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Getting serious about customer focus.

Here are the principles of becoming a customer-focused competitor. Companies successful at this have a fundamentally different way of operating.

Many business leaders preach a "customer-focus" philosophy. Few have seen any reward from these sermons in the form of newly loyal customers or in a stronger competitive position. There remains a dire need in most businesses to connect better with one's customers.

Incremental approaches, such as creating customer satisfaction monitoring programs or promoting service-oriented toll-free numbers, have produced little genuine improvement. Few companies can point to substantially higher rates of customer retention and substantive gains in profitability.

Unlike most companies, which try to inch their way into the hearts of customers, successful customer-focused organizations have a fundamentally different way of operating. Their strategies, measures of success, process flows, and information systems are all tuned and aligned to deliver unique value to the customer on a consistent basis. They draw from a deep base of knowledge about customer needs and behavior, using every contact to tighten their information bond with a customer. At the same time, they consistently invest in new products and services that profitable customers will want while continually seeking opportunities to make each relationship more profitable.

Many companies fall short of this ideal because they lack the measures, incentives, and infrastructure to mobilize their organizations to take actions that always connect to the customer - actions directed as improving the value delivered to and received from every relationship. Although many companies have made valiant attempts to add customer-oriented measures to their plans, product financials and short-term measures of performance still dominate managers' agendas. Becoming a customer-driven competitor requires more fundamental realignment.

What are the underpinnings of a truly customer-focused organization? Seriously focusing on the customer requires constructing a new management system based on three principles:

* Measure customer share and customer profitability as the key metrics of long-term success.

* Integrate information to refine continuously a deep understanding of customer needs and to stay actually ahead of your customers.

* Organize around delivering value to customers rather than around selling products.

These three principles collectively reinforce one another to give your organization the incentives, tools, and processes you need to maximize the strength and value of your customer relationships. You cannot simply choose to focus on one dimension; doing so will ultimately leave your managers frustrated by their inability to deliver on a customer-focused goal. Becoming a customer-driven competitor requires integrating all three principles into a unified strategic vision and plan.

Customer Share and Profitability

Companies have come to rely on customer satisfaction measures to counterbalance the predominance of short-run financial measures. The problem, however, is that traditional measures of satisfaction have proven inadequate. They simply do not tell you how or how much you might improve. If your customers report that they are "satisfied," what then? Too many companies use the incremental activity of monitoring customer satisfaction as proof that they understand and address their customers' needs.

There is enormous untapped opportunity in your customer relationships. But simply striving to improve satisfaction indices drives managers to focus on defensive investments aimed at keeping customers happy -- investments that may not pay off in added profitability. At the same time, your competitors are likely to be improving their service delivery to or beyond comparative levels. In fact, your customers could be quite satisfied while also switching more of their purchases to your competition.

It is imperative to get beyond traditional satisfaction measures and reach for a more ambitious goal: increasing your share of your customers' spending. A "satisfied" customer who gives you, for example, only 25% of his or her business can be satisfied further. Customer share not only reveals the untapped potential in your customer relationships, but it does so in a way that can be clearly communicated and understood throughout your organization. As such, customer share sets a guiding star that drives your organization to new heights of share and satisfaction.

But customer share is only one of the key metrics to which leading companies are turning. Customer-focused competitors link share with a detailed understanding of customer profitability. Instead of striving to raise share and satisfaction among all customers, these companies act to de-average their costs and accurately apply them to specific segments and customers. They then invest only where it will pay off.

Many companies we have worked with found when they adopted these measures that 25% of their customers were actually unprofitable to serve. These companies also found that an 80/20 rule tends to hold, with 80% of profits coming from 20% of customers. Armed with accurate information, you can create programs directed at lowering the cost to serve low-end customers or raising the price to them if they want to continue buying from you. You can also justify service investments for your best customers in areas where they will both value such improvements and repay you with more business.

Benefits of Linkage

Companies that link customer share and profitability benefit in several critical ways:

* They drive managers to identify which customers are profitable and develop superior insight into the needs and behavior of these customers.

* They use this understanding to upgrade and constantly improve their core offerings.

* They motivate managers to lower the cost of serving unprofitable customers.

* They create extensions or enhancements of products or services, further expanding their key relationships.

* They gain competitive advantage by making it harder for competitors who lack such close relationships to perceive leading-edge customer needs.

Developing an understanding of customer profitability differences, coupled with an understanding of your share of customer spending in each customer group, will pay off dramatically in reoriented approaches to nurturing customer profitability.

Leading service providers are using customer share and profitability to improve their performance. One such company is a leading prestige department store. The store found to its dismay that it captured only 20% of the relevant spending of customers who considered it their favorite store. Its largest competitor captured over 50%. This gave the entire organization, from the CEO to the sales people, a goal to strive toward: increasing the store's customer share.

