Marketing Success Is (Almost) All About the Data: Optimizing Customer Loyalty Behavior Initiatives

Much of what I’ve learned over the years about sales, marketing and customer service has to do with the critical importance of customer data, and how those data are converted to actionable insights. It’s how companies generate the right customer data, manage and share data the right way, and use it at the right time. It’s also how they use data to the best effect, to optimize loyalty and profitability, that makes them successful, or not, on an individual customer basis. Culture, leadership, and systems will facilitate effective information gathering, storage and application; and, CRM, CEM, ERP, or other acronyms notwithstanding, it’s impossible to be successful without having as much relevant anecdotal and dimensional content about customers as possible.

Much of what I’ve learned over the years about sales, marketing and customer service has to do with the critical importance of customer data, and how those data are converted to actionable insights. It’s how companies generate the right customer data, manage and share data the right way, and use it at the right time. It’s also how they use data to the best effect, to optimize loyalty and profitability, that makes them successful, or not, on an individual customer basis. Culture, leadership, and systems will facilitate effective information gathering, storage and application; and, CRM, CEM, ERP, or other acronyms notwithstanding, it’s impossible to be successful without having as much relevant anecdotal and dimensional content about customers as possible.

Bill Gates, often a prophet, said in “Business @ The Speed of Thought” (1999):

The best way to put distance between you and the crowd is to do an outstanding job with information. How you gather, manage and use information will determine whether you win or lose.

He might have added, had he really understood how to create and optimize customer loyalty, that what information, particularly customer-specific information, a company collects, and how they manage, share and apply it to the customer will determine how successful they can become.

One of my key sources for the uses of information gathered by customer clubs and, particularly, loyalty programs, for example, is friend and colleague, Brian Woolf (www.brianwoolf.com). Brian is president of the Retail Strategy Center, Inc., and a fountain of knowledge about how companies apply, and don’t apply, data generated through these programs.

In a Peppers & Rogers newsletter, for example, Don Peppers quoted Brian in his article, “The Secrets of Successful Loyalty Programs”:

Loyalty program success has less to do with the value of points or discounts to a customer, and much more to do with a company’s use of data mining to improve the customer experience. Top management hasn’t figured out what to do with all the information gleaned. You have all this information sitting in a database somewhere and no one taking advantage of it.

You need to mine the information to create not only relationships but also an optimum (purchasing) experience. The best loyalty programs use the customer data to improve not only promotions, but also store layout, pricing, cleanliness, check-out speed, etc.

Firms that do this are able to double their profits. When these elements are not addressed, all you’re doing is teaching the customer to seek out the lowest price.”

Tesco, one of the world’s largest retail chains, is using its customer information for a number of marketing and process initiatives. In his book “Loyalty Marketing: The Second Act,” Brian described how Tesco leveraged customer data drawn from its loyalty program to move into offering banking and financial services:

With information derived from its loyalty card and enriched by appended external demographic data, they can readily develop profiles of customers who would most likely be interested in basic banking services, as well as an array of related options, ranging from car loans and pension savings programs, to insurance for all types of needs—car, home, travel and even pets. It costs Tesco significantly less than half of what it costs a bank to acquire a financial services customer. Without a doubt, having detailed customer information gives them a competitive edge.

A few years ago, Tesco parlayed its offline customer data to also become the world’s largest online grocery and sundries home delivery service. Additionally, Tesco uses its customer data to target and segment communications to the millions of its loyalty program members by almost infinite demographic, purchase and lifestyle profiles. In his book, Brian notes that Tesco can create up to 150,000 variations of its promotion and reward statement mailings each quarter. These variations, as he says, ” … are both apparent and subtle, ranging from the product offer (i.e., which customers receive which offers at what price) to the content of the letter and the way it is personalized.”

Tesco is absolutely a company that knows how to leverage customer information. Its customer database contains not just demographic and lifestyle data, food spending in stores and on home delivery, but also specifics about its customers’ interest in, and use of, a diverse range of non-food products and services. As Bill Gates’ statement suggests, incisive and leveraged customer data has enabled Tesco to put distance between itself and its competitors, in both traditional and non-traditional retail markets.

An understanding of the real value and impact of customer information, and a disciplined plan for sharing and using the data to make a company more customer-centric, is needed more than ever. A good analogy, or model, for CEM and loyalty program effectiveness or ineffectiveness in building desired customer behavior, may be what can be termed the “car-fuel relationship.” A car, no matter how attractive, powerful and technically sophisticated, can’t go anywhere without fuel.

Not only that, to reach a desired destination, the car must have the right fuel for its engine, and in the right quantity. For customers, the car is CRM and its key data-related systems components (data gathering, integration, warehousing, mining and application).

The destination is optimized customer lifetime value and profitability. The fuel is the proper octane and amount of customer data.

Leading-edge companies are focusing on customer lifetime value as a destination. They are collecting the right data and using the right skills, processes, tools and customer information management technologies to make sure that key customer insights are available wherever they are needed, in all parts of the enterprise. Jeremy Braune, formerly head of customer experience at a leading U.K. consulting organization, has been quoted as saying: ” … organizations need to adopt a more structured and rigorous approach to development, based on a real understanding of what their customers actually want from them. The bottom line must always be to start with the basics of what is most important to the customer and build from there.”

I completely agree. It’s (almost) all about the data.

