Sat, Aug 05, 2006 - Page 9 News List

Customer satisfaction suffers in companies' quest for profit

Businesses can't grow by declaring war on their customers; rather, they should strive to keep customers happy and willing to act as `virtual product promoters'

By Simon Caukin  /  THE OBSERVER , LONDON

Despite what they say -- and often even think -- many, perhaps most, companies are surreptitiously at war with their customers. Through nuisance games, dirty tricks and small print, they take every opportunity to extract more from your wallet for no extra service.

My mobile phone company now wants to charge me for providing a paper copy of my mobile phone bill each month. Rather than employ more staff, my supermarket asks me to scan and check out my shopping myself. Despite earning tens of billions of dollars of profits last year, my bank no longer allows me to use direct debits and standing orders on my "high interest" current account (high interest being strictly relative here).

Trivial stuff, you might think. But the consequences of this subterranean struggle are momentous. We don't trust our service suppliers and are increasingly willing to drop them at the drop of a hat.

Despite huge amounts spent on aids like customer relations management software, customer satisfaction levels are low and falling, and so is the esteem in which business is held. On the company side, that translates into more effort (to replace lost customers) for lower growth. More insidiously, the warfare often brings with it the dead hand of the regulator, as happened in financial services, building in bureaucracy and in some cases holding back the growth of the market as a whole.

"You can't grow a business if you're at war with your customers; you can only grow by treating people in a way that they come back for more," says Fred Reichheld, director emeritus of consultancy Bain, who has made a career of studying the economics of loyalty.

Well, yes, it shouldn't take a business school education to figure that one out. So why do so many firms go on doing the former at the cost of the latter?

The culprit, Reichheld says, is the profit-based system most companies use to manage performance. Managers are judged and often rewarded on their profit figures. But financial measures make no distinction between how profits are earned. Are they the result of creating new value from customer relationships ("good profits" from increasing loyalty), or were they earned by appropriating value from them ("bad profits")?

The trouble is that customer value is a wasting asset. When it is exhausted and the consumer moves on, the firm has to buy more, with baits, promotions and special offers. Buying growth this way is expensive and hard work, which is one reason, believes Reichheld, why so few large companies grow by more than 5 percent a year. As churn increases, they have to work harder and harder to stand still.

Eventually, value may be eroded faster than companies can acquire it. Compare General Motors, for example, with Toyota, going in the other direction.

So how does a company focus on "good" profits and break the addiction to "bad?" After much experiment, Reichheld and Satmetrix, a company that focuses on measuring customer experience, boiled it down to a single question: on a scale of 1 to 10, would customers recommend the product?

Customers who rate the product 9 or 10 are "promoters," those who rank it 0 to 6 are "detractors." Subtract the percentage of detractors from the percentage of promoters and you get a "net promoter score," or NPS.

NPS is controversial, because it puts any number of vested interests out of joint.

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