Faculty Seminar Series

Why Customers Matter

Professor W. Earl Sasser Harvard Business School

Copyright 2002

1

Why Customers Matter

W. Earl Sasser

Stew Leonard’s

DairyNorwalk, CT

• Experts at listening to customer

• Full suggestion boxes

• Customers willing to do weekend focus groups

• Satisfied customers come back

• Calculating the power of customer retention

Sample CEO Comments

• “Our #1 priority is customer satisfaction.”

• “The customer reigns.”

• “We are committed to changing ourselves from a product to a solutions company.”

2

A Customer Service Story

Chief of Baggage Handling’s admission: “I am not surprised it happened…I have

deliberately understaffed baggage

handling to make budget.”

Airline’s culture stresses making

budget at all costs.

Not making budget is bad!

Making budget is absolutely great!

3

Will the customer fly the airline again?

Does the loss of the customer hurt

baggage handling?

Why do we see this behavior?

Sample Manager Comments• “All we hear about is customer focus, but when it

comes down to rewards, compensations, and promotion, you’d better make budget.”

• “The customer reigns--as long as it doesn’t cost anything.”

• “Becoming a customer-focused solutions company! Let me guess who you heard that from.”

KIDNEY STONE MANAGEMENT

This is going to hurt for a little while, but this too shall pass.

4

KIDNEY STONE MANAGEMENT...Activity-Based Costing Adaptive Organization Autonomous Management BenchmarkingBusiness Process Reengineering Commitment-Based ManagementCompetitive Capabilities Continuous Process Improvement Core Competencies Customer Focus Customer Loyalty Customer Relationship Management Cycle of Failure Database Marketing Employee Empowerment Employee Enfranchisement Five Forces Analysis Flexible Manufacturing Systems Holistic ManagementHorizontal IntegrationJust-In-TimeLearning Organization

Mass Customization Neural Networks Quality Value Engineering Organizational De-layeringParadigm ShiftPerformance-Based CompensationProcess Value Analysis Radical RestructuringReengineeringRightsizing Service Profit Chain Six Sigma Strategic Benchmarking Team-Based Management Time-Based Competition Total Employee Involvement Total Quality Management Value-Added Teams Value Chain Virtual Corporation Zero-Based Budgeting Zero Defections

Why Managers Don’t “Walk the Way They Talk”

• Inadequate customer satisfaction measures

• Lack of research linking customer satisfaction to profitability

MBNA

5

Lifetime Value of a Customer

1 2 3 4 5 6

0

Profit Customer

Year

MBNA America

Lifetime Value of a Customer

12

3

45 6

0-200

-150

-100

-50

0

50

100

Profitable Customers

Cumulative

MBNA America

Customers become profitable after five years

Lifetime Value of a CustomerCharlie Cawley:

“It’s taking us five years to break even. But our average customer is only

staying with us for four years!”

What kinds of suggestions do you have for MBNA to

increase the profitability of the business? What are some

things that Cawley might do?

6

Ways for MBNA to Increase Profits

• Decrease acquisition costs• Stop recruiting• Get more referrals

• MBNA losing 20% of customers per year• Need to increase customer retention

Retention Cycle

Retention Satisfied customers

stay

ReferralSatisfied customers

tell friends– “like customers”

Related SalesSatisfied customers

buy more

Insightful Executives“Very satisfied customers were six times more likely to repurchase.”

Wayland Hicks, Xerox

“We can’t compete with the likes of Microsoft…we need to get it right so that they become apostles.”

Scott Cook, Intuit

“We weren’t just selling a car, just selling a service, we were selling a lifetime relationship.”

Carl Sewell, Sewell Motors

7

Sewell Motor Lifetime Value Calculation

$332,000

Retention Exercise

With fifty percent of its customers very satisfied, and thirty percent satisfied, this company will retain about 73,000 customers for the next period.

What is the solution?

Consider the impact of turning satisfied customers into very satisfied customers.

