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There is mounting evidence that those businesses that take a long term approach to developing value from individual customer relationships are inherently more profitable than the norm. My colleagues at Siemens ProCenter and I will explore the principles for designing customer interaction centres that will maximise the lifetime value of the relationship with your customers.

But first a question - when did you last buy a take-away pizza?....


Loyalty creates profitability

The lifetime value of a loyal customer can be astronomical. Researchers at Harvard Business School estimated that the lifetime revenue stream from a loyal pizza eater can be $8000, a car purchaser $332,000 and a purchaser of commercial aircraft literally billions.

The problem is that most businesses find it very difficult to think in terms of financial consequences of a customer relationship beyond the current deal or perhaps the current budget period. A piece of equipment, a product development or a brand may have long term value, but customer relationships exist only in the present. The startling fact is that loyal customers actually become more valuable over time.



All of us know that attracting new customers costs. Indeed for many businesses, the profits gained from the initial deal or even during the first year may not defray the costs of gaining the customer in the first place. Real value only starts to develop when the customer is able to purchase a variety of products or services from you and savings are gained through aligning processes and preferred supplier relationships.

TeleCheck International, a check acceptance company, calculated the lifetime value of a customer by factoring in increased revenues from its base product, declining per-unit service costs (from customer and supplier learning effects), and increased sales from purchases of a new product and estimated profits from referrals by a satisfied customer. Telecheck's management estimated that a 20% annual increase in revenue from its base product could produce a 33% annual increase in operating profit from the customer relationship. The total five-year stream of operating profit - £52,000 - was used to justify £4,000 spent on acquiring the customer the first year.

Eventually, there comes a point when the distinction between customer and supplier becomes blurred. The customer becomes an apostle for the supplier's company and services, referral business develops and the two organisations concentrate on finding ways of jointly creating value in the marketplace. This may result in special or custom products, or early release and trial of products which enable the customer to differentiate themselves. These sorts of relationships can often result in price premiums which are justified by the additional cost savings and differentiation that the customer is gaining from the relationship.

So, given that profitability is a function of loyalty - what then drives loyalty?


Customer satisfaction drives customer loyalty

Well, no gasps here. As consumers we all know that our own satisfaction with a supplier will be a key determinant in our loyalty. What is surprising is the level of satisfaction required to really generate loyalty in customers. In 1994, Rank Xerox disclosed results of an annual poll of its 480,000 customers. These customers scored their satisfaction with Rank Xerox's products and services using a scale from 1 (low) to 5 (high). Xerox's goal was to achieve 100% of responses in the 4 (satisfied) or 5 (very satisfied) band. However its analysis of the relationship between satisfaction scores and customer loyalty revealed that that even among this band, customers scoring their satisfaction as 5 (very satisfied) were six times more likely to re-purchase than those awarding a 4 (satisfied). This result led Xerox to revise its goals to achievement of 100% scoring 5 on satisfaction.



Customers today, don't leave so much because they are dissatisfied, more because they are not overwhelmingly satisfied and have other choices.


Service quality drives satisfaction

I recently attended a lecture in which a well-known computer telephony guru proclaimed that brand is dead, product differentiation is dead, the only thing that is left is the customer relationship.

This, whilst blunt, captures the basis of competition in many industries today. The American Management Association recently published an analysis of customer defections in the US, and found that 13% of defections were due to product performance, 12% were due to 'other reasons' and a massive 75% due to shortcomings in customer service.

Customers, even business customers, are placing increasing emphasis on the way that they are treated. Today, you have to provide stellar service, going above the customers' expectations, leaving them with a "wow", not an "ok". You have to earn their confidence over and over, make them feel appreciated, and find someway to break through all the marketing clutter . . . and all the filters your customers have invented to deal with all the clutter.

The good news is that your customers, being human, make largely emotional decisions. While you must create compelling, differentiating value for them, keeping them happy doesn't have to mean throwing money, discounts or free toasters at them. It can be a simple as a follow-up question, an acknowledgement of their continued business, a remote smile from a relaxed employee who genuinely loves serving your customers. It can happen over the phone, in a few well-planned moments . . . If you build your customer interaction system to make it happen.


Customer, Investor and Employee Satisfaction are inextricable

In his recent book, "The Loyalty Effect", published by Harvard Business School Press, Frederick Reichheld points out that "Experience has shown us that disloyalty at current rates stunts corporate performance by 25 to 50%, sometimes more."

He discusses the interdependence of customer, employee and investor loyalty, based on years of research and consulting with leading companies throughout the United States, and concludes that:

· Customer retention is based on providing superior value results in optimal business performance;

· Committed employees deliver more customer value than a constantly churning and learning employee base; and

· Investors are influenced by the stability of both customer and employee populations and take mass defections as a sign of something going awry.

Other research evidence draws consistent conclusion about these relationships. One recent study of a car dealer's sales personnel concluded that the replacement of an experienced salesperson with an employee of less than one year of experience would result in lost sales of around £25,000 per month. The consequences for a financial brokerage could be more critical. It may take five years for a broker to rebuild relationships with customers that are worth millions in commission per year.




The call centre - friend or foe?

Nowhere is customer, employee and investor loyalty more immediately visible than in a company's call centre. Whether handling sales, customer service or internal support, increasingly the call centre is the main interface between the company and its customers. As such, it is a key venue for events both driving and driven by loyalty. Satisfied customers keep buying; dissatisfied customers create stress for employees and leave. Satisfied employees provide good service; dissatisfied employees provide poor service or quit. Satisfied investors enable further investment in systems that improve service; dissatisfied investors withdraw their money and leave.

However the call centre can often be at odds with the factors driving loyalty. Usually a one-size-fits-all environment, it assumes that customers fit into generic groupings for common handling and that each centre employee can serve any given caller equally well. The problem is that the conventional call centre is no longer viable as callers expect more personalised service, want to conduct more complex transactions over the phone (for instance, buying pensions or life insurance), and there are more educated, career-bound personnel staffing the centre. The foundation upon which the call centre was originated is no longer adequate.

Employee disillusionment further leads to employee stress and dissatisfaction. Agents receive calls for which they are not qualified, which is frustrating and demoralising. This, in addition to time-based measurements, chips away at motivation to go the extra mile to provide stellar, personalised customer service.


Principles to design-in lifetime value

What is needed is an entirely new philosophy in customer interaction design -organising and distributing work efficiently without a generic view of either customers or agents.

Every principle of this design must recognise and act upon the uniqueness of customers and employees alike. These core principles we will discuss in the forthcoming issues:

1. Leverage customer information. Using the information you have about customers to squeeze the most out of every interaction.

2. Balance the use of people and technology. Some customers prefer doing business through automated systems. This can save money. Others will prefer to deal with people. Getting the right balance for each customer is crucial.

3. Maintain a tenured, high performance team. Motivated and challenged people will be loyal and work hard to boost service quality.

4. Sustain management excellence. Managing successfully requires hybrid skills, and attitudes for which there sometimes are no clear development paths or resource pools.

5. Build an infrastructure to keep the competitive edge. Building systems that can assimilate technology changes and re-size to support a volatile marketplace.

The challenge ahead is obvious. The rewards are high and the technology is now right. It will be the management tools, methods and vision that will transform the potential into results. Those that are successful will find their wallets stuffed with more than just loyalty cards.