1-Trick Ponies and Customer Loyalty Behavior

About 30 years ago, Paul Simon wrote a song entitled “One-Trick Pony.” The song describes a performing pony that has learned only one trick, and he succeeds or fails with the audience based on how well he executes it. As Simon conveys in the lyrics: “He’s got one trick to last a lifetime. It’s the principal source of his revenue.”

About 30 years ago, Paul Simon wrote a song entitled “One-Trick Pony.” The song describes a performing pony that has learned only one trick, and he succeeds or fails with the audience based on how well he executes it. As Simon conveys in the lyrics: “He’s got one trick to last a lifetime. It’s the principal source of his revenue.”

For a long time, I’ve seen this song and its message as something of a metaphor for what challenges many companies endeavoring to create customer loyalty behavior and more effective customer loyalty programs.

A key reason companies have a difficult time achieving stronger customer loyalty is they fail to provide full value and emotional relationship fundamentals. They focus on satisfying customers exclusively through basic rational and functional benefits, which is often too benign and passive an approach to create lasting value.

Mostly, they emphasize single-element or minimal element tactical approaches with customers, such as pricing, merchandise, loyalty cards or points-based programs, without determining (either before programs are launched or after they are up and running) whether this is sufficient motivation for building a long-term relationship. Smart marketers know, for instance, being a low-cost provider can be a trap and that only overall perceived value will prevail. In the United States, chain discount retailers like Caldor, Bradlees, Jamesway, Value City, Ames and Filene’s are either in trouble or have gone out of business, while Target, Costco and Walmart, with strong brand equity and high perceived value, have sustained.

Being a low-cost provider means that brand and customer strategies get little emphasis, and they require little investment. Let’s be honest. Cutting costs seems safe. The downside is it usually does not produce much loyalty (customer or staff), strategic differentiation or profitability.

In a 1980 Harvard Business Review article by William Hall (written, parenthetically, about the same time Simon wrote “One-Trick Pony), he reported study results comparing companies that competed on differentiated customer value vs. companies that competed principally on cost. On any important measure—return on equity, return on capital, and annual revenue growth—companies delivering both rational and relationship value beat the price competitors every time.

Customers can almost always locate cheaper products or services. Ultimately, they will invest a greater share of their purchase dollars with suppliers who create stronger emotional bonds and deliver superior perceived value. Competing on price, or any other single dimension, may pull away customers from other suppliers in the short run, but it will be difficult to keep them for long. Price is rarely a sufficient “barrier to exit,” and is more often an invitation to churn.

The same thing often holds true for incentive programs. Many consumers participate in programs like supermarket bonus clubs and airline frequent flyer programs, but they aren’t particularly effective at producing greater loyalty for any one airline or any one supermarket chain. Customers are often members of several programs, and the most active users tend to be those who would have been frequent purchasers, anyway. The incentive and reward structure more often benefits the already loyal rather than increasing loyalty. Gift programs, travel, dining, entertainment, merchandise, and cash award programs, and other plateau and pre-selected response stimulus programs are having an increasingly difficult time breaking through the clutter to provide unique, differentiated customer value.

Some of the online incentive programs have positively increased transactions, mostly among younger, female and active surfing potential buyers. To keep these incentive promotions from being one-trick ponies, they must be carefully targeted to the right consumers and at the right time. These programs must have four effective elements: ability to attract prospects to the website and, once there, to generate consideration, preference, and purchase. Getting infrequent buyers to purchase more often, or frequent buyers to place larger orders through the use of incentives, will hinge on how well companies leverage their customers’ profiles. Even more basic, it must be well-understood what customers perceive as value and what it will take to optimize their repeat purchases. The essentials for bricks and mortar product and service providers are virtually the same.

Generic, cookie-cutter and “me, too” discounts or incentives don’t do particularly well at increasing overall customer “share of wallet,” because they don’t sufficiently reward the customer for their enhanced purchase activity over time. All that’s really required to meet the customer halfway is infusion of some targeted, personalized elements to the incentive program to make them more attractive and beneficial.

The first step is to segment customers who should receive different incentives. This can be done through both basic data analysis and applied, or pilot, customer research. For example, for large customers who purchase infrequently, the company might have determined that, if they offer special discounts made within the near future, say 60 or 90 days, these customers would find that attractive. Customers who purchase frequently but in low volume amounts might be offered a discount on their next order, so long as it is larger than their last order. The array of potential loyalty program offerings can be customized based on identified needs.

What about incentives for customers who are both frequent and large volume purchasers? Well, start by saying “thank you” to them. Few things are more appreciated than thanks, and few companies express their gratitude as much as they should. Many forget to thank their customers altogether. This is especially critical for Web-based companies, or ISPs and cable companies, where the purchase experience is frequently virtual rather than personal. Thanked customers are more likely to go out of their way to provide positive referrals and testimonials.

Paul Simon’s song lyrics conclude: ” … the bag of tricks it takes to get me through my working day.” Companies would be well-served to have a bag of experience and customer loyalty tricks, using disciplined research and customer data to identify them, rather than relying on only one—price—to get them through.

When Viral Marketing Goes Too Far

A couple of years ago, our local newspaper, The Philadelphia Inquirer, ran a disturbing story about how a mortgage loan company in Phoenix had sent spam advertising messages which appeared on the screens of thousands of wireless phone customers. Not only were the messages not requested, but these customers had to pay to retrieve them.

