It’s generally accepted that it’s cheaper to retain existing customers than to acquire new ones. That being the case, it’s no surprise that many business managers set a great deal of store by fostering customer loyalty. They’re encouraged in this by countless business gurus chanting the tired and worn old mantra: “To succeed in business, you must delight your customers”. But is it actually true?
I was involved in a discussion recently where I argued that delighting your customers may be neither necessary nor sufficient to guarantee success. Instead, you should focus on meeting their expectations – satisfying them.
The customer is NOT always right!
Some customers can be a real pain in the neck and a business owner may well be glad to lose them. Here’s an amusing example of how a website designer may be driven to fire his client.
Some business owners even have what’s known as a “wanker tax”. It’s an extra charge levied on those who they know to be time-consuming and painful clients to deal with.
In any case, not all customers are equally valuable. You’ve probably already heard of the Pareto principle (aka the 80-20 rule) which states that roughly 80% of events come from 20% of the causes. Translated into business-speak this means that, as a rule of thumb, 80% of your profit comes from 20% of your customers. On the other side of the coin, 20% of your customers are likely to account for 80% of the work – and it often seems to be the least profitable customers that demand the most attention.
In which case, I would argue that it’s more profitable for the business to lose the bottom 20% – or “disqualify” them, as it’s also known – and spend the time and resources on those who are worth the time and effort.
Disqualifying a segment of the market is the flip side of qualifying a potential customer. Just as a salesperson may ask a set of questions to probe how serious a customer is, so a business can discourage interest from people who will almost certainly never buy. A particularly striking example of this is the “419” Nigerian scam email – the fraudster is happy to state his true location, as sceptical recipients will recognise it as the mark of a fraud and junk the email. The fraudster can thus avoid having to waste time on them and concentrate on the very few people who are gullible enough to show interest (and may even be gullible enough to send the “advance fee” to release the non-existent funds).
The 80-20 rule and the profitability pyramid
I have to be honest and admit that this is only one interpretation of how things might work. I’ve seen profitability pyramids before, but not visual representations of cutting off the lowest tier and spending the business resources on the more profitable tiers instead, thus creating a more squat and more profitable pyramid. It’s just a hypothesis – do you think it might work? And even if it did, what problems might be associated with the 20% of customers you might want to get rid of? Have a look at this diagram, which explains what I’m on about.
Losing those less profitable customers at the bottom of the profitability pyramid frees up resources to concentrate on expanding the more valuable customer segments. This has implications for your marketing spend too – why spend your time and money where the ROI is lower? Well, there are some dangers involved in getting too obsessed with the 80-20 rule.
Dangers of focusing too much on the 80-20 rule
What if some of your best 20% moves away? This could happen due to various reasons, eg your biggest customer goes bankrupt, your product is superseded by a new innovation, or they have a management change, or perhaps they simply move away for some other reason – disgruntlement or death. Nothing lasts for ever. Meanwhile you have been allocating most of your market spend to your best 20% and not concentrating on growing the rest of your customer base. It’s a case of getting the balance right and, without a crystal ball, that’s going to be difficult to do. If anyone knows how, please tell me.
Different business models and paths to profitability
There are also different models of businesses and what works for them may be significantly influenced by the industry they’re working in. Some businesses rely on customer satisfaction to create loyal customers and keep them coming back. The hospitality industry is a prime example of where customer service plays a major role, and service industries where staff members deal directly with the public also tend to put considerable focus on customer service training for staff. But even in the hospitality industry, there is still a big focus on profitability as well as customer satisfaction.
Offer a range of options
A company might offer a range of options. This enables the owner to segment and diversify his audience. However, the business owner knows which will be the most profitable, so they try to steer the customer towards buying the option with the highest margin, which is what the owner wants to sell rather than what might be best for the customer. We can see this strategy in operation in many industries.
Restaurateurs frequently do it with their wine lists. People rarely buy the cheapest or the most expensive wine on a list, so the restaurateur places the wines he most wants to sell at strategic positions on the list. Countless wine journalists have counselled against buying the second cheapest and second most expensive wine in a restaurant for that very reason; they’re usually overpriced compared to the others on the list.
It’s the same with many online services. The owner could create three offerings, say Platinum, Gold, and Bronze. It’s really the Gold package he wants to sell because that’s where the biggest margin is. Therefore he prices the Platinum too high for it to be a good option, prices the Gold to make it seem good value, and prices the Bronze to make it seem expensive for the reduced services on offer. To reinforce the customer’s perception of Gold being the best value option, he might also stick a prominent “Best seller!” label on it. Hotels also usually offer different rooms for different prices as well as different packages. Very often these offers are geared up to sell what’s most profitable for the hotel rather than necessarily provide what best meets the customer’s needs.
