Foul-weather friends

Economic uncertainty can wreak havoc with customer relationships.

Deep cost cutting compromises service. To make up for lost revenue, companies sometimes add new charges and fees that make customers feel they are being gouged. And the negative effects of lost customer trust can be deep and long lasting.

On the other hand, the advantages of customer loyalty are more pronounced in a downturn. Loyal customers cost less to serve. They typically concentrate spending at companies they trust. Their referrals provide companies with more like-minded customers, laying the foundation for growth when the economy rebounds.

These powerful advantages of customer loyalty help explain why the biggest changes in market share occur during downturns. When spending drops, companies that focus on protecting and expanding their most loyal, profitable customer segments can often stabilise their businesses. They may even attract new customers as competitors falter.

But maintaining customer loyalty in a downturn is difficult. The situation requires fresh strategic thinking. Executives need to ask themselves how customers’ preferences have changed, how long the changes will last, and how they can appeal to new needs without diluting long-term competitive advantage.

Executives who answer those questions effectively and strengthen loyalty in a downturn share some characteristics.

First, they avoid the trap of chasing revenue by trying to appeal to every potential customer group, often through aggressive discounting. New customers attracted only by lower prices often fail to buy more when prices recover. Moreover, they sometimes place additional demands on the business system, creating unexpected costs.

Myer, Australia’s largest chain of department stores, has avoided using blanket discounts to boost sales in slow periods by introducing double shopping credits for its Myer One loyalty program members. Even before hard times hit, the chief executive and his team decided to shift dollars away from mass market advertising to a focused, direct appeal to its best customers. In 2006, Myer made the loyalty program central to turnaround efforts, spurring spending primarily by giving customers credits that translate into gift cards.

In 2008, members spent an average of three times more than the value of the gift card when they redeemed it. By tracking members’ product preferences in the program’s database, Myer is able to position favourite brands near each other and stimulate sales.

Such attention to customer preferences has helped boost targeted perfume sales by up to 75 per cent above the average. The data also allows store managers to keep in touch with their top 100 customers and give personal attention.

In just three years, the loyalty program has tripled in size from 1.1 million to 3.3 million members. Members account for 60 per cent of store sales and typically spend 15 per cent more annually. Perhaps most impressive, the loyalty program has helped fuel double-digit growth amid the downturn. In fiscal 2009, Myer’s earnings grew by 10.6 per cent.

Second, the loyalty leaders apply a set of practical disciplines that keep their most important customers front and centre. This is harder than it seems. In a downturn, every company faces difficult choices about which customers it will fight to keep and which to pass up.

To make the right trade-offs, management teams first need to identify an attractive customer core that becomes the prime focus of their energies and investment. We call this group the design target – the heart of the market to which your company sells. They’re the customers your company can serve better than any competitor can.

For example, St George Bank focuses its energy on the middle-market business segment where it has built a loyal following – and is watching the number of customers rise by more than 10 per cent annually – through a systematic approach to relationship management and referrals. The bank introduced an internal training and accreditation system for the entire relationship management process in the middle-market business segment, including strict guidelines for following up on referrals – something that falls between the cracks at many commercial banks.

The bank’s investment in cultivating loyal customers pays off in several crucial ways. For one thing, St George has virtually no client defections in this segment – a zero per cent churn rate. Also, the bank’s cross-selling revenues have grown steadily, contributing to annual revenue gains of 12 per cent during the past six years. And importantly, St George has found that a single, satisfied customer in the middle-market business segment can mushroom into an entire network of referred clients.

One way to find an inner circle of targeted customers is first to pinpoint discrete segments based on their different needs, attitudes and behaviours. Next, executives can sort their customers in each segment by profitability and potential value. Then they can group them as promoters, passives or detractors by asking them to rate their likelihood of recommending the company’s products or services to a friend or colleague on a scale of zero to 10.

Customers responding with scores of 9 or 10 are promoters – your company’s biggest boosters. Those answering with a 7 or 8 are passives. They are positive but not committed to your company.

And customers giving a score of 6 or less are detractors. This group is dissatisfied with your company and apt to drive away potential new customers through negative word-of-mouth. Subtracting the percentage of detractors from the percentage of promoters yields a company’s net promoter score (NPS), which measures the degree of loyalty among a company’s customers.

Concrete metrics such as NPS help sharpen a company’s focus on loyal customers based on what they say and do. Such metrics help to identify what loyal customers like most about today’s products and services – important to maintain at all costs – as well as the issues that create real detractors among target customers. Understanding what motivates promoters and detractors helps successful companies to prioritise improvements in the design and delivery of their products. It also enables them to make tough trade-offs in the allocation of scarce resources.

Third, customer-focused companies take pains to identify the critical moments of truth that have the greatest potential to delight customers – or to drive them away.

One way to determine which issues matter most is to ask customers directly.

Contact them two or three weeks after a sale, a warranty repair or other front-line interactions. Invite them to rate how likely they would be to recommend the company based on that experience, and give them an opportunity to explain why they gave that rating. Then feed this information back to the front line.

United States insurer Progressive, which started selling insurance in Australia in December, learned how sensitive policyholders were to payment delays when their cars had been damaged beyond repair.

By fine-tuning how claims were routed, Progressive shortened the payment cycle from initial filing to paying the customer by more than 35 per cent and saw its NPS jump by more than 50 percentage points.

This is the same listening approach that Coca-Cola Amatil took when customers complained about the taste of its energy drink Mother.

CCA swiftly responded by reformulating Mother and sales skyrocketed.

Loyalty leaders have distinct advantages in a downturn.

When companies are seeking every advantage they can wield in a tough economy, keeping loyal customers front and centre can make a critical difference – when we are on uncertain ground and when strong economic cycles return.

Bain & Co partner Rob Markey heads the customer practice in Boston in the US. Jayne Hrdlicka and Scott Tanner are Bain & Co partners in Sydney.

BRW

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