A couple of years ago, our local newspaper, The Philadelphia Inquirer, ran a disturbing story about how a mortgage loan company in Phoenix had sent spam advertising messages which appeared on the screens of thousands of wireless phone customers. Not only were the messages not requested, but these customers had to pay to retrieve them.

In the United States, phone numbers are allocated to wireless companies in blocks of 9,999, all beginning with the same three-digit prefix following the area code. The text messaging address for each mobile phone is derived from the phone number assigned to each customer’s handset and the wireless company’s name. This means that an advertiser can simply choose any three digit prefix in an area code and send a message to 10,000 people by changing the last four digits after the prefix

One industry analyst noted that this is just the tip of the iceberg. This type of spam is cheap and easy for advertisers to use. Wireless text messaging is widely used in the U.S.; and, while some carriers are taking precautions to protect their customers from text message advertising, so far neither the direct marketing industry nor the federal government has been able to control this form of spam. As the president of the mortgage company noted, the advertising had brought in new clients and “There still isn’t any rule against emailing.” Online, the concept of “permission marketing” is similarly tossed aside each day with the receipt of unsolicited promotional emails.

We call this indiscriminate solicitation of prospective customers one variation of the “Casanova Complex” customer acquisition model, reflective of the 18th century Italian adventurer, perhaps best known for his many female “conquests.” In the haste to bring in customers, companies can often forget to court the right customers, those who represent the best long-term revenue potential, or who won’t overtax the company’s customer service and support structure.

If offline instances of the Casanova Complex are a disease, then it is an epidemic among Internet companies. Many online retail sites have engaged in sweepstakes and other customer generation programs. Their objectives, they say, are to create “viral” promotions which create excitement for their sites and build their databases of available names both inexpensively and quickly. In one instance, a portal site which runs more than 1,000 websites featuring links to other sites signed up 50,000 registrants in a “Win Up to $4,000” game. Another sweepstakes program secured 126,000 registrants. An online travel products retailer, offering 1 million air miles to the winner, generated more than 60,000 names in 90 days, almost all of whom were new to the site.

The big issue for any of these sites is—do these promotions and schemes draw attractive customers who can then be cultivated over time through the various marketing tools available today? And, once these customers are on board, are companies doing enough of the right things to keep them? Or is this just another extrapolation of the Casanova Complex? As one site marketing executive said: “This is a great, low-cost way for us to acquire new names. The jury’s still out on how many of those new people will come back.” Companies involved in developing or using promotional tools like sweepstakes, unsolicited email, or wireless spam seem inclined, though, at least for the moment, to believe that these possibilities generally don’t apply to them.

For traditional offline companies, the Internet may be “commoditizing” their industry or undermining customer relationships. Many brick and mortar CEOs say a key corporate goal is to transition more of their offline customers to online, self-transactional usage. Why? Because an online transaction costs dramatically less than a brick-and-mortar transaction, there is less risk for service error, and the company can more effectively capture and leverage information from an online transaction, to cite a few advantages. Certainly, the transactional advantages of e-commerce are very appealing. But what about the effects on loyalty—especially for new customers?

One of the important ways both online and offline companies can discipline themselves to avoid the Casanova Complex is to apply personalization in all contact with customers, both new and established. This, at least, gives companies a better chance of establishing the basis of a value-based, viral relationship with these customers.

While it’s been estimated that more than 80 percent of e-commerce sites have customer and visitor email personalization capabilities (Opens as a PDF), less than 10 percent of the sites used personalization in follow-on marketing campaigns. For websites favoring incentive devices like sweepstakes and frontal assault “push” email programs to attract potential customers, personalized communication is the perhaps the best opportunity to demonstrate ongoing interest in customers—especially new ones.

Personalization is at the heart of the “relationship” in successful online CRM programs. Ultimately, it’s what makes any CRM effort viral.

Avoiding the One-Night Stand

Stating that all customers are not created equal is hardly an oversimplification. But, just like the pigs in Orwell’s “Animal Farm,” some customers are more equal than others. No company has unlimited resources to equally service or support all its customers. Repeat buying power, the essence of customer loyalty, is everything. Some customers are worth a great deal, some may become more valuable over time, some may be valuable for a brief period but may be easily lured away, and some are never likely to become valuable.

Stating that all customers are not created equal is hardly an oversimplification. But, just like the pigs in Orwell’s “Animal Farm,” some customers are more equal than others. No company has unlimited resources to equally service or support all its customers. Repeat buying power, the essence of customer loyalty, is everything. Some customers are worth a great deal, some may become more valuable over time, some may be valuable for a brief period but may be easily lured away, and some are never likely to become valuable.

At minimum, companies need to segment their customers so they can determine how much longer that customer will remain with them, how much revenue each customer will contribute, how much and what kind of services the customer should receive, and what efforts will be needed to keep them whether they are new, at risk, or even already lost. Also, if a company is changing product or service focus—such as beginning a new customer experience management or frequency marketing program—decisions will have to be made about which customers it wants to retain.

Just as companies are becoming smarter about keeping the customers they want or “firing” less attractive customers through stepped-down services, they have to invest more upfront, at the beginning of the customer life cycle, in learning which potential customers will be the most valuable over time. This goes beyond segmentation. It is almost pre-segmentation.