The result was an unprecedented effort to use data base analysis and market research to learn which customers were profitable, what these customers needed, and how they behaved. Sales associates on the floor became relationship managers, while buyers for each department became suppliers of the goods that customers wanted. Marketing concentrated more on telling the right customers about the right goods than on broadcasting sales. By using customer share as a means of articulating new roles for the organization, all employees acted in concert to improve profit by 50%, with most of the increase coming from a 20% improvement in sales to the store's top customers.

Customer share is often not an easy measure to track. It requires salespeople in the field to have a strong sense of what their accounts are doing, market research programs that provide regular feedback on customer purchase patterns, an information system that tracks individual customer purchases, and clear definitions of the competitive set of products against which you are measuring share. Few companies have all of this in place, but many have more information about customers than they realize.

Information Integration

Customer share and profitability point you toward untapped potential, but realizing that potential requires a deep understanding of your customers' needs and behavior. In the name of "better" service, companies have been bombarding customers with needs-assessment forms, performance-feedback questionnaires, and endless surveys on lifestyles and tastes. Such information can be useful, but since it's also available to competitors, many companies have found that it produces only limited advantage. Besides, a customer who tells you everything is fine does not help you know what you can do better.

Few companies put together a comprehensive research program that integrates surveys with direct information about customers gathered from sales contacts, service contacts, and promotion response. Leading companies have found a way to go beyond asking customers what they want. They go out and "discover" what the customers need, even if the customers are not yet aware of these needs. These companies succeed in staying ahead of the competition by striving to stay one step ahead of their customers.

The brief case study in the accompanying sidebar illustrates how such customer understanding provides the foundation for the development of a strategy for profitable growth.

Over the past few years, many companies have tightened their management of individual product cost structures by focusing on the profit and loss statement for a product or product line. Along the way, however, the customer has often been left out, and product managers are unable to see new opportunities outside their product areas. Most product-managed organizations find it difficult to stay ahead of the customer because each product manager is motivated to make incremental improvements to enhance the profitability of the existing product. Beyond that product, however, could be a whole range of new opportunities that require cross-product bundling or new product development.

The Right Architecture

Turning a deep, integrated understanding of customers into a sustainable advantage requires a management architecture that is customer-, not product-, focused. The key components of this architecture are:

* A customer segment-based organization and management structure;

* A cross-functional measurement system geared to continual marketing process improvement; and

* A customer information system that integrates knowledge about each customer across the organization and sends that information to key managers in a useful way.

Each component contributes to ensuring that managers can act and be measured in ways that lead to more satisfied customers and higher profits. Although few companies have put all of these pieces together, many organizations have begun to experiment with them.

The Segment-Managed Organization: In product-focused companies, the ferocity of competition among product managers often leads to suboptimal, parallel streams of marketing and service activity. Particularly where companies sell related products to the same set of customers, companies have found that consumers are confused -- products frequently look alike, marketing materials follow on the heels of one another with seemingly unrelated messages, and the parent company's brand image becomes muddled in the mind of the customer.

The customer-focused organization, in contrast, develops strategies aimed at maximizing customer share and profitability within specific, discrete customer segments. Segment-based operational and financial objectives support such goals. The management information system provides not only product P&Ls, but customer and segment P&Ls. In such an environment, products become tools that customer-segment managers can "buy" to achieve their financial targets within a segment. Companies such as Unisys and AT&T are experimenting with these techniques to shift pressure in their organizations. Where product managers once compelled the sales force to sell weak products, now product managers are driven to make their products appropriate enough for a segment manager to want to sell to his or her customers.

To make this work, you need to define segments that are both identifiable and measurable -- not always an easy task for many marketers. In financial services, segmented strategies have helped companies such as Merrill Lynch, Fidelity, and Citicorp to coordinate their product line and service investments to meet the integrated needs of sets of customers. These companies have been substantially more successful than many of their peers at new product introduction.

Many industrial marketers already attempt segment strategies using specialized sales forces, and some consumer marketers use different distribution channels to reach different customer groups. The question to ask yourself is whether you can take the next step and actually set different strategies and targets for each segment, with supporting measurement systems.

Process Management: Customer-focused organizations see themselves as a series of processes oriented toward the customer. From product development through offer, from offer to order, from order to delivery -- each series of activities is viewed as an integrated process with output, quality, time, and cost all specifically measured and managed. The ability to measure, compare, and learn which marketing techniques and processes are or are not effective is fostering a marketing revolution comparable to the enormous changes that have occurred in manufacturing.

