Don Peppers - Managing Customer Experience and Relationships

The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise.

The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise. High levels of customer churn trouble all types of enterprises, not just those in the online and wireless industries. The problem partly results from the way companies reward sales representatives: with scalable commissions and bonuses for acquiring the most customers. Fact is, many reps have little, if any, incentive for keeping and growing an established customer. In some cases, if a customer leaves, the sales representative can even be rewarded for bringing the same customer back again!

Although it's always somebody's designated mission to get new customers, too many companies still don't have anybody responsible for making sure this or that particular customer sticks around or becomes profitable. Often, a service company with high levels of churn needs to rethink not only how its reps engage in customer relationships but also how they are rewarded (or not) for nurturing those relationships and for increasing the long-term value to the enterprise of particular customers. Throughout this book, we will see that becoming a customer-value enterprise can be difficult, depending on the category. It is a strategy that can never be handled by one particular department within the enterprise. Managing customer relationships and experiences is an ongoing process—one that requires the support and involvement of every functional area in the organization, from the upper echelons of management through production and finance, to each sales representative or contact-center operator.

EXHIBIT 2.3Customer Acquisition Costs (2020)

Source: Rishabh Rathi, “Customer Acquisition Cost by Industry: How to Calculate CAC?” February 14, 2022, available at https://startuptalky.com/cac-by-industry/, accessed February 24, 2022.

Customer-driven competition requires enterprises to integrate five principal business functions into their overall customer strategy:

1 Financial custodianship of the customer base. The customer-strategy enterprise treats the customer base as its primary asset and carefully manages the investment it makes in this asset, moving toward balancing the value of this asset to the long-term as well as the short-term success of the company.

2 Production, logistics, and service delivery. Enterprises must be capable of customizing their offerings to the needs and preferences of each individual customer. The Learning Relationship with a customer is useful only to the extent that interaction from the customer is actually incorporated in the way the enterprise behaves toward that customer.

3 Marketing communications, customer service, and interaction. Marketing communications and all forms of customer interaction and connectivity need to be combined into a unified function to ensure seamless individual customer dialogue, which includes remembering everything that already happened with this customer anywhere in the organization, so the next interaction can pick up where the last one left off.

4 Sales distribution and channel management. A difficult challenge is to transform a distribution system that was created to disseminate standardized products at uniform prices into one that delivers customized products at individualized prices. Disintermediation of the distribution network by leaping over the middleman is sometimes one solution to selling to individual customers.

5 Organizational management strategy. Enterprises must organize themselves internally by placing managers in charge of customers and customer relationships rather than of just products and programs. 29

We'll talk a lot more about this in Chapter 13.

Customer-centricity is not always easy, and it's not without controversy. Some believe that employees matter more than customers because without great, engaged employees, an enterprise will have a hard time building strong customer relationships and building customer equity. Others continue to focus on cash flow and on making sure that strong product managers are held responsible for product promotion, distribution, and profitability. Ad agencies continued to tend brand promise. But while all of these are important to a successful business, a growing number of firms have recognized that three things are true about a company's customers. Because of these truths, a company stands its best chance of success when it focuses on increasing customer value through outstanding customer experiences and relationships.

1 Customers are scarce. There are successful organizations that do not have products, but there is no such thing as a successful firm that doesn't have customers. Despite the fact that the world has billions of people, only so many of them will ever want a particular company's offering. That company's ability to find them, win them, get as much business from them as possible, and keep them for a long time will be the determining factor in how much it can ever grow the size of its business. There are only so many hungry people, right now, within reach of a neighborhood pizzeria, and each of those people can cook for themselves, or go to a competitor, or start a diet today. Customers are scarcer than products, services, new ideas, or channels. For all but those companies in real financial trouble, customers are even scarcer than capital itself. There is no secondary market for customers. They can't be borrowed at the bank and paid back with interest. Once a company's leaders realize this fact, they may make decisions differently, as we will see in Part III.

2 Customers are the sole source of all a company's revenue. Products don't pay a company any money, ever. Neither do brands or services, or employees, or marketing programs, or stores, or factories. Only customers generate revenue for a business—the customers the business has today and the customers it will have in the future. All the other stuff is important to a business only to the extent that it contributes to generating more revenue from customers. Thus, the goal will not just be to create value from each product or channel or even the greatest return on the investment of money, but instead to make sure the company creates the greatest value from each of its customers.

3 Customers create value in two ways. Today, they are generating profit this quarter (or not), and—also today—the experience they are having with a particular company's product, its brand, its contact center, or any of the rest of what it is selling is also causing them to become more (or less) likely to do more business with the company in the future, to become more (or less) likely to recommend it to friends, to think kindly of it (or not) when they need something else in its category. It's interesting that nearly every company is very, very good at measuring and managing one way that customers create value: Companies know how much they spent making money from customers this quarter and what their revenue was from customers this quarter—since that's the total of the cost and revenue on the quarterly books. But many companies are content not to know the second part of this equation: They don't know, don't measure, and don't manage what is happening to underlying customer equity while the current numbers are falling into place. That means understanding a company's Return on Customer (ROC) 30 is as important as understanding its return on investment (ROI). 31 We talk a lot more about ROC in Chapter 11. 32