Here’s a prime example. The business of gaming in Las Vegas, Atlantic City, numerous riverboats, Indian reservations and offshore is built not on a house of cards, but a house of numbers. At Las Vegas casinos like the Rio, those players who gamble $1,000 a day with the Rio, whether they win or not, receive the designation “hosted guests.” These are the kinds of customers the Rio works hard to acquire. Their level of play accords them VIP status, with more “comps” (free dinners, show passes and other gifts). Each hosted guest has an individual staff host assigned to check on them and provide any needed services.

The host is actually a highly paid, personal customer service representative. It’s an important position, which casino operations like the Rio consider pivotal to their success. The hosts cultivate relationships with the players; and VIP players are encouraged to call their hosts before arriving at the casino, so the host can have show tickets, restaurant reservations and suites set up, per the player’s profile.

There’s even a higher echelon of gaming customers—those players who have a $1 million line of credit. They get the best suites and virtually everything the casino has to offer. They’re nicknamed “whales,” and with good reason. At the Rio, this means a suite with 7,000 square feet of space and bathroom sinks with gold-plated faucets. These players are relied upon to bet in the Rio’s secluded back room, called the Salon, where they may play baccarat and roulette with $100,000 chips.

In an industry like gaming, where the level of customer migration is very high, it is imperative that casinos not only keep the players they want but target the right customers in the first place. They do this in a number of ways, including geodemographic profiling for their acquisition. For the high rollers they’ve lost, many of the casinos make an extra effort to get them back, as well.

Advanced companies have begun applying “conversion” models, seeking customers who:

  • Need less direct motivation (incentive) or indirect motivation (promise of support and committed resources) to purchase;
  • Have demonstrated more resistance to claims and attempts to lure them away;
  • Are less price-sensitive;
  • Are more accepting of occasional value delivery lapses and are less likely to accept alternatives if the brand/service is unavailable; and
  • Demonstrate more positive attitudes about “their” brand.

In the retail automotive industry, as another example, potentially loyal new customers take less time making their purchase decisions, consider fewer dealerships, are less price-driven, and rely less on magazine articles and other media and more on previous experience and personal recommendation.

Some years ago, South African researchers Jan Hofmeyr and Butch Rice created an effective conversion model, which helped marketers develop and sustain effective customer loyalty initiatives programs for customers, both new and established. They found that, beyond customer needs and value delivery requirements, companies must understand the potential depth of a customer’s commitment to the supplier. Part of this means identifying the degree of customers’ tangible and intangible involvement with the company. Tangible involvement can include such factors as the actual dollar cost of switching to a competitor. Intangible issues include the emotional strength of the connection or the upset and insecurity created by switching suppliers. The model also measures the degree of attractiveness of competitive brands, based on what these customers want as prioritized elements of value.

Hofmeyr and Rice’s model also enabled them to view their clients’ marketplace in terms of users and non-users. Users can be divided into those who are truly committed and loyal and those who are “convertible”; that is, declining or wavering in their loyalty. Non-users—prospects and previous customers—are divided into potentially convertible and non-available (because they are committed to their current supplier).

Detailed analysis could then be developed for current customers and prospects. The percentage of current customers who are entrenched, or completely loyal, can be identified, as well as those who have moderate loyalty, shallow loyalty, or convertibility (true vulnerability). Non-users, or prospects, could also be identified in a similar manner: those who are available, or highly receptive to a competitive offer; and those who are ambivalent, but who would switch with the right value-based incentive. Other prospects, who have average or strong loyalty to their brand or supplier, are considered unavailable by the model.

The model has been used to plan the amount of advertising and promotional activity required for new customers and prospects, according to their commitment level and potential value. It has been applied in more than 50 countries and for scores of products and services.

On an everyday, or tactical, basis, companies should also always be on the lookout for customers who could represent more of a problem than the revenue they might contribute. Through our own research, we’ve identified seven such types of customers:

  • Non-Complainers—Customers who never express any negative feelings about performance or identify potential areas of improvement may just be hiding their disaffection. Marketing scientist Theodore Levitt has said: “One of the surest signs of a bad or declining relationship with a customer is the absence of complaints. Nobody is ever that satisfied, especially not over an extended period of time.”
  • Over-Complainers—Customers who tend to complain frequently, sometimes irrespective of whether their issues are really consequently or not, can beat down a company’s morale and overtax its support infrastructure.
  • Price Grinders—New customers who pressure their suppliers to lower prices on initial sales in return—they often promise—for future business that may or may not exist.
  • Chronic Defectors—When customers have a history of pulling their business without explanation or warning, this may be a sign that they’ll never be happy with any supplier’s performance. Their volatility and refusal to communicate issues makes them undesirable.
  • Friends in Need—These “quick-jump” customers who want to find new suppliers with great haste often don’t make purchase decisions very well, or they may have economic challenges.
  • Discourteous Slobs—Any customers who are chronically rude and verbally abusive, even though they may not contact their suppliers frequently, can undermine a company’s morale and operations. If they have reason to be upset or annoyed, that’s one thing. Their concerns should, obviously, be addressed and dealt with as quickly as possible. If the negative behavior continues, they’re probably not worth the effort.
  • Misfits—The needs of some new customers may simply not align well with the supplier’s ability to perform. If, for example, 99.9 percent of the deliveries to customers are made during normal business hours and the new customer wants delivery in the middle of the night, unless this customer truly represents a great deal of business, they are probably not serviceable.

