How to Avoid Destruction

How to Avoid Destruction

In Irving, Texas, Texas Stadium, past home of the Dallas Cowboys for 38 seasons, was destroyed. Over 20,000 people came to watch the implosion that demolished the stadium. Many more watched on television and online. The Cowboys moved to their new state-of-the-art facility in Arlington, Texas after the 2008 season. After their move, Irving officials decided that the land the stadium sat on was more valuable than the stadium itself and the decision was made to tear Texas Stadium down. While many fans were saddened by its demise, the fact was that the stadium no longer met the needs of consumers so it was destroyed and the fans, like the players, have moved on.

Moving on is a part of life. Every day people discard and destroy objects that are no longer meeting their needs; things that have outlived their usefulness. Our possessions are not the only things vulnerable to being discarded or destroyed; businesses are at risk as well. If enough of our customers perceive that the products or services we provide are not meeting their needs, they will turn elsewhere and we can find ourselves in an inescapable position. Of course, this is something we all want to avoid and the good news is that it is not difficult to determine whether our customers believe we are adequately meeting their needs. Through customer surveys, we can gain information about what our customers want and also discover the key drivers of their behavior.

Frederick Reichheld, in an article published in the Harvard Business Review, stated that on average, companies in the United States lose approximately half of their customers every five years. Unfortunately, many businesses do not have insight into why these customers leave. In a way, some executives do not want to know because it can be unpleasant to study failure. Some companies simply aren’t concerned about customer dissatisfaction, or they become concerned too late, because they do not understand the causal relationship between customer loyalty and profits. Some executives realize that being knowledgeable about customer dissatisfaction and defection is important, but they mistakenly believe that it is extremely difficult to reveal the root causes of customer behavior. Other executives find it problematic to conceptualize and set up a system for analyzing customer perceptions as part of an ongoing strategic system.

This lack of knowledge of customer perceptions is a crucial problem because it is a direct cause of diminishing cash flow from customers. Even if lost customers are replaced, it costs money to acquire new customers and they do not produce as much profit as older customers. Customers are worth more to a business the longer they stay because long-term customers tend to buy more, bring in new customers, are less sensitive to price, and take less of a company’s time. Decreasing customer defections by as little as five points per year has doubled profits in some industries.

Becoming aware of customer perceptions and making a significant decrease in customer defections are attainable goals as evidenced by Deere & Company (makers of John Deere tractors) and USAA, an insurance and financial services company. Deere & Company uses retired employees to interview defectors and customers. They have attained a customer loyalty rate of almost 98% in some product areas! Of all the companies in the United States, USAA has come the closest to eliminating customer defections. Most of the customers they lose are due to people who die! The company treats customer defection very seriously and has an ongoing system in place to prevent customer loss.

Most CEOs believe that customer loyalty is important and would prefer to have loyal customers, but many do not perform the calculations to determine just how much a loyal customer is worth over the customer life cycle. Without information on the net present value of the company’s present customer base, numerous CEOs judge the company’s performance on the basis of cash flow and profit. Some CEOs rarely study the only statistic that indicates how much real value the company is creating and the only statistic with predictive power: customer intent to return. Reichheld asserts that discovering the root causes of customer behavior can help companies identify business practices that need changing, enabling them to retain more customers.

What keeps customers coming back? One key to our customer’s intent to return is their perceived value of our product or service. Many businesses fail because they spend too much time studying profit margins and not enough time measuring customer’s perceived value. When this approach is taken, CEOs become aware of problems only after profits start to fall. Once profits begin to decrease, the focus becomes the symptom rather than the underlying problem: the breakdown in perceived value.

Q: So, where do you start if you want to put a system in place to learn about customer perceptions and prevent customer defection?

A: Find a consulting firm to do the work for you.

