thinking: relating- celebrating :-)

Had a great conversation the other week about the growth fixation of business.

The idea is that with most businesses we focus on growth all the time – however we can get to it.  As mentioned previously growing business with existing customers seems an obvious but overlooked area for most.

The follow-on idea was just imagine you can’t get the obvious growth angles like customer numbers and revenue – what would you focus on?

My guess is quality improvements for existing customers would have to be at the top of the list.

And it is getting to be much cheaper to go to market with some of the systems and processes on offer.

David Cowan has written again about the reducing cost of those systems…

“My Internet Law
The time and money required to produce (design, develop, secure, test, launch, scale) a typical data-oriented form application on the web drops in half every 2 years.
This seems to have held true since the public emergence of the web in 1994. Do you agree? I don’t have much hard data, but McCain proposes new internet laws with far less.

For example, I recall the large systems integration firms charging as much as $20 mlllion to completely outsource development of a web application. (I forget the name but I recall a DFJ-backed pay-me-to-advertise-to-me startup that spent as much in 1996 with someone like Perot Systems and the app still never worked.)

Is there any doubt that most apps today can be launched with as much scalability for $300,000? The implied factor of improved efficiency is 0.5 to the sixth power over a 12 year period.

Cheaper hardware (Moore’s Law) accounts for only a small fraction of this effect. The real gains seem to come from decoupling and automating specific steps of the process. Major disruptions that come to mind: Microsoft FrontPage, SSL, Exodus hosting, Apache, Java, ActiveX, Javascript, Shockwave, Flash, load balancers, PHP,  XML, Ruby on Rails, web service APIs, AJAX, Amazon S3, DIY communities (Ning).”

We could quibble about the significance of some of his picks but it does make sense.

Not sure you can extract a reliable formula for this but the point that development costs are roaring lower makes huge sense. I have based a business on open source.

It is the only way to compete in the longer term I believe.

Guy Kawasaki has blogged often about this idea. Marketing and sales are still going to be much larger. The analogy might be production costs for a movie going much lower but marketing costs increasing at the extreme as competition for mind-share escalates.

In the future more businesses can be competitive but will need to do much more to get noticed and win business.

There is a still a certain level of novelty around online networking now / the equivalent of “free ink” is available but it won’t last. More of us will be in the advertising and communications sector for more of the time.

The idea of a Moores laws echo is a good one for gaining attention but the math doesn’t really hold up and for the reasons I’ve mentioned the game is being played elsewhere.

So production cost are lower – marketing costs are rising.

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Thanks to the reader who spotted this paper by  Bronwyn E. Howell which was presented at a conference in Rome, Italy, September 17-20, 2008.

Abstract:
Using an efficiency-based framework, this paper analyses the performance of New Zealand’s telecommunications sector under competition law-based sector governance (the period from 1987 to 2001) and under industry-specific regulation (2001 to 2007). The framework considers the productive, allocative and dynamic efficiency effects of each regime, and the nature of the strategic interaction of sector participants.

The analysis reveals that substantial gains in all forms of efficiency were achieved during the 1990s, both compared to historic New Zealand and contemporary OECD benchmarks.

Under industry-specific regulation, however, transfers to consumers appear to have reduced, transaction costs have increased and delays are being incurred in the deployment of new applications and technologies relative to the competition law regime as participants engage in strategic gaming with politicians and the regulator and respond predictably to the range of incentives offered under the regulatory regime.

The paper concludes that on balance in the New Zealand circumstances, the regime based predominantly upon competition law appears to have outperformed the industry-specific regulatory regime, albeit due in large part to sector participant interaction shaped by contractual obligations imposed by the government on the incumbent which have prevailed unchanged under both regimes.

Keywords: Competition, Regulation, Telecommunications, New Zealand, OECD, Performance, Efficiency

by Howell, Bronwyn E., From Competition to Regulation: New Zealand Telecommunications Sector Performance 1987-2007 (August 14, 2008).
at SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1227862

Is it just me or are these academic papers long in execution and way too diplomatic in their language. (Based on reading a downloadable full copy.)

It is good that someone researches the area and tries to make sense of it but it does seem like a bit of  a sideshow when the policy is being decided elsewhere – most of the time – or am I wrong about that?

Right at the end the author notes

“Pursuit of efficiency, not pursuit of competition, must be the goal.”

Uhuh… still feeling slightly underwhelmed but maybe I’m being too partisan.