If most people are like me—a statement always open to interpretation—virtually every day they will see content or promotional material from long distance telephone companies offering their latest and greatest low cost plans. Typically, they don’t try to find out about my business and personal long distance needs. They just try to push the plan. One of the enduring reasons for the high rates of customer turnover in this industry is the lack of scientific prospect targeting, and attempts to understand potential customers’ tangible and intangible switching issues, done at the outset. Perhaps it’s time for their conversion.

How an Already Damaged Reputation Got Worse and Worse

We’ve all witnessed how impaired corporate or brand image can undermine both consumer trust and financial performance. Recently, Target’s CEO was relieved of his duties because of the massive customer account security breach which occurred during his watch. The poster child of negative reputation, at least in the U.S., has been British Petroleum. BP’s then-president of U.S. operations was forced from office because of some ill-conceived and dismissive language, and BP’s corporate behavior since the Gulf of Mexico oil disaster has been of little help in image recovery.

We’ve all witnessed how impaired corporate or brand image can undermine both consumer trust and financial performance. Recently, Target’s CEO was relieved of his duties because of the massive customer account security breach which occurred during his watch. The poster child of negative reputation, at least in the U.S., has been British Petroleum. BP’s then-president of U.S. operations was forced from office because of some ill-conceived and dismissive language, and BP’s corporate behavior since the Gulf of Mexico oil disaster has been of little help in image recovery.

British Petroleum has recently “celebrated” four years of cleanup and payout in the Gulf by announcing the end of active cleanup of the 500 miles of coastline from Louisiana to Florida, the result of 87 consecutive days of oil pouring from the Deepwater Horizon rig of its Macondo Project. After dealing with issues over the health and economic impact by setting up a multibillion-dollar cleanup fund, conducting a massive image PR repair campaign, and paying huge federal fines, BP had originally agreed to keep its corporate cash register open for environmental and business claims as long as they were what the company termed as “legitimate.” Though this began as an eagerness to address and settle these damages as a way to manage its impaired reputation, it has now devolved into legal, and very public, name-calling between BP and claimants.

Not including Federal fines, BP’s payout to Gulf Region businesses and residents has thusfar totaled almost $10 billion. The sheer volume and financially cascading nature of these claims, it turns out, was way beyond BP’s reckoning; and the company began to openly challenge many of them as “nonexistent and artificially calculated” in court. In mid-2013, BP even took out full-page ads in The Wall Street Journal, The Washington Post, and The New York Times, claiming that attorneys were filing dubious and hyper-inflated claims on behalf of Gulf-area businesses. As stated by a BP spokesperson at the time, “The litigation is seeking to rectify the misinterpretations of the settlement that have led to inflated, exaggerated or wholly fictitious claims … will continue unabated.” Not exactly image-restoring language, and a direct slap at the federal judge who drafted the financial agreement.. By the Fall of 2013, BP’s attorneys were appealing one out of every five claims received.

BP was also receiving massive negative publicity due to both real and suspected improprieties among its legal staff involved in processing claims, with one lawyer fired for accepting fees from claimants and another lawyer resigning. The suspicions were so strong that the Freeh Group, a firm headed by former FBI director Louis Freeh, was brought in (by a consortium of attorneys and BP) to investigate. Numerous “inappropriate” actions by the claims department were uncovered in the investigation; and one sidebar result was that, following the publication of its report, the Freeh Group took a more visible and active role in overseeing claims.

One result of this outside claims takeover has been more rigorous inspection of individual claims, even taking back payments (which Freeh’s team was empowered to do), if the original payment was deemed excessive or illegitimate. BP has been public about its support of the added scrutiny; while area attorneys and local government and other civic officials have noted how this has stifled claims filings.

Still, even as BP has pulled back in the Gulf, and gotten people to stop filing, it has left continued sore feelings by claimants, and those whose claims are either under investigation or still yet to be resolved. An example of this is a shrimper from Slidell. After extensive documentation consisting of multiple years of tax returns, financial statements and shrimping reports showing the vast sums the Louisiana shrimper had lost over several seasons, directly as a result of the Deepwater Horizon spill, he was paid about 7 percent of what had been claimed. To keep his business going, he had to take out loans. He also refiled his claim, but BP delayed it by beginning yet another investigation into his filing papers. As he told the area press: “BP is giving me the runaround.” Is this really the way to reclaim trust and bring back its image?

Putting the ‘Bar’ in Barista: Pricey Lattes, Capuccinos and Macchiatos … With a Beer Chaser?

With a serving concept originally generated about four years ago, and then intensively beta-tested, Starbucks has begun rolling out its new drink and munchies menu, serving beer, wine and its version of bar food to thousands of locations. The new wrinkle, called “Starbucks Evenings,” has been thoroughly designed and cascaded into key markets; and alcoholic beverages will be served only in locations where demand is expected to be—high.

With a serving concept originally generated about four years ago, and then intensively beta-tested, Starbucks has begun rolling out its new drink and munchies menu, serving beer, wine and its version of bar food to thousands of locations. The new wrinkle, called “Starbucks Evenings,” has been thoroughly designed and cascaded into key markets; and alcoholic beverages will be served only in locations where demand is expected to be—high.

Starbucks has reached 40, a mature middle age; and the chain has been actively seeking to rebuild and evolve its brand, and make its locations more a part of the neighborhood. The chain has tried “line extensions” in the past (Starbucks ice cream was a total disaster), but Starbucks Evenings is serious and strategic. The updated stores will have new, more muted colors in their interior design that are definitely a departure from what customers have come to expect—at a refurbishment cost that begins at $25,000 and can reach six figures. From many perspectives, this is a huge gamble for the worldwide chain.

