The Economics of Customer Relationships
By Lior Arussy
Following the release of our 2003 Customer Experience Management Global
Survey, and the results that were revealed last year, we felt
compelled to identify the root cause of the inherent conflict between
the nature of the customer and the nature of the company.
Specifically, we wanted to learn, despite the forceful
articulation expressed by academics, media and consultants worldwide,
why companies refuse to make the necessary investment in their
customer relationships? While
we suspected that the answer was tied to an overall misunderstanding
and distrust of the financial upside associated with successful
customer strategies, what we found this year, was even more startling.
New to the 2004 study was a section for measuring the economics of
relationships. In it, we
asked some pretty basic questions, such as, “Do you know the cost of
a customer complaint?”, “Do you know the average annual customer
value?” and “Do you know what the cost of complaint resolution
is?” Amazingly enough,
the answer “I Don’t Know” was circled 89, 83 and 90 percent of
the time, respectively.
As it turns out, the survey results validated our hunch. The
great majority of executives lack basic customer information and do
not understand the costs and revenues associated with customer
Knowing and understanding the questions as laid out above is core to
understanding your business and key to managing successful customer
Ignorance to Actual Costs and Revenues Associated with Customer
Relationships: As mentioned above, when asked about the economics
associated with managing customer relationships, a large majority of
executives did not have access to basic information.
Despite focused attention from academia and the media directed
towards the value of existing customers and the cost inherent in
obtaining new ones, companies are ignorant to many of the economics
associated with their customer relationships.
In light of much of the cost-cutting going on at many
companies, this lack of understanding is startling. Companies
continue to pay a great deal of lip-service to their customers and
customer strategies yet very few of them can demonstrate long-term
success in forming strong, sustainable, and profitable relationships
with customers. The
Strativity Group study demonstrates that despite the pick up in the
economy, companies have not improved their investment in their
relationship financial drivers such as these must be monitored by
every company. In the
absence of such measurements, companies ultimately miss the full
potential of their customer relationships by not taking advantage of
the financial opportunities associated with each.
Consequentially, they cannot justify proper investment for a
long-term relationship which is exactly what is needed in order to
properly address customer issues, in depth.
critical and representative driver of customer relationship economics
is Portion of Budget (the percentage of business the customer gives
your company vs. what is given to your competitors).
For every company and industry, these are examples of industry
specific, customer relationship numbers that can be measured and
tracked. The results above
clearly indicate that the great majority of executives don’t get it.
The most important element of business – the customer – is
left unmeasured, improperly managed and under-invested in. In
spite of the current trend where businesses are transforming
management into a science and are measuring every element of the
operation, the lack of measurement on the customer management side of
the business is contradictory, and shocking.
of basic understanding and subsequent absence of customer performance
metrics certainly helps to explain some of the other surprising
results, as revealed in the study:
60% of the respondents claim they do not deserve the loyalty of
their customers! Study
respondents claim that the majority of companies do not provide the
tools and authority to solve problems, do not invest in their people,
or base compensation on quality of service.
The absence of these investments can only be explained by their
association with them as being unnecessary.
that the great majority of executives have blindly taken the position
that maintaining passionate and committed relationships is an added
cost and not a profitable way of doing business.
must be defused. It is an
incorrect assumption stemming from a lack of basic information.
It is a critical mistake that must be rectified as soon as
which fail to understand the costs and revenues associated with their
customer relationships will continue to treat their customers as a
cost item. Lacking
the ability to see the future value of a customer or the current cost
of a complaint will lead companies to “skim” over customers and
not invest in them over the long term.
Despite the large amount of ink dedicated to the topic of
existing customer value or the cost of obtaining new customers, it
appears that companies have been unable to internalize this knowledge.
This is especially surprising considering the ongoing cost
conscious approach taken by most companies over the last several
years. One would think
that with such a focus on the bottom line (or the last dollar),
executives would have a better understanding of the economics of their
customer relationships and would operate according to a more
transparent economic model.
imperative is clear: Companies
need to measure and track the numbers associated with customer value
and establish benchmarks by which they can profitably manage their
customer strategies. In my
book, Passionate &
Profitable, Why Customer Strategies Fail and 10 Steps to do the Right
(John Wiley & Sons, February, 2005), I argue that applying passion
to your products and strategies is a far better and more profitable
way to do business.
book I detail ten strategic steps companies should take to become more
passionate and ultimately, more profitable.
In addition, I’ve included what I believe are the 10
fatal mistakes companies make in their existing customer relationship
relationships with customers can be extremely profitable and must be
embraced by any company seeking to last beyond the quarterly results.
Customers will pay a premium for passionate service.
As detailed in the book, this premium comes in several forms
including longevity of relationship, lower cost of marketing and
sales, evangelization and recommendation by word of mouth or other
means, as well as actual premium price.
But to get the customer strategy right, companies must start
taking their relationships seriously.
They must understand the financial metrics associated with
these relationships and start adapting their strategies accordingly.
executives avoid trying to obtain this understanding and knowledge
because they are afraid of what they might find….Who knows? But what
we do know is that no stockholder will knowingly invest in a company
ignorant of the key drivers behind revenue generation.
It is time
to take grab the truth by the horns, no matter how bad it may be, and
do something about it. Understanding
the economics of relationships will set you free and for the first
time will enable you to build profitable customer strategies on a
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