Of Technology, Loyalty, And Fries

Tracking customer loyalty is becoming more common as organizations recognize that unlike loyalty, high satisfaction is poorly correlated to increased profitability. However, this trend has not yet influenced the return on investment (ROI) analysis associated with software projects. I hope this changes as research has shown that an increase in customer loyalty can have a tremendous impact on profitability (a 5% increase in retention translates to a 25-100% increase in profits).

In this environment of inadequate data, we must resort to inference to understand how software can impact loyalty. In certain instances this may appear to be a fool's errand (e.g., word processing's influence on customer loyalty), but many applications make sense. Let's review for example, Business Process Management Suites (BPMS), defined by Gartner as [a set of tools that] "enables the direct control and management of operational processes in near-real time by business managers and process owners to better meet today’s business cycle time needs and enable more-agile." In my last post , I discussed how loyalty is most directly impacted by the quality [and subsequent delivery] of an organization's products and services. The challenge is as delivery scales, the importance of making each customer interaction positive remains stable, while the difficulty grows exponentially. This is where a properly implemented BPMS shines.

Think of it this way, why was McDonalds so successful from the start? Consistency. The same quality and service no matter where you go. Imagine if those famous french fries were different from location to location. Their customers' loyalty comes from this consistency, a McDonald's fry is the same the world over. Similarly, a BPMS allows for this consistency of quality service and responsiveness, even in the face of a changing business climate, fluctuations in workload, new rules and regulations, employee movements, new products, major disasters, etc. Not only is this level of consistency possible, but the degree of oversight and monitoring is unparalleled. It is the equivalent of Jim Skinner, McDonald's Corp. CEO, tasting the fries from the 30,000+ restaurants in 100 countries every moment of every day.

Through the comprehensive use of a BPMS, if a customer's interaction with an organization is consistently positive (e.g., requests are responded to promptly, orders are fulfilled without error, applications are processed quickly, payment is ontime, etc.) their likelihood to stick like a barnacle and pass-along a recommendation promoting the vendor's products/service is much greater. With the ability to monitor these interactions, benefit from real-time, automated, process improvements, and simulate adjustments, it is reasonable that a BPMS can help drive customer loyalty and the bottom-line.

Using Technology To Drive Loyalty

You are probably familiar with the term "loyalty program," however you may not know these programs do little to influence true loyalty.

So-called loyalty programs typically assign points to your continued usage of the vendors' product... the more you use it, the greater the reward. Think frequent flyer miles (FF miles), which began in 1981 at American Airlines to keep business travelers flying with them. While many argue that without FF miles, only a couple of airlines would remain today, from a loyalty standpoint they failed. That is because money, rewards, gifts, etc. do not impact what is most important - quality of products and services. If an airline existed that was almost 100% on-time, comfortable, went everywhere you needed to go, reasonably priced, safe, etc., but did not give you a "gift," how would this lack of a "gift" or "reward" impact your loyalty? Probably not at all. The gift only matters when you first meet the basic requirements for loyalty.

This issue of quality applies to every company and industry. Dell was once the poster child for exceptional customer service, a major competitive advantage, but is now fraught with customer service woes after letting customer service slip as Kevin Rollins, CEO, admits. So how can software help?

In and of themselves, nothing from CRM to ERP to ECM to BPM to BI to CEM to BRM or any other 3-letter software-related acronym will generate loyal customers. As much as a brochure may say, it simply will not happen. However as I discussed in May, enterprise software implementations with an agile plan, solid project management, executive sponsorship, collaboration between IT and "the business," realistic expectations, strong user adoption, and appropriate metrics with a feedback loop for improvements, can put your organization on the track for driving loyalty and profitability.

Capitalizing On Loyalty

In Frederick Reichheld's Loyalty Rules he describes the concept of butterflies and barnacles when evaluating potential customers. A "butterfly" is very attractive, but easily moves from place to place, while a "barnacle" may not appear quite as attractive, but sticks around. "Loyalty Leaders," those companies that have the most loyal (and profitable) customers and employees, seek to attract customers who exhibit barnacle-like behaviors. The reason? As Reichheld describes, attracting new customers is costly and only generates big returns in the later years when the cost of serving a loyal customer falls (they become more self-sufficient) and the volume of purchases rises.

Another significant benefit of a barnacle is in frequent referrals. Since a butterfly does not stick around long enough to experience how much value you provide, they will rarely generate referrals. Conversely, a barnacle has a significant depth of experience and knowledge with a particular vendor, leading to highly credible peer recommendations. This value is three-fold.

1. The referred customers typically turn out to be barnacles
2. Since referred customers cost so little to acquire, they begin to generate profits much earlier in their life cycles
3. Referred customers cost less to support, since they tend to use the people who referred them for advice and guidance

Furthermore, barnacles, unlike butterflies, are not easily lured away by flashy, attractive, offerings. This means that they'll stick with you through thick and thin, even in the face of a seductive media campaign. To understand this, think about a company or brand that you have used for years. Then consider how many alternatives you have encountered, but ignored. Many industries have done a poor job at luring barnacles... think cell phones and airlines.

How does all of this (including the last couple of posts) relate to enterprise software - the topic of this blog? You can easily leverage your information technology investments to drive customer loyalty. I will explore this in my next post.

In the meantime, for further insight and discussion into the impact of customer loyalty, and Reichheld's venerable "One Number You Need To Grow: Net Promoter Score" (% of promoters - % of detractors) check-out these related blogs and resources:

http://netpromoter.typepad.com/paul_marsden/2006/03/title_here.html

http://netpromoter.typepad.com/fred_reichheld/

http://www.cfo.com/printable/article.cfm/7108840?f=options

Measuring Loyalty

Since loyalty (customer, employee, partner, member, etc.,) is so important to the profitability and longevity of your organization, it must be measured. The good news is that measuring loyalty is relatively easy, but the question is how to use the results to your advantage. Check out Reicheld's standard loyalty acid test which asks key questions especially useful to help to pinpoint problem areas. It is important, however, that upon surveying you thoroughly analyze the results, report, and then communicate what was learned and what actions must be taken to improve and drive loyalty. The most progressive organizations will incorporate the results as a key metric to be correlated and measured within their Business Intelligence and CRM systems. In this way, they can identify those who are loyal and the specific qualities that make them loyal. With this information, it is possible to develop specific programs and initiatives to encourage loyalty across the ideal customer base.

There are a few key components to capturing loyal customers and it all starts with the integrity of senior management. In fact, research shows that companies with loyal customers have employees who feel their leadership deserves their loyalty. So like most aspects of corporate culture, loyalty seeking flows from the top down. Prime examples of what Reicheld calls "Loyalty Leaders" include: Southwest Airlines, Vanguard, Dell, Harley-Davidson, and Intuit.

Here are the "Six Principles of Loyalty" he also describes:

• Play to win/win: Profiting at the expense of partners is a short cut to a dead end.
• Be picky: Membership is a privilege.
• Keep it simple: Complexity is the enemy of speed and responsiveness.
• Reward the right results: Worthy partners deserve worthy goals.
• Listen hard, talk straight: Long-term relationships require honest, two-way communication and learning.
• Preach what you practice: Actions often speak louder than words, but together they are unbeatable.

Of these elements, the concept of "being picky" is most fascinating because it means that you choose who is worthy of being your customer. While this may sound a bit controversial, it makes a great deal of sense when you consider the economics. Next, I'll explore how seeking out only those customers who demonstrate loyal tendencies pays off considerably over time.