Everyone understands the potential negatives: a compromising of Starbucks’ high-end coffee house image, and the business downside this can bring. Baristas need to be trained in how to sell alcoholic beverages, and may also need to be trained in how to deal with “overserved” customers. Finally, the company has to address how to accommodate the minors who frequent their locations in large numbers. After all, drinking coffee and tea is legal irrespective of age; and there may be challenges in setting up spaces for underage customers, for those adults who don’t want to be around alcohol, and for those customers who are only in Starbucks for beer and wine. Starbucks is convinced that won’t happen, in part because other chains—Chipotle Mexican Grill and Red Robin Gourmet Burgers (though a family restaurant, it’s offering dessert/alcohol combinations, such as a Mango Moscato Wine Shake)—have been doing this for some time.

On the (calculated) plus side, the company’s approach represents an opportunity to attract customers who would like to have an alcoholic beverage in a safe, calm and pleasant atmosphere and who will pay a premium for the privilege. Some of these may be new customers, who could return during the day to enjoy Starbucks’ traditional food and beverage fare. Also, the evening food and drink menu will be served at locations near public transportation, generating high levels of foot traffic.

At the end of the day (pardon the pun), it’s all about the customer experience. Starbucks believes selling alcoholic beverages is a natural progression for the company. As stated by its spokespeople, Starbucks is all about occasions for customers to gather, relax and interact with one another. And this is particularly true in the evenings, after work and after dinner, which is usually the busiest time for coffee shops and bars.

Most observers and analysts think Starbucks will succeed. As one local daytime patron, who has now included evenings in his Starbucks visits, noted: “It’s not just the wine, it’s the unwind. The atmosphere here is all part of the experience.”

A tip of the hat, a tip of the cup and a tip of the glass to Starbucks.

McKinsey Thinks Bland, Generic Loyalty Programs Are Killing Business – And They May Be Right!

A recent Forbes article by McKinsey, “Making Loyalty Pay: Six Lessons From the Innovators,” showed loyalty program participation has steadily increased during the past five years (a 10 percent annual rate of growth), with the average household now having almost 25 memberships. For all of that growing popularity, there are huge questions for marketers: Are the programs contributing to increased sales? And what is the impact of loyalty programs on enterprise profitability?

A recent Forbes article by McKinsey, “Making Loyalty Pay: Six Lessons From the Innovators,” showed loyalty program participation has steadily increased during the past five years (a 10 percent annual rate of growth), with the average household now having almost 25 memberships. For all of that growing popularity, there are huge questions for marketers: Are the programs contributing to increased sales? And what is the impact of loyalty programs on enterprise profitability?

Overall, companies with loyalty programs have grown at about the same rate as companies without them; but there is variance in performance value among industries. These programs produce positive sales increases for hotels, for example, but negative sales impact on car rental, airlines and food retail. And, companies with higher loyalty program spend had lower margins than companies in the same sector which do not spend on high-visibility loyalty programs.

McKinsey has noted that, “Despite relative underperformance in terms of revenue growth and profitability, over the past five years, market capitalization for companies that greatly emphasize loyalty programs has outpaced that of companies that don’t.” This, as they see it, may be indicative of hope among companies with programs that long-term customer value can be generated.

Within the McKinsey report, several strategies are offered for helping businesses overcome the negatives often associated with loyalty programs. Key among these are:

  • Integrate Loyalty Into the Full Experience
    Companies can link the loyalty program into the overall purchase and use experience. An example cited in the article is Starbucks, which has created its program to reflect the uniqueness of its café experience. Loyalty is built into the program by integrating payments and mobile technology, which appeals to its target audience.
  • Use the Data
    This may be the most important opportunity represented by loyalty programs. Data collected from the programs can offer competitive opportunities. Tesco, the largest supermarket chain on the planet, has been doing loyalty program member number-crunching for years through DunnHumby. Similarly, Caesars Entertainment has rich databases on its high-rolling program members. One retailer has combined its loyalty program with a 5 percent point-of-sale discount, building volume from its highest-value customers. In another well-documented example, a retailer has used its loyalty program data to identify future mothers before other chains, thus targeting offers to capture both their regular spend and new category purchases as buying habits evolve.
  • Build Partnerships
    As stated on so many occasions, organizations that build trust generate stronger, more bonded, customer behavior. This applies to loyalty programs as well, where there is ample opportunity to build cross-promotion for customers with non-competing products and services. In the U.K., Sainsbury, the major supermarket competitor of Tesco, has partnered with Nectar, a major loyalty coalition. Nectar has more members than Tesco, and participants can collect rewards across a large number of non-competing retailers. Through partnership, Sainsbury’s offers customers a broader and deeper value proposition; and Nectar also generates data from coalition partners, which it uses to better target promotions to customers.
  • Solve Customer and Industry Pain Points
    Numerous customer behavior studies have shown that people will gravitate to, and pay more for, better service. A perfect example of this is Amazon Prime, where additional payment gets customers faster delivery and digital tracking. This is good for Amazon (estimates are that members spend more than four times more with Amazon than non-members), its customers, and its suppliers, who also get access to Prime customers and the positive rub-off of affiliating with a trusted brand.
  • Maximize Difference Between Perceived Value and Real Cost
    Often, program elements can represent high perceived value without adding much in the way of bottom-line cost to the sponsor. The example cited is Starwood Hotels and Resorts where, through its Starwood Preferred Guest (SPG) program, there is a focus on personal leisure travel rewards for high-spending frequent guests.
  • Allocate Loyalty Reinvestment to the Most Valuable Customers
    Many companies have only recently come to the realization that some customers are more valuable than others; and, to be successful, loyalty programs need to target the higher revenue customers. In 2010, Southwest Airlines revamped its loyalty program to make rewards more proportional to ticket price; and this has better targeted the most profitable customers, as well as enabled the airline to adopt a loyalty behavior metric that is closely tied to actual revenue generation.

