Most companies assume they're giving customers what they want. Usually, they're kidding themselves. When Bain & Company recently surveyed 362 firms, we found that 80% believe they deliver a "superior experience" to customers. But when we asked customers, they say only 8% are really delivering.
This "delivery gap" doesn't exist because businesses fail to recognize the importance of their customers. More than 95% of surveyed management teams say they're customer focused.
We've found two reasons for the gap. The first is a basic paradox: Most growth initiatives damage the most important source of sustainable, profitable growth-a loyal customer franchise. To increase revenue and profits, businesses do things like raising transaction fees that end up alienating their core customers. Efforts to pursue new customers compound the problem, distracting management from serving the core.
The second is that good relationships are hard to build. It's extremely difficult to understand what people really want, keep your promises and maintain a dialogue to ensure you meet customers' changing needs. Even initiatives to "better understand" customers can backfire, drowning firms in a sea of data.
How can you close the delivery gap? We found, in analyzing the achieving 8%, that they rigorously focus on treating their most profitable customers in ways that ensure they come back for more and recommend the company to friends. Unlike most companies, which instinctively turn to product or service design to satisfy customers, the elite few pursue three imperatives simultaneously. We call them the "Three D's": They design the right propositions for the right customers. They deliver those propositions at the lowest system cost. And they develop the institutional capabilities to do it again and again. Each of these Three D's reinforces the others. Together, they ensure the company is continually led by the voices of its customers.
Design. Most large companies are adept at traditional market research, segmentation and product design. But in their efforts, the 8% who succeed include customer interaction—focus groups, interviews and observation—that leads to real insights. They convert those insights into truly differentiated propositions reflecting a customer's total experience. Vodafone, for example, stopped categorizing customers according to where they live, as most cellular providers do. Instead it divided its immense marketplace into a few high-priority global segments such as occasional users and "young, active, fun" users. It offered the first group simple, straightforward service, and the second state-of-the-art service that includes games, popular ringtones, news and sports.
Delivery. The achievers treat every customer interaction as a precious resource, continually listening to what customers want. These companies set up cross-functional teams to ensure that they keep their promises to customers at all touchpoints.
That kind of mind-set led Feargal Quinn, founder of the Irish grocery chain Superquinn, to overturn a manager's initiative that reduced waste in his bakeries by allowing bread baked after 3 p.m. to be sold until 3 p.m. the next day. Sales plummeted as a result, because the smell of freshly baked loaves was one reason shoppers came to Superquinn. Understanding this, Quinn halted the initiative and instated a policy that increased waste: baking new bread every four hours. Superquinn was rewarded with a dramatic jump in sales and profits.
Developing capabilities. Finally, companies that delight customers build processes to maintain a real dialogue. They establish capabilities that foster ongoing, systematic improvement and feedback loops that identify shifts in customer attitudes.
Software powerhouse Intuit did this to help reverse a slide its TurboTax program briefly experienced in the online market in 2003. Intuit institutionalized constant improvements in its offerings by creating a 6,000-member "Inner Circle" of customers, who serve as an ongoing focus group. In addition to answering the all-important question "How likely are you to recommend TurboTax?" they explained their top priority for enhancing any aspect of service, and ranked a list of suggestions from others.
Thanks to such moves, Intuit was able to better segment its customers, redesign its TurboTax product, deliver it more effectively, and maintain a mechanism for continually developing related capabilities. Customer advocacy surged, and unit sales for the tax season rose 27% over the previous year. By systematically attacking the Three D's, Intuit closed the delivery gap.
James Allen is a partner at Bain & Company in London and co-directs the firm's Global Strategy practice. Frederick F. Reichheld is a Boston-based Bain Fellow. Barney Hamilton is a Bain partner in London. Rob Markey, a partner based in New York, is the leader of Bain's Customer Strategy practice.
To find out more about how to truly deliver to your most important customers, read a longer version of "Closing the Delivery Gap." Also, listen to James Allen discuss how achieving companies approach the Three D's of customer-led growth in an audio slideshow.