in the skills they need for their jobs.

Everyone in the organization needs to have a customer-focused attitude. No one should be exempt, not even workers who spend little or no time in front of customers.

For example, a talented but egomaniacal software programmer can delay product releases and make life truly miserable for teammates. If the programmer's attitude problems go unchecked, delays will continue, and the most highly skilled co-workers will find jobs with a competitor.

Go beyond frontline service

Many organizations understand the need for training frontline workers to be polite, empathetic, and knowledgeable. But great frontline service is simply not enough. Everyone in the company is responsible for delivering the results the customer wants.

For example, a major airline subcontracted a shuttle service to fly passengers from a hub to the smaller airports in the region. Frontline workers were polite, industrious, and efficient. Unfortunately, the planes were never on time, when they took off at all. Flights were canceled almost continuously. Passengers constantly arrived hours or even a day late, frequently missing important events and meetings. Eventually, the poorly run shuttle service lost its contract and went out of business.

Obviously, great frontline service is critical for success in any organization. But, as this story shows, capability cannot stop at the front line if the company is to be profitable. When capability is lacking anywhere, it compromises the company's ability to deliver what the customers want. In the case of the airline, that was reliable transportation.

As a manager, you have the power and responsibility to strengthen the first link in the service-profit chain: employee capability.

Match expectations

"It takes months, even years to find a
customer ... and only seconds to lose one."

Great companies remember that even target customers are moving targets—their expectations shift and evolve over time. Thus, service quality is not absolute, because it is determined by the customer, not by the service provider. And it varies from customer to customer. Consequently, excellent service quality firms are those that can adapt their products and services to meet and exceed changing customer expectations.

For example, an automobile manufacturer with an extremely high loyalty rate noticed that it was losing customers. They went to their defecting customers and asked why. The customers were happy with the quality of the cars, but they were beginning to have families and wanted bigger cars. Their expectations had changed. When the manufacturer responded by designing bigger cars, its efforts were rewarded by increased loyalty and sales.

Misguided marketing

"Various estimates place the cost to attract new customers at five or more times the cost of retaining existing ones"

–James L. Heskett

The illustration below represents a typical marketing budget. As you can see, only a small fraction of the entire budget is devoted to maintaining loyal customers.

Most companies today don't work very hard at developing a relationship with a long-term customer. They focus nearly all their energy and money on getting new customers. They promise low, introductory rates and sign-up incentives, and, of course, they spend millions on marketing and advertising and lose money on bad debts.

The reward structure within the company is geared almost exclusively to luring new customers. The biggest incentives often go to employees who bring in new customers, not to those employees who work hard at keeping loyal internal and external customers satisfied.

Marketing budgets like these are driven by the misconception that if you want to make a profit, you must increase market share. This traditional marketing approach focuses on the four Ps—product, price, promotional activity, and "place" (distribution channels)—and leads to the misguided concept that any customer is a good customer.

Tools for getting feedback

All tools that measure feedback are best used in an atmosphere of trust. They should be used to gather useful information as a way to improve products and services, not as weapons or methods for assigning blame or punishing people. And all tools should measure both positive and negative feedback.

Listening posts include:

Web sites. Your company's Web site offers an excellent arena for obtaining customer feedback quickly and easily. Make the most of e-mail functionality by soliciting general feedback prominently on your site and posting e-mail addresses for designated contact people. Scan bulletin boards either on your site or look at those of competitors to find out what people are saying about your products or services.

• Audits. Audits take many forms. Perhaps the most popular among them is "mystery shopping." Mystery shopping may consist of actual visits to retail or other business sites, calls to customer service providers, or the actual consumption of either products or services. It is thought to offer a high degree of objectivity, although employees can regard it as unfair or even as "spying," if not evenly conducted to identify ways in which efforts can be improved.
• Market research. Many large corporations hire market research firms to do extensive studies that explore demographics, lifestyles, buying habits, preferences, and buying patterns. Small businesses may not be able to commission such extensive studies, but they can get data from the Small Business Administration.
• Focus groups. There are many kinds of focus groups, from small, informal meetings to elaborate, carefully orchestrated sessions. An informal group of customers from a target market can help a company testing an initial product idea, design, or concept. As the product develops, the company may begin to conduct more geographically expansive, professionally organized focus groups. Focus groups are excellent for testing products and services, but the focus group phenomenon can send an unfocused company into disarray as it becomes unable to think clearly in the face of often contradictory results.
• The ordering process. One of the most overlooked listening posts is the ordering process. Whether an order is taken in person, over the phone, or on the Web, valuable information can be obtained from customers by asking the right questions and listening carefully at this contact point.
• Satisfaction cards. Most service industries give customers a chance to fill out guest satisfaction cards. Today, they're prevalent in industries like food and lodging, health care, and automotive care.
• Surveys. A well-designed survey can help you determine what you are doing to deliver the greatest satisfaction, or lack of it. More elaborate than a satisfaction card, a survey measures many areas of satisfaction. Sometimes a written survey is followed up with a phone interview. Information gathered from surveys can be used to replicate the most successful strategies and solve the problem areas.
• The customer service process. Complaints that arise in the course of serving a customer should be carefully studied and responded to promptly. At one successful hotel chain, when a customer complains, it is noted on a Guest Incident Form and entered that day into a database so that other hotel personnel can be notified. This helps employees know that the guest may need special attention.
• Follow-up satisfaction calls. Recently, many organizations have established a follow-up satisfaction call as another listening post in their customer relationships. More elaborate than a card, but less involved than a comprehensive survey, the follow-up call is a personal, brief phone call that takes place shortly after a transaction. A representative calls the customer to make sure that everything is okay and ask a few, simple questions about their products and services.