While it is possible to have an in-house system for customer surveys, it is not cost effective unless you already have employees trained at the doctoral level in organizational behavior, research methodology, and statistics. I recommend that you hire an experienced firm (one that has been around for at least 20 years) with research associates and statisticians trained at the doctoral level. In addition, the firm should provide benchmarking and root cause analyses. Look for a firm that has a benchmarking database of at least several million scores and one that will provide root cause analyses of both customer satisfaction and intent to return.

To see how the survey process can provide the information needed to prevent customer loss, let’s look at the process in a case study. Recently, a healthcare communications company retained the services of the National Business Research Institute (NBRI), a business research firm, to conduct their customer surveys, analyze the data, and provide benchmarking statistics. Once the company decided on the topics they wanted to include in their instrument, the survey was deployed by the research firm. In just 16 days the firm was able to collect data from nearly 17,500 customers. After the data collection period ended, the research firm conducted the data analyses and benchmarking and presented the findings to the communications company.

The first score provided to the healthcare communications company was an overall performance score. This benchmarked score compares an individual company’s overall score with the average for their industry and is reported by percentile ranking. Each industry’s average is at the 50th percentile. Scores falling between the 75th and 89th percentiles are rated as “stretch performance” and scores at the 90th percentile and above are rated as “best in class.” The communications company had an overall performance score at the 63rd percentile, putting them 13 percentiles above the industry average.

The survey report also provided analyses by each survey topic and each survey item. Topics and individual items are also benchmarked with other companies in the industry and given a percentile ranking. A ranking from the 75th to 100th percentiles is a “strength;” from the 50th to the 74th is an “opportunity;” from the 25th to the 49th is a “weakness;” and rankings between the first and 24th percentiles are “threats.” The survey for the healthcare communications company included 13 topics. Only one ranked in the “strengths” category, nine ranked as “opportunities” and three ranked as weaknesses. Those topics ranking as weaknesses included control systems, product delivery, and customer service.

The 13 topics were measured by 29 individual items. Three items ranked as “strengths,” 19 as “opportunities” and seven as weaknesses. The seven items scoring as weaknesses were:

• The company’s customer service representatives resolve my issues in a timely manner.

• The company’s customer service representatives understand customer needs.

• The company’s hours of operation are satisfactory.

• The company improves my office’s referral/pre-certification process.

• I am able to speak to a customer service representative when I need assistance.

• I would recommend the company to others.|

• The company’s customer service representatives are courteous.

With seven weaknesses, where do you begin? It is obvious that there are issues with customer service since half of the weaknesses are related to it, but just because these items scored as weaknesses does not mean they are driving customer behavior. While some research firms do not provide any information beyond topic and item scores, NBRI provided the communications company with a root cause analysis for intent to return. The root cause analysis identified just two items that were driving customer intent to return. These items were:

• The company has improved staff satisfaction at my office.

• I can easily find help on the company’s website when I need it.

Notice that these items are different from the items that ranked as weaknesses. Taking action to attempt to improve weaknesses will not necessarily improve customer perceptions and prevent loss. The key drivers of customer perceptions must be addressed and in this case, makes the task of improving perceptions much easier. Improving customer perceptions on just these two items (rather than the seven that scored as weaknesses), will impact numerous other survey items in a positive way and will help the company retain valuable customers.

In order to benefit from customer surveys, a company must commit to make surveying an ongoing process. Customer behavior is dynamic and if customers are not surveyed often you will not have the knowledge you need to prevent loss. At a bare minimum, I recommend surveying customers at least once a year, but quarterly is even better. Some companies make it an ongoing process and continuously collect data from customers. The cost of surveying pays for itself many times over via the increased profits from customer loyalty.

Don’t let your customers begin to perceive your business in the same way the city of Irving came to view Texas Stadium; as worthless. If you would like to learn more about how NBRI can help your business avoid destruction by implementing a survey process to prevent customer defection and increase profits, call us today at 800-756-6168.

Dr. Cynthia K. S. Reed, Ph.D.
Organizational Psychologist
National Business Research Institute