Article

Foul-weather friends

Loyal customers cost less to serve. They concentrate spending with companies they trust. And their referrals to friends provide a company with more like-minded customers, laying the foundation for growth when the economy rebounds.

By Rob Markey, Jayne Hrdlicka and Scott Tanner

First published on julio 22, 2010
min read


Economic uncertainty can wreak havoc with customer relationships. Deep cost cutting compromises service. And to make up for lost revenues, companies sometimes add new charges and fees, which make customers feel they are being gouged. But 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 more spending with companies they trust. Their referrals to friends provide a company 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, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilize their businesses. They may even attract new customers, as competitors falter. But maintaining customer loyalty in a downturn is difficult. The situation requires new 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 your 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 revenues 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 new costs. Myer, Australia's largest chain of department stores, has avoided using blanket discounts to boost sales during slow periods by introducing double shopping credits for members of its MYER one loyalty program. Even before hard times hit, the CEO and his team decided to shift dollars away from mass market advertising to a more focused, direct appeal to its best customers. In 2006, they made MYER one central to turnaround efforts, spurring spending primarily by giving customers shopping 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. And, by tracking members' product preferences in the program's database, Myer is able to position favorite brands near each other, encouraging more purchases. Such attention to customer preferences has helped boost targeted perfume sales by as much as 75 percent above the average. The data also allows store managers to keep in touch with their top 100 customers and give them personal attention. In just three years, the loyalty program has tripled from 1.1 million to 3.3 million members. Members account for 60 percent of store sales and typically spend 15 percent 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 percent. Second, the loyalty leaders apply a set of practical disciplines that keep their most important customers front and center. That's harder than it seems. In a downturn every company faces difficult choices about which customers it will fight to keep and which it will 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 investments. 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 grow by more than 10 percent annually-through a systematic approach to relationship management and referrals. The bank implemented 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 major ways. For one thing, St George has virtually no client defections in this segment-a zero percent churn rate. Also, the bank's cross-sell revenues have grown steadily, contributing to annual revenue gains of 12 percent 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 identify discrete segments based on their different needs, attitudes, and behaviors. Next, companies can sort their current customers in each segment by profitability and potential value. Then group them into promoters, passives, or detractors by asking them to rate their likelihood of recommending the company's products or services to a friend or a 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 is 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 like NPS help sharpen a company's focus on loyal customers based on what they say and do. The 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 which create real detractors among target customers. Understanding both what drives promoters and what drives detractors helps successful companies prioritise improvements in 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 purchase, a warranty repair or other direct interactions with your organization's front line. Invite them to rate how likely they would be to recommend the company based on that most recent experience, and give them an opportunity to explain why they gave that rating. Then feed that information back to the front line. United States auto insurer Progressive, which in December started selling insurance in Australia, learned how sensitive policyholders were to reimbursement delays when their vehicles had been damaged beyond repair. By fine-tuning how claims were routed, Progressive shortened the payment cycle from initial filing to the customer's receipt of a check by more than 35 percent and saw its NPS jump by more than 50 percentage points. This is the same approach of listening to consumers that Australia's Coca-Cola Amatil (CCA) took when customers complained about the taste of its new energy drink, Mother. CCA swiftly responded by reformulating Mother and grocery store sales skyrocketed. Loyalty leaders have distinct advantages during a downturn. At a time when companies are seeking every possible advantage they can wield in a tough economy, keeping loyal customers front and center can make a critical difference-both now when we are still on uncertain ground and when strong economic cycles return. Rob Markey, a Bain & Company partner based in Boston, heads the firm's Customer practice. Jayne Hrdlicka and Scott Tanner are Bain & Company partners based in Sydney and leaders in Bain's customer strategy and marketing practice.

Economic uncertainty can wreak havoc with customer relationships.

Deep cost cutting compromises service. And to make up for lost revenues, companies sometimes add new charges and fees, which make customers feel they are being gouged. But 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 more spending with companies they trust. Their referrals to friends provide a company 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, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilize their businesses. They may even attract new customers, as competitors falter.

But maintaining customer loyalty in a downturn is difficult. The situation requires new 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 your 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 revenues 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 new costs.

Myer, Australia's largest chain of department stores, has avoided using blanket discounts to boost sales during slow periods by introducing double shopping credits for members of its MYER one loyalty program. Even before hard times hit, the CEO and his team decided to shift dollars away from mass market advertising to a more focused, direct appeal to its best customers. In 2006, they made MYER one central to turnaround efforts, spurring spending primarily by giving customers shopping 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. And, by tracking members' product preferences in the program's database, Myer is able to position favorite brands near each other, encouraging more purchases. Such attention to customer preferences has helped boost targeted perfume sales by as much as 75 percent above the average. The data also allows store managers to keep in touch with their top 100 customers and give them personal attention.

In just three years, the loyalty program has tripled from 1.1 million to 3.3 million members. Members account for 60 percent of store sales and typically spend 15 percent 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 percent.

Second, the loyalty leaders apply a set of practical disciplines that keep their most important customers front and center. That's harder than it seems. In a downturn every company faces difficult choices about which customers it will fight to keep and which it will 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 investments. 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 grow by more than 10 percent annually-through a systematic approach to relationship management and referrals. The bank implemented 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 major ways. For one thing, St George has virtually no client defections in this segment-a zero percent churn rate. Also, the bank's cross-sell revenues have grown steadily, contributing to annual revenue gains of 12 percent 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 identify discrete segments based on their different needs, attitudes, and behaviors. Next, companies can sort their current customers in each segment by profitability and potential value. Then group them into promoters, passives, or detractors by asking them to rate their likelihood of recommending the company's products or services to a friend or a 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 is 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 like NPS help sharpen a company's focus on loyal customers based on what they say and do. The 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 which create real detractors among target customers. Understanding both what drives promoters and what drives detractors helps successful companies prioritise improvements in 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 purchase, a warranty repair or other direct interactions with your organization's front line. Invite them to rate how likely they would be to recommend the company based on that most recent experience, and give them an opportunity to explain why they gave that rating. Then feed that information back to the front line.

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

By fine-tuning how claims were routed, Progressive shortened the payment cycle from initial filing to the customer's receipt of a check by more than 35 percent and saw its NPS jump by more than 50 percentage points.

This is the same approach of listening to consumers that Australia's Coca-Cola Amatil (CCA) took when customers complained about the taste of its new energy drink, Mother.

CCA swiftly responded by reformulating Mother and grocery store sales skyrocketed.

Loyalty leaders have distinct advantages during a downturn.

At a time when companies are seeking every possible advantage they can wield in a tough economy, keeping loyal customers front and center can make a critical difference-both now when we are still on uncertain ground and when strong economic cycles return.

Rob Markey, a Bain & Company partner based in Boston, heads the firm's Customer practice. Jayne Hrdlicka and Scott Tanner are Bain & Company partners based in Sydney and leaders in Bain's customer strategy and marketing practice.