Use penalty clauses
Some companies infuriate their customers with clauses in small print, extra fees, and penalty charges. Why? Because it pays and it can be a profitable business model to have confused and ill-informed customers. When the customer makes a poor purchasing decision or attracts a penalty for doing the wrong thing, it can be very profitable for the business. There are a number of reasons why a company might want to run its business in this way.
A company might offer their main service at a low margin – or even at a loss! – because they make more money doing things that way. Ryanair is a prime example of this. They sell their flight tickets very cheaply and make up for the shortfall by charging “ancillary” fees. Some of these are for avoidable things such as checked-in baggage, refreshments and out-of-hours help lines, as well as failure to print out the boarding pass before arriving at the airport and various other “misdemeanours” committed by the customer. But others are for essential parts of the journey, notoriously the £7 fee for checking in – which you do online before arriving at the airport. It’s unlikely that Ryanair is anyone’s favourite airline, but they’re a popular choice on the routes they fly simply because they’re often the cheapest – as long as you take the time to familiarise yourself with their complex terms of service.
Other companies use penalty clauses to discourage undesirable customer behaviour. The penalties can be used to offset the extra costs of dealing with the 20% of customers who cause 80% of the work, thus mitigating part of the drain on profitability. However, some businesses have used penalties to actually generate profit, eg certain credit card companies found that it was more profitable to allow a customer to exceed their agreed credit limit and penalise them for doing so, rather than to prevent an overspend in the first place.
Neither of the above methods of using penalties create delighted customers, but many business still find it profitable to use these tactics.
Different factors contribute to business success
Unique selling point (USP)
To be successful a business usually needs a USP. Otherwise there’s nothing to differentiate them from their competitors. Pricing is the obvious starting point. If you’re the cheapest, then people will buy from you. Looking at the airline industry again, we can see how Michael O’Leary, CEO of Ryanair, has successfully differentiated on price. Amazon does this too by attempting to always be the cheapest place to buy anything.
But it’s a dangerous strategy. If your competitors have the financial backing they can slash their prices and put you out of business by a sustained campaign of undercutting you. Part of the reason Freddie Laker’s transatlantic SkyTrain flights were forced out of business was that his competitors were able to undercut him for long enough to exhaust his cashflow. (The killer blow was that his competitors refused to buy aircraft from McDonnell Douglas and engines from General Electric unless they abandoned a rescue package they’d agreed with Laker Airways.)
Unless you have the skills and resources available, which Michael O’Leary and Amazon have, then being the cheapest is not usually recommended as being a good business strategy. It’s more usual to differentiate by adding value. You can charge a bit more, and still keep the customer satisfied, if you offer a bit more. What “more” you offer could be a number of things, eg a better product or service, or even good branding and creating a community of followers.
Convenience also comes into play. How many people would prefer to get higher quality food, locally produced, and sold by local vendors? Most would probably say yes. But going to the butcher, fishmonger, baker and greengrocer can be time-consuming. It’s so much easier and more convenient to do a one-stop shop at the local supermarket. It’s probably easier to park there too. Therefore, many of these local artisans who delighted their customers have gone out of business because they simply can’t compete with the convenience and price cutting of the massive supermarket industry.
Stop trying to delight your customers
Whilst researching for this blog post, I came across an article in the Harvard Business Review with the title “Stop trying to delight your customers”. (It’s a five page article and to get beyond the first page you need to register. You can register free and read up to three articles per month.)
According to conventional wisdom, customers are more loyal to firms that go above and beyond. But our research shows that exceeding their expectations during service interactions (for example, by offering a refund, a free product, or a free service such as expedited shipping) makes customers only marginally more loyal than simply meeting their needs.
For leaders who cut their teeth in the service department, this is an alarming finding… Indeed, 89 of the 100 customer service heads we surveyed said that their main strategy is to exceed expectations.
This research goes on to explain that there’s often very little correlation between customer satisfaction and loyalty. The author further argues that problem solving can be more important for creating customer loyalty.
This concept of “service recovery” is said to create more loyal customers than getting everything right in the first place. Having experienced things going wrong several times, both online and offline, I’m inclined to agree. I tend to be more loyal to those who quickly and efficiently solved the problems – at least I can be fairly confident that if anything goes wrong again, they’ll sort it out without any fuss.
The businessballs website has lots of interesting and useful information about customer service. Once again, the emphasis is on those in the service industry. Here they pay particular attention to call centres.
Most people talking about customer service and its importance seem to focus on B&M interactions – and above all, those B&M industries where the business’s staff spend a good deal of “face time” with the customer. However, many of the traditional business concepts may not apply to new models created by online businesses. The rules have changed. Back in the day, you had “The customer is always right” and “Delight your customers”. Now there’s more of a drive to fire the least profitable and most time-consuming customers – the moaners and tyre-kickers.