Loyalty programs continue to grow, but they are also tending to become more closely integrated with brand-building and multichannel customer experience optimization. But, there is also lots of commoditization and passivity were these programs are concerned—sort of the “If You Build It, They Will Come” syndrome at work. And, of course, there’s a mini contra movement among some retail chains, where they have removed established loyalty programs—or never initiated them in the first place—in favor of everyday low prices and more efficient performance.

Too Big to Fail – But Not Too Big to Suck

On a recent “Real Time With Bill Maher” show, Maher responded to the announcement that Time Warner Cable would merge with Comcast Corp. in a $45 billion purchase. He noted that, combined, the two cable systems represent 19 of the 20 largest U.S. markets; and, apart from suppliers like Dish and DirecTV, they have no competitors in these metros. Further, Maher said, the two companies have the lowest customer satisfaction ratings of any cable system. So, as he asked his panelists, where is the value for customers in this merger if both companies are known to have questionable service performance?

On a recent “Real Time With Bill Maher” show, Maher responded to the announcement that Time Warner Cable would merge with Comcast Corp. in a $45 billion purchase. He noted that, combined, the two cable systems represent 19 of the 20 largest U.S. markets; and, apart from suppliers like Dish and DirecTV, they have no competitors in these metros. Further, Maher said, the two companies have the lowest customer satisfaction ratings of any cable system. So, as he asked his panelists, where is the value for customers in this merger if both companies are known to have questionable service performance?

The Federal Communications Commission (FCC) will, of course, have a great deal to say about whether this merger goes through or not. During the past couple of decades, we’ve seen a steady decline in the number of cable companies, from 53 at one point to only six now. Addressing some of the early negative reaction to its planned purchase of TWC-which would increase Comcast’s cable base to 30 million subscribers from the 22 million it currently has (a bit less than 30 percent of the overall market)-Comcast has already stated that it will make some concessions to have the merger approved. But, that said, according to company executives, the proposed cost savings and efficiencies that will “ultimately benefit customers” are not likely to either reduce monthly subscription prices or even cause them to rise less rapidly.

Comcast executives have stated that the value to consumers will come via “quality of service, by quality of offerings and by technological innovations.” David Cohen, their Executive VP, said: “Putting these two companies together will not deprive a single customer in America of a choice he or she will have today.” (Opens as a PDF) He also said, “I don’t believe there’s any way to argue that consumers are going to be hurt from a price perspective as a result of this transaction.” But, that said, he also admitted, “Frankly, most of the factors that go into customer bills are beyond our control.” Not very encouraging.

As anyone remotely familiar with Comcast’s history will understand, this is not the first time the company has navigated the river of communications company consolidation: 1995, Scripps, 800,000 subscribers, 1998, Jones Intercable, 1.1 million subscribers; 2000, Lenfest Communications, 1.3 million subscribers.

In 2002, Comcast completed acquisition of AT&T Broadband, in a deal worth $72 billion. This increased the company’s base to its current level of 22 million subscribers, and gave it major presence in markets like Atlanta, Boston, Chicago, Dallas-Ft. Worth, Denver, Detroit, Miami, Philadelphia and San Francisco-Oakland. In a statement issued by Comcast at the time the purchase was announced, again there was a claim that the merger with AT&T would benefit all stakeholders: “Combining Comcast with AT&T Broadband is a once in a lifetime opportunity that creates immediate value and positions the company for additional growth in the future. Shareholders, employees, and customers alike are poised to reap considerable benefits from this remarkable union.”

There have been technological advances, additional content, and enhanced service, during the ensuing 13 years. But “immediate value” and “considerable benefits”? Having been professionally involved with customer research conducted at the time of this merger, there was genuine question regarding the value perceived by the newly acquired AT&T customers. In a study among customers who discontinued with Comcast post-merger, and also among customers who had been Comcast customers or AT&T customers prior to the merger, poor picture quality (remember, these were the days well before HD), service disruption and high/continually rising prices were the key reasons given for defection to a competitor.

Conversely, when asked to rate their current suppliers on both key attribute importance (a surrogate measure of performance expectation) and performance itself, the highest priorities were all service-related:

  • Reliability of cable service
  • Availability of customer service when needed
  • Speed of service problem resolution
  • Responsiveness of customer service staff

On all principal service attributes except “speed of service problem resolution,” the new supplier was given higher ratings than either Comcast or AT&T. And there were major gaps in all of the above areas. Overall, close to 90 percent of these defected customers said they would be highly likely to continue the relationship with their new supplier. When correlation analysis was performed, pricing and service performance were the key driving factors. In addition, even if Comcast were now able to offer services that overcame their reasons for defection, very few (only about 10 percent) said they would be willing to become Comcast customers again.