As often happens the last post on customer service prompted a flurry of emails. Thanks to Philip for the ideas in this extended sequence as quoted below. In effect a guest post…

“Churn is a well known issue in the telecommunications sector but I was piqued by your comment, “In fact many companies treat all customers the same and that is a fatally flawed strategy”

Yes, I think that’s right too. But equally that’s hard to do and the bigger the company, with systems then the harder to start making exceptions.

So how does a company, medium or larger scale figure out if there something to this idea of treating customers different so that they would be encouraged to translate that into a business action.

I mean it has to ultimately make them some money – somewhere right, even if that initially only comes out as good news stories and praise as decent company ?

How does a company design a loyalty program? or a pricing scale?

or a something that acknowledges and rewards their long term customers?  so that even if the customer service wasn’t great one night/day/weekend, or there is a hot special with someone else, the customer still feels OK to do business with their long term provider.

I don’t think it’s an easily answered but the more I thought about it . . .

How about I counter that while your statement  “In fact many companies treat all customers the same and that is a fatally flawed strategy” appears to be right
- it is fact incorrect.
(dum-a-dum- dummmmm)

Big spending customers get volume discounts, so they ARE treated differently. New customers can get introductory offers to join, so they ARE treated differently, Seniors get a deal ???

So it’s the people in the middle, you are talking about here.

Not big spends in corporate terms, nor people who churn as a way of life as they hunt out deals) but just business people or maybe better put, busy people,  who cannot be blowed, to getting on to new platform, or phone etc  and reprogramming their handsets with all those numbers (do I really have her phone number after this many years?)

So is your point is that there is a market, I mean a dollar in keeping them right?

Now if you could figure out the numbers for that – that would be a business”
Philip

Thanks Philip – what do the rest of you think about this? I’d say that I am in the neglected middle part of the customer group. In my view there is more than a dollar in reaching this group and that is one of the ideas I  was trying to reach.

I still maintain a view that segmenting customers and offering segment messages is the way to go but the temptation is just to go for velocity and hope customers stay for the ride.

When people ask “What business are you in?” I would say I’m in the business of leveraging customer capital.

The concept of customer capital includes goodwill and increasingly in these days of social media the ability to communicate widely about customer experiences far and wide.

Update: They might even twitter about it.

The old measurement used to be if I liked the company I might tell a few people but if I disliked the experience I would tell 9 people. Given the viral nature of websites and other media the multiple has to be more like hundreds and possibly thousands.

In the world of the internet market reach can also have a darker side and its your reputation that is up for grabs.

The thing is that not every company realises this and so there are no really useful measurements in place to find out what is happening to the customer vibe for the business.

When I worked as a management consultant we would look at ways to develop measurement criteria outside of the typical accounting numbers.

Sometimes managers would say we should know how many customer complaints there are.  The dirty secret with customer complaints is that staff manage those down to make it difficult for a formal complaint to actually show up in the systems.

According to the book “Customer Service From Hell” (by Phil Slater) only 5 percent of complaints actually show up as a formal measurement.

Another 10% of people tried to register a complaint and were blocked from the process. The other 85% just walked away and may have told everyone they know that they had a problem – but the company itself is blissfully unaware.

And worse they don’t realise that for every customer complaint that gets through the system they are missing the other 90+ percent. Each time this happens they miss an opportunity to win back a customer and buzz in the market and staff morale are effected like some kind of invisible virus.

Just imagine you have outsourced your front-line customer management (bad idea) how many complaints do you think you might hear about? This means the number of formal complaints might be less than 5%.

The answer is very few because outsourcers are expert at the fob-off and in the absence of explicit customer service policy a customer avoided might suffice when they are crunching the numbers.

Just like exit interviews for people leaving jobs – the person might actually say the truth about the company an exit interview for disappointed customers would be a great idea but most companies don’t want to think about it.

This is vital information on the health of the company and just like the canary in the mine – when the customers sing the management had better be listening.

If I was asked to develop a measurement on customer capital for a typical business I would want to have a look at customer lifetimes, churn rates and actual numbers lost each month. I would then annualize that up so that management teams have a more tangible idea of the power of customer buzz.

For instance if I pay company x $150 per month for a service then the annual revenue is multiplied by 12 times. If I stay for 3 years instead of 2 then as a customer I can be worth $1800 or by lifetimes $3600 or $5400 on a 3 year rolling cycle.

