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Sunday, June 12, 2011

We’re running out of stupid customers.

Years ago, I worked with a company President that remarked on multiple locations that his best customers were stupid, and what he really needed from sales & marketing was for them to find more stupid customers.

What he meant was that, at least on the surface, customers that showed the highest levels of operating profit were those that were willing to sustain a long-term relationship with our organization but did not price-compare among service brands. As a result, the price they paid was dramatically above-market.

Apart from the customer contempt that this remark showed, it also showed his (and that organization’s & really, that entire industry’s) fundamental lack of understanding of cost-to-serve and customer lifetime value. As the industry rejected any effort to base it’s business model off of contemporary service pricing schemes, it developed another industry comprised completely of intermediaries who (smartly) made their money by helping end users make more informed decisions.

The pattern repeats itself across service industries. Airlines had their own version of the imperfect information problem. Wireless and cable services are well known examples, but any industry that has an ongoing service relationship model faces a version of the same thing – a company’s commitment to an existing profit stream favors new customers, allowing them better access to value than existing customers exhibiting brand loyalty.

Is this a fair outcome?

It doesn't matter what the company thinks. It isn’t perceived as fair when the relationship customer accidentally gets a “service invitation” promotion in the mail, and calls the cable company for the new customer deal, only to be told their ineligible. (I have heard literally scores of those stories about cable companies)

The Internet changed many business models, and it has become the great equalizer when it comes to improving the information customers rely on to make purchase decisions. Small, loyal customers that once happily paid above-market prices today have full visibility to what a fair price is, and can compare their deal with that of others.

The counter I often hear – usually from pricing and finance organizations – is that “our company can’t afford to give those customers the same deal that new customers get.”

That’s a shortsighted answer. Those loyal customers are precisely the one that your competitors are targeting with their new customer offers. When they ultimately discover what their relationship is worth, they won’t be nearly as receptive to your matching offer. Some of the most intelligent people I know have run themselves ragged trying to figure out how to stop loyal customers paying above-market rates from churning from a business, without ever considering what loyalty looks like to a customer who learns that a prospect who has never put a penny into the company's coffers is more prized than their relationship.

The only thing that hasn’t exposed how bad this is as strategy is that in each industry, every competitor follows the same strategy. A company married to this business model inevitably loses that business to someone who isn’t, who doesn’t draw their profit from a small base of loyal stupid customers.

We don’t have perfect information yet, but it’s closer than it was 10 years ago and approaching rapidly. The pool of stupid customers is getting too small to sustain everybody. Amen to that, because it’s about time that these service industries started designing value into their offer, rather than dispatching search parties for the increasingly elusive stupid customer.

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