Finally, we’ve often focused on unexpressed and unresolved complaints as leading barometers, or indicators, of possible defection. Few of the customers interviewed indicated problems with their current suppliers; however, as in other studies, problem and complaint issues were frequently surfaced for both Comcast and AT&T.

It should be noted that having lost a significant number of customers to Verizon’s FiOS, Comcast has a winback program under way, leveraging quotes from subscribers who have returned to the Xfinity fold. In the usual Macy’s/Gimbel’s customer acquisition and capture theater of war, this marks a marketing change for Comcast. As often observed (and even covered in an entire book, with my co-author, consultant Jill Griffin), winback marketing strategies are rather rarely applied, but can be very successful.

One of the key consumer concerns, especially as it may impact monthly bills, is the cost and control of content. For example, Netflix has agreed to pay Comcast for an exclusive direct connection into its network. As one media analyst noted, “The largest cable company in the nation, on the verge of improving its power to influence broadband policy, is nurturing a class system by capitalizing on its reach as a consumer Internet service provider (ISP).” This could, John C. Abell further stated, be a “game-changer.” Media management and control such as this has echoes of Big Brother for customers, and it is all the more reason Comcast should be paying greater attention to the evolving needs, as well as the squeeze on wallets, of its customers.

Perhaps the principal lesson here, assuming that the FCC allows this merger to proceed and ultimately consummate, will be for Comcast to be proactive in building relationships and service delivery. There’s very little that will increase consumer trust more than “walking the talk,” delivering against the claims of what benefits customers will stand to receive. Conversely, there’s little that will undermine trust and loyalty faster, and more thoroughly, than underdelivery on promises.

What Customer-Centric, Customer-Obsessed Companies Must Do

In building relationships with and value for customers, my longtime observation is most organizations tend to progress through several stages of performance: customer awareness, customer sensitivity, customer focus and customer obsession. Here is the “executive summary” version of some conditions of each stage.

In building relationships with and value for customers, my longtime observation is most organizations tend to progress through several stages of performance: customer awareness, customer sensitivity, customer focus and customer obsession.

Here is the “executive summary” version of some conditions of each stage.

Customer Awareness
Customers are known, but in the aggregate. The organization believes it can select its customers and understand their needs. Measurement of performance is rudimentary, if it exists at all; and customer data are siloed. There’s a traditional, hierarchical, top-down management model, with “chimneyed” or “smokestack” communication (goes up or down, but not horizontal) with little evidence of teaming.

Customer Sensitivity
Customers are known, but still mostly in the aggregate. Customer service is somewhat more evident (though still viewed as a cost center), with a focus on complaint and problem resolution (but not proactive complaint generation; internal groups tend to point fingers and blame each other for negative customer issues). Measurement is mostly around customer attitudes and functional transactions, i.e. satisfaction, with little awareness of emotional relationship drivers. The organization has a principally traditional, hierarchical, top-down management model, with “chimneyed” or “smokestack” communication (goes up or down, but not horizontal), with some evidence of teaming (mostly in areas of complaint resolution).

Customer Focus
Customers are both known and valued, down to the individual level, and they are recognized as having different needs, both functional and emotional. The customer life cycle is front-and-center; and performance measurement is much more about emotion and value drivers than satisfaction. Service and value provision is regarded as an enterprise priority; and customer stabilization and recovery are goals when problems or complaints arise. Communication and collaboration with customers, between employees, and between employees and customers is featured. Management model and style is considerably more horizontal, with greater emphasis on teaming to improve customer value processes.

It’s notable that, at this more evolved and advanced stage of enterprise customer-centricity, complaints are thought of more in terms of a life cycle component, and recovery is more of a strategy than a resolution.

Customer Obsession
Throughout the organization, customer needs and expectations—especially those that are emotional—are well understood, and response is appropriate (and often proactive).

Everyone is involved in providing value to customers—from C-suite to front-line—and everyone understands his/her role. Customer behavior is recognized as essential to enterprise success, and optimal relationships are sought.

Performance measurement is focused, and shared, on what most monetizes customer behavior (loyalty, emotion and communication metrics—such as brand-bonding and advocacy—replace satisfaction and recommendation).

Customer service (along with pipelines and processes) is an enterprise priority, and seen as a vital, and profitable, element of value delivery.

The management model is far more horizontal, replacing traditional hierarchy; and there is an emphasis on teaming and inclusion of customers to create or enhance value.

Companies that are customer-obsessed, and what makes them both unique and successful, have been extensively profiled by consultants and the business press. Often, they go so far as to create emotionally driven, engaged and even branded experiences for their customers, strategically differentiating them from their peers.

In addition, these companies focus on the complete customer life cycle, and much more on retention, loyalty and risk mitigation (and even winback) than acquisition. Support experiences are strategic, nimble and seamless, and often omnichannel. Multiple sources of data are used to develop insights. Recognizing the information needs of their customers, they invest in altruistic content creation (over advertising); and they communicate proactively and in as personalized a manner as possible

Customer obsession, what I refer to as “inside-out” customer-centricity, has been a frequent subject of my blogs and articles: One of Albert Einstein’s iconic quotes reflects the complete dedication of resources and values needed for an organization to optimize its relationships with customers: “Only one who devotes himself to a cause with his whole strength and soul can be a true master.” Mastery requires, as well, a storehouse of experience coming from experimentation; so, just like in the pole vault and high jump, we can expect that the customer-centricity bar will continue to be raised.