If your customer support is not focused on satisfying your most important customers you are probably losing shareholder value.
Is efficiency killing the customer service experience?
Most companies consider customer satisfaction to be a core value for doing business, even highlighting it in their mission statements. But do they deliver?
Current thinking about customer service is more focused on technological solutions and the most “cost effective” models for driving down the cost of customer care. The initial touch point for all customers is being pushed (or rather shoved) to the Worldwide Web, and each successive step in the customer interaction process is being examined with the same intent. Cheaper and faster are the real key words here, but what about the client relationship? Some IT companies have turned away from this trend and refocused on their customers. These organizations have a new understanding of the value of their client relationships.
Satisfaction is not enough – you need loyalty
Many service providers think that an 80% satisfaction rating (satisfied and very satisfied customers) is a reasonable score. Think again! Research shows that at an 80% rating you are an average performer in the industry and your service has no point of differentiation. In fact, it is only “very satisfied” customers who are truly loyal – everybody else just feels indifferent about your service and will swap to another provider as soon as they see a cost advantage.1
The Xerox experience supports these findings. Xerox found that its very satisfied customers were six times more likely to repurchase company equipment than were customers who were merely satisfied.2
Other realities about customer (dis)satisfaction include:
- Happy customers tell four to five others of their positive experience
- Dissatisfied customers tell nine to twelve others how bad it was
- It costs between five and six times more to attract a new customer than to keep an existing one3
Measuring customer loyalty/retention is not straightforward. Rather it is a combination of several factors which are interdependent. The customer loyalty diagram measures key attributes to highlight opportunity areas for improving customer loyalty. In the case diagrammed, the company achieved adequate revenues by selling a range of products up front but provided poor support, damaging the other contributors to customer loyalty and long-term value.
Key attributes to customer loyalty:
- Satisfaction – How do your satisfaction scores compare to the industry benchmark? Is the relationship truly value-adding or are you being perceived as a commodity?
- Revenue – Is the monetary value of services increasing, staying the same or declining?
- Pocket Share – Are customers buying all their products from all of your services or are they just choosing the most economical or complex ones?
- Referral Rate – Are existing customers your ambassadors? How many new customers are acquired through referrals?
- Churn Rate – Do customers come back to you more often? And is the rate of return improving continuously?
The customer satisfaction—shareholder value equation
While most companies and service organizations will buy into the natural and logical relationship between customer satisfaction and profitability, in reality, we still know little about it. Most organizations cannot “monetize” the impact of an increase of customer satisfaction on the top or bottom line.
One of the leading bodies of research in this field is the American Customer Satisfaction Index (ACSI). Companies like Apple, Dell, Gateway, HP and IBM have been measuring their customer satisfaction according to this index. In its recent 10-year report, the institution makes visible the relationship between the measured ACSI and corporate earnings including:
- A 5% improvement in ACSI leads to an increase of over 35% of future operational cash flow and a decrease of 20% in its variability.
- For all publicly traded firms in ACSI, a 5% change in ACSI is associated with a 19% change in the market value of common equity.
- A 5% improvement in ACSI is associated with an 8% change in shareholder value, as measured by Tobin’s Q (a ratio of the market value to replacement costs of assets) for PC makers, this ratio is roughly 1:1.
The ACSI study also shows that when the stock market grew, stock prices of companies with highly satisfied customers grew faster than others. When the stock market dropped in value, higher satisfaction served as a safety cushion.4
Within the software industry, research reported in the Harvard Business Review has shown that the net present value (an indicator of profit) of the average customer life goes up by 35% by increasing customer loyalty by an extra 5%.5
One can conclude that, for the technology industry, there is roughly a 1:1 relationship between customer satisfaction and shareholder value, i.e. a 1% increase in customer satisfaction translates into a 1% increase in shareholder value.
Do you know the CLV of your customers?
For business-to-business relationships in the technology industry, which typically require vendors to maintain an enterprise support function, knowing the customer lifetime value (CLV) becomes critical. It is not enough to guess at the current or future value, you need to quantify and qualify the value of the customer relationship over time. Why? Because you need to know which customers to keep most satisfied.
