The Edge

Loyal customers help companies win market share in downturn

Loyal customers cost less to serve. They concentrate spending with companies they trust. And their referrals to friends lay the foundation for growth when the economy rebounds.

Par Seow-Chien Chew and Rob Markey

First published on août 24, 2009
min


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. 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 the companies they trust. Their referrals to friends lay 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 growing their most loyal, profitable customer segments 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 new strategic thinking. How have your customers' preferences changed? How long will those changes last? How can you appeal to their new needs without diluting your long-term competitive advantage? Companies that answer these questions effectively and strengthen loyalty in a downturn share some common 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. US department store Saks Fifth Avenue encountered this trap during the 2001 recession, implementing deep price cuts that temporarily boosted revenues but undercut its luxury status for many longtime customers. Nieman Marcus assumed the luxury mantle, and when the economy rebounded, Saks' sales were slower to recover. Second, the loyalty leaders apply a set of practical disciplines that keep their most important customers front and centre. That is 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". They are the customers whom your company can serve better than any competitor. While the design target itself may be small, it is representative of a broad range of customers. BMW, for example, designs its cars for the relatively small group of people who treasure high performance and attention to detail, all for a reasonable price. Yet its products appeal to a broad range of buyers who may never make full use of the engine's power or the suspension's precise road handling. One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes, and behaviours. 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, on a scale of 0 to 10, how likely they are to recommend the company's products or services to a friend or a colleague. Those responding with scores of 9 or 10 are promoters, your company's biggest boosters. Those answering with a 7 or 8 are passives, lukewarm at best to your company. Those 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 this 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, as well as actions that drive core customers away. Third, customer-focused companies take pains to identify the critical moments of truth that have the greatest potential to delight customers. One way to determine which touchpoints 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 organisation's frontline. 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. US auto insurer Progressive Corp 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%, and saw its NPS jump by more than 50 percentage points. 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 centre can make a critical difference—both now and in the long term. Seow-Chien Chew is a partner in Bain & Company and a leader in the firm's Customer Strategy practice. Rob Markey is a partner and leads Bain & Company's Global Customer Practice. Adapted from the forthcoming book, Winning in Turbulence, by Bain & Company, published by Harvard Business Press. ® Net Promoter, NPS, and Net Promoter Score are trademarks of Bain & Company, Inc., Satmetrix Systems, Inc. and Fred Reichheld Bain Book Winning in Turbulence Learn more about how companies can navigate through turbulent times and succeed as the economy improves.

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.

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 the companies they trust. Their referrals to friends lay 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 growing their most loyal, profitable customer segments 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 new strategic thinking. How have your customers' preferences changed? How long will those changes last? How can you appeal to their new needs without diluting your long-term competitive advantage?

Companies that answer these questions effectively and strengthen loyalty in a downturn share some common 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.

US department store Saks Fifth Avenue encountered this trap during the 2001 recession, implementing deep price cuts that temporarily boosted revenues but undercut its luxury status for many longtime customers.

Nieman Marcus assumed the luxury mantle, and when the economy rebounded, Saks' sales were slower to recover.

Second, the loyalty leaders apply a set of practical disciplines that keep their most important customers front and centre. That is 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". They are the customers whom your company can serve better than any competitor.

While the design target itself may be small, it is representative of a broad range of customers.

BMW, for example, designs its cars for the relatively small group of people who treasure high performance and attention to detail, all for a reasonable price. Yet its products appeal to a broad range of buyers who may never make full use of the engine's power or the suspension's precise road handling.

One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes, and behaviours.

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, on a scale of 0 to 10, how likely they are to recommend the company's products or services to a friend or a colleague.

Those responding with scores of 9 or 10 are promoters, your company's biggest boosters. Those answering with a 7 or 8 are passives, lukewarm at best to your company.

Those 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 this 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, as well as actions that drive core customers away.

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

One way to determine which touchpoints 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 organisation's frontline. 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.

US auto insurer Progressive Corp 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%, and saw its NPS jump by more than 50 percentage points.

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 centre can make a critical difference—both now and in the long term.

Seow-Chien Chew is a partner in Bain & Company and a leader in the firm's Customer Strategy practice. Rob Markey is a partner and leads Bain & Company's Global Customer Practice. Adapted from the forthcoming book, Winning in Turbulence, by Bain & Company, published by Harvard Business Press.