The well-trained representative can spot service recovery problems before they begin, and can reveal more general information about what the target customer values or does not value.

For example, a major optical company calls customers about a week after they buy a pair of glasses. They check to make sure that the glasses fit properly, and invite the customer in for a follow-up fitting. At that time, representatives also ask a few other, brief questions that measure satisfaction. This "extra" service distinguishes this optical company from its competitors, and helps ensure repeat business.

Follow-up calls are also excellent marketing tools, establishing a feeling of trust between the company and the customer. A follow-up satisfaction call should be a sincere effort to ask about and provide service. It should not be used to "sell." If the caller uses a satisfaction call as a trick to "push" products, the customer will become annoyed.

The three Rs

Studies show that the longer customers are loyal, the more profitable they become. Why? The answer has to do with what are known as the three Rs of customer loyalty.

The first R of customer loyalty is retention. An ongoing relationship with a customer creates a steady stream of revenue over time as the customer continues to buy products. The costs associated with marketing decline, and, in many cases, so do the costs of actually serving the customer who becomes familiar with the company, its product lines, and its procedures.

Loyal customers also generate related sales, the second R. The profit generated by selling new products and services to existing customers is greater than it is for selling to new customers. The forward-thinking company develops new products by listening to its loyal customers. Loyal customers are therefore more likely to buy because the new product has been designed to meet their needs, and because they have a degree of faith in the company already.

In fact, the original product may generate a minor profit compared to related sales over time. New sales to existing customers are less costly, because they require less marketing, no new credit checks, less paperwork, and less time. Furthermore, loyal customers are often less sensitive to price than new customers.

Positive referrals, the third R, are the best kind of marketing—and they're free! Positive customer referrals are vital to profit and growth. Research suggests that satisfied customers are likely to tell five other people about a good experience, while dissatisfied customers are likely to tell eleven other people about a bad one. From your own experience, you know that personal referrals carry much more weight than traditional marketing.

Take risks

Sometimes, talking and listening to customers, studying market research and one process after another, can stifle imagination and creativity. How can a new product or service be introduced without solid approval from its target customers? How can any product make it without the blessing of a hundred focus groups? However, we need only to look at the histories of some of the most successful businesses to find that they were founded on products that focus groups rejected.

Do your market research. Listen to your customers. Deliver the best service. But use your imagination. Don't be afraid to let a new product or service create a need. Don't let the data drive you. You need to drive the data.

The service-profit chain

Research across a wide variety of industries confirms that profitability and growth are strongly related to variables such as:

• Employee capability
• Employee satisfaction
• Employee productivity
• Employees' ability to deliver good value to customers
• Customer satisfaction
• Customer loyalty

For example: Employee capability—built by hiring the right people, giving them training, support, latitude, and rewards—promotes employee job satisfaction. When employees enjoy their work and believe they are making a difference, they tend to stay longer and become more productive and knowledgeable. Such employee loyalty, in turn, creates greater customer satisfaction. After all, customers are more likely to be happy when they are being served by motivated employees who take the time to get to know their specific needs and circumstances. Not surprisingly, happy customers tend to buy more from the company and also to refer other customers to the company more frequently. Thus, customer satisfaction breeds customer loyalty. And there is a dramatic cause-and-effect relationship between customer loyalty and profitability: in some industries, a small percentage of a company's most valuable and loyal customers can account for more than half of total profitability.

The high cost of turnover

Research suggests that employees place a high value in their jobs on capability—which can be translated roughly as the latitude and ability to deliver results to both internal and external customers. High perceived capability can, in turn, lead to reductions in the rate of employee turnover.

Successful organizations have lower employee turnover than their competitors. Even firms that have relied upon high employee turnover—for example, fast-food chains, which have tended to hire low-skilled employees at minimal wages and provide them with minimal training—are beginning to understand that satisfied, long-term employees help build customer loyalty and satisfaction and cost less to manage. As a consequence, these companies are starting to question their traditional assumptions.

The visible costs of bad hires and high employee turnover show up in related costs, such as:

• Additional recruiting and training expenses
• Lower productivity on the part of co-workers and managers

A broad range of hidden costs can be equally damaging. High employee turnover can have a negative impact on:

The morale of other employees

• The quality of service provided
• Customer retention
• Productivity and profitability

Use the information you generate from calculating the cost of employee turnover in your own organization to help convince colleagues that it makes economic sense to hire, train, support, and reward loyal employees.

Set the right goal

Setting customer satisfaction goals requires you to identify target areas where your team or company needs to improve.