Understanding which customers are providing the greatest value requires understanding a customer’s behavior throughout its “life span” and the true cost of providing service. CLV can make visible the activities required to create and maintain customer relationships, and can help expose resource consumption patterns that traditional cost accounting procedures cannot. Properly used, it also enables us to clearly identify those loyal customers with whom we wish to build a deeper relationship.
Research shows that loyal customers can bring value through many ways.
- They can be retained longer and in greater numbers
- They tend to buy more products and services
- They are served more cost-effectively
- They are willing to pay price premiums of up to 20% for their preferred brand
- They respond faster to marketing and new campaigns
- They refer others, thus helping reduce the cost of new customer acquisition
- They suggest and evaluate new products and revenue streams6
The CLV of a customer can be calculated by totaling up the net present value (NPV) of all your interactions with the customer. This has both a revenue and a cost side as displayed in the formula below:
CLV = NPV (the sum of revenues from sales, secondary purchases and referrals minus total cost of acquiring, retaining, and fulfilling the customer).7
Realizing true value of customer satisfaction in a technical support environment
Now that we know what CLV is based on, the big question is, how can we realize the true value of customer satisfaction in a technical support environment?
Unfortunately the technical support function has been managed too tactically in the past and only recently have the players who are “ahead of the curve” recognized the strategic importance of CLV.
In the absence of technical support center benchmark practices on CLV, it is worth exploring and borrowing proven ideas from manufacturing industries for realizing value from CLV.
The strategic direction of an organization should help prioritize the organization’s highest value activities. This structured approach helps identify an operational “sweet-spot,” where improvement efforts yield the most strategic and valuable results. The technical support function can benefit from an analogous operational model.
The recommended CLV realization model
The CLV realization model we are suggesting is founded on the following principles. To succeed, these principles need to be understood and accepted by the technical support management teams.
- Technical support center operating performance is a direct result of detailed technical knowledge and performance discipline.
- The management team must set the example by providing the behavioral role model. Behavior is learned by example.
- All people want to do an excellent job and will do so, given the capability and opportunity.
- Every support organization‘s performance and cost structure is primarily the result of past and current management decisions. Therefore, any significant cost or performance change must be driven by significantly different management decisions.
To realize the true value of customer satisfaction using the CLV model requires change. Fundamental to success is focusing on doing the right things, not just doing things rightly. It is not enough to get better at doing something that has no consequence to ultimate CLV. We can no longer view all customers and all interaction modes as equal. The CLV model guides management towards making significantly different decisions.
CLV is always managed as a portfolio and requires dynamic rules of engagement for customers based on their interaction and value attributes. The customer base should be profiled along two dimensions, interaction volume intensity and customer value. Interaction volume intensity is a combined measure of the volume of support requests received weighted by a measure of where these support requests get resolved within the system. The higher the interaction volume intensity, the higher the need for automation, but the deeper the resolution space i.e. escalations, the higher the need for reduced variability and improved process flows.
The customer value percentage is the true cost margin of serving a customer. It is our observation that traditional customer profitability measures, which are based on gross margins, are simplistic and result in serious judgment errors. Gross margins based on uniformly spread costs hide the inconsistencies and complexities of serving a customer. This leads an organization to inadvertently keep underperforming customers at the expense of good customers.
Customer value percentage, a purely financial measure, is the margin earned by the organization after offsetting all direct and indirect costs associated with serving a customer. A higher customer value percentage is better for CLV, provided that these customers can be retained and their numbers grown.
Focusing your technical support on “high CLV customers”
The matrix drawn below suggests strategies for maximizing the CLV of a customer portfolio.
Clearly the customer base with a high customer value and high interaction volume intensity is the competitive advantage and should be protected and continuously improved through customer collaboration and resolution process transparency. This group should also be used for internal benchmarking for other customer categories. Collaboration is the key in this zone.
Customers with higher value and lower interaction volume need to be grown. Often this is more of a sales opportunity. However the support organization can play a significant role in growing the size of the customer by adopting a flexible model that focuses on speed when it comes to first-time resolutions and by building process visibility as the cases escalate up the resolution chain. The key element for this zone is delighting the customers.