Straight away you can see why some companies want to “lock-in” customers on a fixed term.

The background reason for these calculations is that I recently changed suppliers after one customer service meltdown too many.

To put things in context – lets look at some real numbers. In the June quarter of 2008 Vodafone won 35,000 net new customers compared with a 57,000 gain in the March quarter. (Public numbers from NBR page 11, July 25th 2008.) On the website they have mentioned a customer numbers baseline of 2,024,000 for new Zealand.

What is not reported is how many existing customers left the company in the March and June quarters. Those numbers are even larger.

This is called a churn rate from Lock the Customer – Not the Phone (November 2007)

“This month KPMG completed a global study into customer loyalty in the telecoms sector. The findings show an industry rife with CRM failure – and it doesn’t look like things will improve any time soon…..”

“despite the advent of 3G services mobile telecoms companies were losing customers twice as fast as they were in 2003. Defection rates had more than doubled in those two years, from 15.5 percent to a crippling 33.4 percent.”

So if Vodafone churn rates are 15% then 300,000 customers each year are leaving. If it is closer to 30% then that number doubles and 35,000 net new customers for the quarter doesn’t look so good.

In fact 300,000 customers churning each year works out at 25,000 per month so in one quarter the numbers leaving can be anything between 75,000 and 150,000 (@30%)

To place it in a more bite sized context this is a range of between 1100 and 2200 people every day that have some kind of reason to leave Vodafone (based on 22 working days each month.)

This might be why there is /was all those 25min phone queues and outsourcing to Egypt.

In my case after 9+ years with Ihug and Vodafone I chose to leave as do many hundreds of others each day. I tried to make a complaint but was told there was no way to escalate as the team manager was on leave and couldn’t action any complaints till he got back.

He never did. I left and Vodafone is poorer and dumber as a result which doesn’t help anyone.

I’d say more but Vodafone has a monopoly position on GSM mobiles in NZ and until there is more competition I can’t really say exactly what I think – but you can guess my feelings.

In my case each time a customer like me leaves at $5400 per lifetime this equates to millions of dollars that the company has to replace in revenue and profit.

Even if we were to assume that only 10% of customers had a customer lifetime value of $5400 that is still at least 2,500 customers each month. This is still a very large number.

The real point is that for most companies the numbers are too scary to even calculate so they just don’t do it. Eventually this exodus can reach a “tipping point” at by then its all over red rover.

“The average number of businesses that will stop doing business with you each year is 20%. To achieve a 10% increase in sales you need to win 30% more customers.

On average each business spends 6 times more to win new business than it does on keeping existing customers.” From Six Marketing Mistakes off Marketing Best Practices

Who then goes on to recommend much better customer care of existing customers. In fact many companies treat all customers the same and that is a fatally flawed strategy.

For example – if the Ihug / Vodafone had kept various customer self service options for long standing customers then I might still be around – but forcing me to call a help-desk on numerous occasions for functions I had previously been able to do was the straw that broke the camels back.

How about this quote

“We can’t afford to have unhappy customers.  Just one mistreated customer can affect thousands of future sales.”

This comes from a list at on Measuring Customer Experience by Paul Holstein

We review our Product Reviews to see the problems or successes our customers experience.

We have a suggestion box on every single page of our website where customers can tell us if any page is confusing or needs additional information.

We monitor blogs with a tool from bloglines.

We use Google Alerts to monitor new web pages that reference us.

We look at new referrers to our site to see what they say about us.

We have a self serve testimonial page where our customers can share comments.

We monitor our e-mail to sales@ or orders@ or webmaster@ using help desk software.

We regularly perform usability studies in our own lab.

We regularly perform multivariate testing using Google’s website optimizer.

We use Alertsite to monitor our website performance.  Gomez is a more expensive competitor.

We monitor our 404 errors by studying our log files, not just our Omniture reports.

We poll our customer service reps. to get an idea of our customer’s thoughts.

We monitor high bounce rate pages.

We monitor zero site search results.

We use a newspaper clipping service from Cison (formerly Bacons). A competitor is Burrelles Luce.

We regularly crawl our own site looking for problems.

There are also a whole range of other  tactics businesses can use to leverage their customer capital. However will leave that till next time as this post is longer than I guessed it would be.

Is your business a customer circus or are you leveraging customer capital?

Circuses are fun but in my view it is much better to actively leverage customer capital.

Customer complaints are gold dust and should not be ignored or discouraged. Use them to do much better.