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This chapter is from the book

1.3 Loyalty in the New Marketplace

Loyalty is built on relationships developed through the customer's experiences when she interacts with your company. Of course, so is disloyalty! Loyalty, for our purposes, is the likelihood that a current customer will buy from you again, rather than from a competitor, whenever she needs new or additional products that you sell. The value of loyalty is well understood. A recent study by Bain and Company showed that when loyalty (customer retention) was increased 5 percent, profits within various industries (both consumer and B2B) increased from a minimum of 18 percent up to a high of 125 percent. The impact of customer loyalty on profits hasn't changed, nor has the way loyalty is created through a customer's experiences with our company. Positive experiences build strong loyalty, but so can prompt resolution of negative experiences. In fact, many people believe that reversing a negative experience is the strongest way to ensure loyalty (Vavra, 1992).

From the corner grocery store to the sophisticated telephone support organization, managing customer relationships has traditionally involved human interactions. But with so many of these interactions now taking place over the Internet and involving less (or no) direct human contact, how do we build relationships now? There is a simple (but not easy) solution. The answer lies in information. The knowledge about our customers that we collect and save, combined with our ability to use this information, will allow companies to build and maintain loyalty in the Internet age.

Information can make it possible for us to link together customer experiences across different interaction channels. Information can make computers appear to recognize a customer and thereby create a relationship with him. Information can be used to personalize and humanize electronic interactions. Information can be used to customize the best product or service for a customer.

Regarding the critical role that information plays in making the Internet successful, Pradeep Jotwani, president of Hewlett-Packard's Consumer Business Organization said in a presentation at an e-commerce summit in San Jose,

The Net has forever changed our world, and as a result, we can expect to be part of a continually shifting social and economic landscape. [...] Electronic sales to consumers passed $20 billion in 1999. U.S. online consumer retail revenue will exceed $184 billion by 2004. Business-to-business sales will surpass consumer sales at about the same time. You wouldn't be here today if you didn't believe this was true. The online opportunity is staggering, and the long-term success of almost every business will require some degree of online activity. Success in this New World will depend on creating new and inventive ways of doing business. Data is collected, mined, and analyzed to provide extremely high qualitative and quantitative information. As a result, we are in a position to provide levels of customized, personal services never before imagined. From New Delhi to New York to Newcastle, it's a New World.

The Internet has a big impact on how we do business. Let's look at these changes and consider how they relate to our ideas of what it will take to be successful in the future. Although this book certainly isn't a study of Treacy and Wiersema's Value Discipline theory, understanding their three basic operating styles allows us to form a good foundation for measuring the impact of the Internet on the way we do business. (If you do want to know more about Value Disciplines, please refer to Treacy and Wiersema's terrific book.) Understanding the changes in measuring success or even maintaining the minimum standard for each of the disciplines will explain why managing your customer relationships must be an important component of your business strategy even if your company is not, and never will be, customer focused.

1.3.1 Loyalty and Operational Excellence

In an effort to streamline and focus on core competencies, most companies have found ways to outsource elements of their operating environments to third-party specialists at lower costs. Focusing just within the walls of the company hasn't been enough to achieve operational excellence for some time. Now, in an effort to streamline processes and further reduce costs, companies are moving many of their remaining internal processes to the Internet. Activities including order management, product delivery, product support, and fulfillment are taking on new forms.

We've already discussed how the Internet has impacted the customer's expectations across all types of interactions with your company. The Internet has caused customers' expectations for the operational performance of your company to be raised as well. Today your customers can easily experience and compare how your competitors do the very same things you do, so you must be at a level that is at least acceptable. It's also easy for your competitors to test and emulate your processes. You can continue to improve operations to maintain your operationally excellent position, but each improvement in your operational performance in effect challenges your competitors to match or exceed your performance. It's not as quick or easy for them to do as price slashing, but the resulting level of performance is now part of your competitor's operating environment and is sustainable (unlike a price war, which can't be sustained over the long haul).

You can provide this value by capturing and storing knowledge about your customers that only you have. Use that knowledge so that you can consistently recognize your customers. You can remember and understand what they really need, and respond to their specific requirements in the most efficient and cost-effective manner. Competitors can duplicate your processes, but they can't duplicate your knowledge. Use your knowledge to ensure that you are delivering what the customer wants at the best possible price.