Very Dissatisfied

1Dissatisfied

2Satisfied

4Neutral

3

Very Satisfied

5

Total number who stay = 72,450

5,000 (5%)0.1

500

5,000 (5%)0.2

1,000

10,000 (10%)

0.3

3,000

30,000 (30%)

0.6

18,000

50,000 (50%).999

49,950

Customers by group (100,000 total)% Retention

Number who stay

Retention ExerciseVery

Dissatisfied 1

Dissatisfied 2

Satisfied 4

Neutral 3

Very Satisfied

5

Total number who stay = 80,430

5,000 (5%)0.1

500

5,000 (5%)0.2

1,000

10,000 (10%)

0.3

3,000

10,000 (10%)

0.6

6,000

70,000 (70%).999

69,930

Customers by group (100,000 total)% Retention

Number who stay

8

Retention ExerciseVery

Dissatisfied 1

Dissatisfied 2

Satisfied 4

Neutral 3

Very Satisfied

5

Total number who stay = 72,450

5,000 (5%)0.1

500

5,000 (5%)0.2

1,000

10,000 (10%)

0.3

3,000

30,000 (30%)

0.6

18,000

50,000 (50%).999

49,950

Customers by group (100,000 total)% Retention

Number who stay

Retention ExerciseVery

Dissatisfied 1

Dissatisfied 2

Satisfied 4

Neutral 3

Very Satisfied

5

Total number who stay = 80,430

5,000 (5%)0.1

500

5,000 (5%)0.2

1,000

10,000 (10%)

0.3

3,000

10,000 (10%)

0.6

6,000

70,000 (70%).999

69,930

Customers by group (100,000 total)% Retention

Number who stay

Retention Exercise

Increasing very satisfied customer numbers to 70,000 still has this company losing nearly 20%.

The big deal is not turning satisfied into very satisfiedcustomers, its retaining very satisfied customers. They’ll buy a lot more.

Very Dissatisfied

1Dissatisfied

2Satisfied

4Neutral

3

Very Satisfied

5

Total number who stay = 80,430

5,000 (5%)0.1

500

5,000 (5%)0.2

1,000

10,000 (10%)

0.3

3,000

10,000 (10%)

0.6

6,000

70,000 (70%).999

69,930

Customers by group (100,000 total)% Retention

Number who stay

9

Very Satisfied Customers’

Behavior Over Time

Customer Satisfaction Level

Spen

d ing

& R

efer

r al

Very Satisfied Customers’Behavior

• Referrals to like customers-spenders

• Referrals advertising is a lot cheaper

• Stay with you longer• Buy more from you• Tell others about you

Lifetime Value of a Customer

12

3

45 6

0-200

-150

-100

-50

0

50

100

Profitable Customers

Cumulative

MBNA America

Customers become profitable after five years

10

MBNA Example• Examined customer base• Asked, “Who are the best customers for

us?”• Dropped costly customers• As a result, marketing is more targeted• Improved retention, lowered acquisition

costs, and increased word of mouth, which resulted in increased profit

• Profitability went up by 16 times

WILMINGTON, Del., Jan. 10 /PRNewswire/ --MBNA Corporation (NYSE: KRB) announced today that net income for the fourth quarter of 2001 rose to $524.8 million or $.60 per common share, an increase of 25%, compared with $423.8 million or $.48 per common share for the fourth quarter of 2000.

For the full year, net income rose to $1.7 billion or $1.92 per common share, compared with $1.3 billion or $1.53 per common share for 2000. MBNA has produced consistent earnings increases, averaging 25%, in each of the 44 quarters since it became a public company.

MBNA Example

• What’s the secret?• Finding the right customers and

keeping them

11

High

Loyalty measure

Low1

Completelydissatisfied

High cost ofswitching

Value-basedcompetitors

• Market competitiveness• Potential Substitutes• Ease of switching

Low

High

2 3 4

Monopolies

Commodities

5Completely

satisfied

Satisfaction vs. Loyalty

High

Loyalty

Low

CompletelySatisfied

Defector

Hostage Loyalist

Mercenary

CompletelyDissatisfied

1 2 3 4 5Satisfaction

Apostle

Satisfaction vs. Loyalty

Exercise: Analysis of CustomersAnswer these questions:

Why do your customers leave? Where do they go? Use the chart below to describe your customers. Outline a strategy for increasing the number of apostles.

High

Loyalty

Low

HighSatisfaction

Defectors

Hostages Apostles

Mercenaries

Low

12

Satisfaction

Loyalty

1Highly

Dissatisfied

2Somewhat

Dissatisfied

3Neither

Satisfied norDissatisfied

4Somewhat

Satisfied

5Highly

Satisfied

Key Drivers of CustomerSatisfaction

ILLUSTRATIVE

Product

Performance

Accou

nt/Rela

tions

hip

Manag

emen

tProblem Resolution

Different customer needs must be met as you move up the Satisfaction-Loyalty Curve

• Acquire with Product• Retain with Service• Create Apostles with Solutions

Key Lessons