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Protect and grow customer loyalty in the 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 juillet 02, 2009
min


Deep cost-cutting compromises service. To make up for lost revenues, companies sometimes add new charges and fees that infuriate customers. 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 lay the foundation for growth when the economy rebounds. These powerful advantages of customer loyalty help explain why the biggest market share changes occur during downturns. When spending drops, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilise their businesses. They may even attract new customers. But maintaining customer loyalty in a downturn is difficult and requires new strategic thinking. Companies that succeed share some common characteristics. First, they avoid the trap of chasing revenues by appealing to every potential customer group, often through aggressive discounting. New customers attracted by lower prices often fail to buy more when prices recover. The US retail group 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 customers. Sales were slower to recover than those of competitors. Second, loyalty leaders apply practical disciplines that keep their most important customers front and centre. Their management teams 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 segment to which your company sells. Even though the design target may be small, it represents 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 at a reasonable price. Yet its products also 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 ability. One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes and behaviours. The next stage is to sort current customers in each segment by profitability and potential value. Then group them into "promoters", "passives" and "detractors" by asking them to rate on a scale of zero to 10: "How likely are you to recommend our company's products or services to a friend or a colleague?" Those responding with scores of nine or 10 are promoters, your company's biggest boosters. Those answering with a seven or eight are passives. Those giving a score of six or less are detractors. They are 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 identify what loyal customers like most about today's products and services. It can also let companies know what are the actions that drive their customers away. Third, customer-focused companies identify the critical moments of truth that have the greatest potential to delight customers. One way to determine which touch points matter most is to ask customers directly—and then feed that information back to the front line. The US auto insurer Progressive Corp shortened its payment cycle to reimburse customers whose vehicles had been damaged beyond repair. The result: its NPS jumped more than 50 percentage points. Loyalty leaders have distinct advantages over their competitors during a downturn. At a time when companies are seeking every possible advantage they can wield, keeping loyal customers front and centre can make a critical difference —both now and in the long term. Seow-Chien Chew is a partner with Bain & Company and a leader in the firm's Customer Strategy practice. Rob Markey is a partner and leads Bain's Global Customer practice. Adapted from the forthcoming book "Winning in Turbulence" by Bain & Company, published by Harvard Business Press. 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. To make up for lost revenues, companies sometimes add new charges and fees that infuriate customers. 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 lay the foundation for growth when the economy rebounds.

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

But maintaining customer loyalty in a downturn is difficult and requires new strategic thinking. Companies that succeed share some common characteristics.

First, they avoid the trap of chasing revenues by appealing to every potential customer group, often through aggressive discounting. New customers attracted by lower prices often fail to buy more when prices recover.

The US retail group 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 customers. Sales were slower to recover than those of competitors.

Second, loyalty leaders apply practical disciplines that keep their most important customers front and centre. Their management teams 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 segment to which your company sells.

Even though the design target may be small, it represents 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 at a reasonable price. Yet its products also 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 ability.

One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes and behaviours. The next stage is to sort current customers in each segment by profitability and potential value. Then group them into "promoters", "passives" and "detractors" by asking them to rate on a scale of zero to 10: "How likely are you to recommend our company's products or services to a friend or a colleague?"

Those responding with scores of nine or 10 are promoters, your company's biggest boosters. Those answering with a seven or eight are passives.

Those giving a score of six or less are detractors. They are 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 identify what loyal customers like most about today's products and services. It can also let companies know what are the actions that drive their customers away.

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

One way to determine which touch points matter most is to ask customers directly—and then feed that information back to the front line. The US auto insurer Progressive Corp shortened its payment cycle to reimburse customers whose vehicles had been damaged beyond repair. The result: its NPS jumped more than 50 percentage points.

Loyalty leaders have distinct advantages over their competitors during a downturn. At a time when companies are seeking every possible advantage they can wield, keeping loyal customers front and centre can make a critical difference —both now and in the long term.

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