Xerox has set a standard of seven minutes for the time it should take an inbound telephone inquiry to get into the hands of a salesperson who can follow-up and contact the account. Frito-Lay aims to respond to promotions competitors are running in any convenience store in the U.S. within a week. Do you know how effective your marketing processes are? Few companies use measures beyond total cost per sale to measure their marketing effectiveness. But marketing is a series of processes, just like manufacturing or service delivery, and should be held to the same standards of timeliness, effectiveness, and efficiency as processes elsewhere in the company.

Customer Information Systems: Customer-driven organizations capitalize on investment in superior customer knowledge to support every other element of the management architecture and create an important source of competitive advantage. The "Preferred Reader" program of Waldenbooks is a powerful example of the value of customer information. Frequent book buyers usually purchase from a variety of stores. Walden's Preferred Reader program, which now boasts over four million members, has created an incentive for these customers to give Walden a greater share of their spending. Along with greater customer share, Walden has used the program to stimulate extra book purchases by these core customers. Information systems track their purchases in any Walden store or from their 800-number, allowing the company to tailor individualized newsletters publicizing books of interest to each member. As Walden acts to strengthen these relations, it will become harder for competitors to break the bond.

Asking the Critical Questions

The experiences of customer-driven competitors raise questions about whether conventional marketing practices, incentives, and organizational structures will continue to work. How to define one's business, where to look for growth, how to gain knowledge about the customer, how to act on that insight, and how to measure performance are all questions that will be answered differently by a CEO whose company is truly customer-focused than by one whose company is not. Becoming a customer-focused organization will challenge your company to achieve new standards of operational quality, customer satisfaction, and profitability. It will open new strategic options and help you find fundamentally new opportunities for growth.

Each of the individual steps outlined above is a substantial one. Still, without an integrated approach that synthesizes all of these actions into a collective, coordinated effort, you could leave your managers striving to achieve customer-based goals but lacking the necessary tools or knowledge. Fragmented realignment could also lead to several product lines bombarding the same customer in an effort to build customer share. The customer-driven competitor becomes a consistent profit generator only when all of the pieces are in place.

Even if your customers appear satisfied, might you be able to satisfy them further? Are you satisfied with the profits that they are generating for you? Staying one step ahead of your customers isn't easy, but it may be the only way to increase your profitability in today's competitive environment.

A Case of Arrested Brand Decline

A venerable food product had been plagued by volume declines and, despite price increases and advertising cuts, profit was falling. An initial wave of survey research identified a core market of regular and heavy users: Just six million households represented two thirds of sales. Yet even with this core, there was a problem of customer share: Frequent brand switching was the principal cause of the volume declines.

Through a coupon offer of "buy two, mail in for a coupon for a free third package," the company was able to actually identify, by name, a large portion of the dedicated core user base. Follow-up research, sometimes from in-person interviews in the homes of customers, helped the company understand how the product was used and the potential obstacles to stimulating more frequent use among core customers.

Most of these obstacles seemed easy to overcome with some changes in packaging and the introduction of greater flavor variety. More importantly, the company began to realize that investing more in new product introductions and marketing for these most valuable customers offered substantially greater returns than investing to build share among light users or attracting completely new customers.

These insights led the company to develop a program aimed at increasing share of spending by existing users. Using further volume-oriented coupon promotions and toll-free recipe help numbers, the company broadened its list of heavy users. A targeted newsletter and direct-mail program offering special promotions and new recipe ideas kept the loyal base informed of new product introductions and spurred additional purchases. By cutting most television and print advertising, and shifting spending into the relationship-building program, the company boosted heavy user repurchases by 25%, arrested the brand's sales decline, and cut marketing costs by 15%.

Few companies actually make this connection between direct information they have about the behavior of specific customers and the surveys they conduct to learn more about customer needs. Often they fail to save the data they could capture about customers, such as who calls the 800-number help lines. Most market research groups use surveys to understand customer behavior instead of building models from actual customer purchasing data.

The goal is not to keep ahead of your competitors -- it's to keep one step ahead of your customers. By understanding the root causes of customer behavior better than even your customers do, you can come up with the key innovations that enable you to expand your share and keep competitors at bay.

David C. Edelman is a Vice President and Director of The Boston Consulting Group, a worldwide strategy consulting firm. He has pioneered the development of many of BCG's concepts in marketing, and he is the originator of "Segment-of-One Marketing." Andrew B. Feiler is a case leader with BCG and leads the firm's development work in Customer Satisfaction. Both are based in BCG's Boston office.
COPYRIGHT 1993 Directors and Boards
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Edelman, David C.; Feiler, Andrew B.
Publication:Directors & Boards
Date:Jun 22, 1993
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