This doesn't mean that your operationally excellent company must change its focus to become customer intimate. It does mean that, while you are focusing on operational excellence, you can't ignore the importance of your customers and their relationship with your company. We will look at how to build and manage these relationships.

1.3.2 Loyalty and Product Leadership

Product leadership also doesn't look quite the same as it did. It's becoming harder to sustain success based on product differentiation alone. Your competitors are able to copy you and catch up more quickly and without the heavy, initial product development effort or expense that your company incurred. This leaves a much shorter period of time during which a company can remain in a product-dominant position before the competition at least matches current offerings.

Because so many industries sell products that have already become (or are in danger of becoming) commodities, prices are being squeezed and product differentiation is becoming blurred. When profits are narrowed, it's more difficult to continue to invest in the development efforts that will keep your products out in front. As an example in the high-tech industry, PCs have become essentially ubiquitous. PCs are everywhere, and they all have basically the same capabilities because there is little customer demand for extraordinary features. Gone are the days when each manufacturer could claim (and charge for) a uniquely "best" product. The market is looking for basic, standard capabilities, and no one is willing to pay significantly more for any specific product. PCs and many other products from many different industries have become commodities. Price wars are common and continue to shrink margins painfully. This catch-22 cycle, as presented in Figure 1-2, makes product leadership riskier and more expensive to sustain.

Figure 1-2 Figure 1-2 A catch-22: Commoditization means less money for development, which increases commoditization

How do you continue to be a successful product leadership company when so many products, maybe even yours, have become commodities? Customer loyalty can make the difference between successful and unsuccessful product leadership companies, because loyal customers will choose your products even if they aren't that much better than someone else's. Your customer's loyalty to you makes your product the best choice for him. You will undoubtedly continue to invest in those efforts that have always resulted in your superior products, but because you also recognize that return on investment may have shrunk, you also allocate resources toward managing your customer relationships. Loyal customers feel that your product is better and choose it over other similar products. Loyal customers seek out your products. The relationships you have with your customers are the only differentiators that your competitors can't duplicate. Loyalty once created is extremely stable; it is hard for competitors to dislodge. Customer loyalty is based on developing and maintaining personal relationships with your customers and providing them excellent experiences, even when using the Internet means that many of these experiences will not involve people on your end.

This certainly is not to suggest that all product leadership companies need to change everything they do and make customer intimacy their discipline focus. It does mean that the luxury of having such a superior product that you can afford to ignore your customers and force them to do business your way is going, going, gone.

1.3.3 Loyalty and Customer Intimacy

The Internet has had a tremendous impact on both the numbers and types of interactions that customers have with your company. Customer intimacy is no longer just a matter of providing excellent call center support and a high-quality sales force. Only in rare cases is there one single person who has knowledge of all of a customer's needs and experiences. Many of these interactions are online and don't involve the customer's having direct contact with any one of your employees. Others involve isolated interactions with a large number of people who may never see or talk with each other.

Historically, it was the men and women in your sales and service organizations who built and managed relationships with customers. The most successful sales and service people knew intuitively that their relationships with their customers were the keys to their success. Sales people knew that PEOPLE make buying decisions, that keeping a customer for the long term is where you really make money, and that long-term loyalty is based on maintaining good relationships and providing consistently high quality experiences. Service people knew that heroic individual efforts could often overcome a negative situation, making the customer more loyal.

As other sales channels emerged, the customer could experience your company through many different avenues. Whether through a retailer, a reseller, catalog phone order, or telemar-keter, people have been involved in building and managing the customer relationship. But these people operate in silos, and some aren't even your employees. They certainly don't work as a customer-centered team. The Internet has removed "people" from the product supplier end of the interaction. How can you build intimacy without consistent and direct human interactions? What information do you need? How do you get it? Where do you store it? How do you protect it? How do you use it? We'll explore the answers to these questions throughout the rest of the book. Soon, you will fully understand the discipline that uses information and technology to emulate human interactions and to bridge the organization's silos. You will learn how to build relationships between your company and your customer when there are either too many or too few (or zero) human beings responsible for the relationship.

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