Customers with high interaction volume intensity and low customer value offer the biggest improvement opportunity for any customer support organization. There is enough case volume to dedicate management time and support resources, but lower customer value means that the support costs are higher. Significant cost reductions should be pursued through process improvement initiatives that focus on reducing variability and improving business process flows. The organization cannot afford to lose these customers, but at the same time, cannot afford to serve them with the current cost structure.
The low customer interaction intensity and low customer value quadrant is no more than a black box for a majority of support organizations. Customers in this category consume more organization time than the value they generate and there is not enough volume to deploy operational improvement initiatives. Clearly these customers are better served by alternative support models.
After you have reviewed your CLV portfolio and have made decisions regarding its optimization, it is critical that you focus your resources on your high CLV customers. The typical experience across a range of industries shows that 5% of customers provide 40 to 50% of the CLV in an organization. These customers would fall in the far right quadrants in the matrix.
Getting close to these potentially loyal customers is a start, but the ongoing interaction between companies and customers is what makes or breaks a relationship. Paradoxically it is in the most trying times, when customers have problems that need extra attention, that the strongest bonds between the customer and the supplier/provider can be formed.
Your highest value – core – customers are your most critical, and it is imperative that the support they get reinforces the value they see in their relationship with you, and you with them.
Managing the total customer experience of your strategic customers
IT service and support providers are starting to realize that keeping strategic—meaning high CLV— customers satisfied is about more than fixing the technical problem at hand. It is about the “total customer experience” (TCE) that you create.
TCE is a function of key service elements:
- The level of trust you have established with the client
- The degree to which you support the client’s business rather than just their IT
- The level of consistency in the troubleshooting process you use
- The way you involve the client in the solution of the problem by asking systematic questions (not the same ones over and over again!)
- The way you keep the customer informed about the progress being made on their issues in a comprehensible manner
- The degree to which your first suggested fix actually takes care of the problem vs. having the customer go through aggravating, expensive, trial-and-error iterations
- How fast you solve the problem—for good
Getting to this level of support capability is not easy, but it can—and is—being done. A powerful way to get there is to use the Kepner-Tregoe resolution path as a basis for articulating this process, and to implement it in ways that bring you and your most valued customers ever closer.
In solving customers’ problems, the quality of the troubleshooting process is critical. A high quality troubleshooting process is specific, systematic and applicable without immediate technical knowledge. It drives resolution from first call to full closeout. It is visible in action to managers, customers and colleagues. It sets standards for quality of information. It establishes effective questioning as the route to incisive troubleshooting.
By managing the concern resolution path with a constant focus on customer need and on reaching beyond the present to deliver exceptional, anticipatory service, satisfied customers will become loyal customers. The consequence will be that your organization increases in value.
Peter Drucker said, “The only profit center is the customer.”8 It is time to refocus support on what really matters: the customer.
1 Heskett, James L., Thomas O. Jones, Gary W. Loveman, W. Earl Sasser, Jr., and Leonard A. Schlesinger. “Putting the Service-Profit Chain to Work,” Harvard Business Review, March/April 1994: 164.
2 Jones, Thomas O, and Earl W Sasser, Jr. “Why Satisfied Customers Defect,” Harvard Business Review, (1995): 88.
3 Stevens, Mark, Extreme Management, What They Teach At Harvard Business School’s Advanced Management Program, NY, Warner Books, (2001).
4 The American Customer Satisfaction Index at Ten Years, Ann Arbor, Stephen M. Ross School of Business, University of Michigan, (2005).
5 Rust, Roland T., Debora Viana Thompson, and Rebecca W. Hamilton. “Defeating Feature Fatigue,” Harvard Business Review, February 2006: 98.
6 Fojtik, Chic. “Calculating the Strategic Value of Customer Satisfaction: What do your metrics tell you?” Graviado Business Report, 4 (2002) 5.
7 Heskett et al:164.
8 Drucker, Peter. “Viewpoint: What Executives Need to Learn,” Implementing the Information-Based Organization Conference, March 1990.