This guest column is authored by Ajay Kelkar, Co-Founder, Hansa Cequity
I’m waiting in line with my 4-year-old daughter, Alisha, at a fast-food restaurant. It is 1:30pm on a Saturday afternoon, and we’ve “forgotten” to eat lunch. Alisha is hungry and tired from running errands with me. It’s been raining all day, and we’re both soaked. Now we’ve been waiting ten minutes to place our order seven minutes beyond the industry standard. Finally, I order for Alisha. “Sorry, sir,” the salesperson says. “We can give her a meal, but there are no more toys.” Four-year-olds understand “no toys,” and Alisha begins to wail. For her, this restaurant is about trinkets, not food. In her eyes, its failure to supply the toy has condemned the brand.
It happens every day. Customers are disappointed and even mistreated. Most companies fail to quantify the cost of poor service and instead mistakenly believe that more advertising will somehow take care of the problem.
Now Alisha doesn’t want to go back to that restaurant. Like many dissatisfied customers, she won’t risk another disappointment. She is the principal decision-maker in this meal occasion; her lunch preference carries the rest of the family. Moreover, with a life expectancy of more than 70 years, Alisha is worth at least Rs. 15,000 in discounted revenues to this restaurant chain and even more if she grows up to become a “group influencer” or the head of a large household.
One often reads about “power brands” and how Unilever has in earlier years pulled out of the recession by focusing on these brands. But isn’t it time for businesses to look for “power customers” – who contribute disproportionately to the company’s top line and profits.
But to put in place a “power customer strategy” needs companies to think about individual customers and not amorphous masses. Most marketing in India however is dominated by “product centric” initiatives which rely on traditional mass marketing channels and advertising as the dominant medium.
On the other hand, Retailers, Banks, airlines, and other service businesses are leveraging their superior customer relationships and retailing skills to take a share of the limited customer budget.
But there is a way out. If brands could form deeper relationships with their customers, they would enjoy greater share of wallet. By expanding the amount and range of business they do with individual customers, they would be in a position to use relationship pricing—trading off margin on individual products for volume in the total bundle of offerings—to compete more effectively with the product specialists. Developing this kind of customer franchise requires a radically new approach to Marketing.
Increasingly India is becoming a Service economy, but our mindset is still manufacturing. It is far easier to market a “product” which a consumer can hold vs. a “service” which by nature is fragmented. There is also an increasing trend towards “servicisation” of products. A washing machine is more than a product, its servicing needs are a “service offering”. You could imagine a brand like “Coke” offering “dating” services.
As emerging market economies moves increasingly towards services, consumers move from commodities to brands to services to Experiences. Coffee costs are low at the wholesale market and we sell it as an “experience” at BARISTA for US $1/cup .
A silent revolution is on in the minds of urban consumers across emerging markets like India, Brazil, Indonesia. And the revolution is about a change in expectation about how brands “build relationships” with customers. The question is – Are marketers who have been used to “building brands” able to fathom the changes that “building relationships” demand?
What do traditional Marketers need to effectively compete in the Service economy?
1. Marketing to Power Customers
The first paradigm shift the marketer needs to make is to think “one to one” vs. thinking mass. Most marketers are used to thinking mass. It’s a struggle to think “one to one”. Most service providers like advertising agencies and promotion agencies are geared to tackle mass market action.
Today Analytics can allow the marketer to run extremely personalized campaigns. Increased relevance and personalization can actually allow marketers to “mass customize” relationships.
Possibly, most businesses that drive “Database acquisition” are today not in “Retention” mode. As the Cellular, Retail, Insurance and Banking businesses mature, those opportunities will open up.
Yet the opportunity to build “Relationship Marketing” is large because most consumers are still eager to hear marketing messages despite being inundated with huge amounts of junk mails and telephone calls. Consumers are far more amenable to allow marketers to build a relationship if the message is “relevant”.
The other issue is that top management in many companies still does not have a body of Relationship Marketing experiences which spells winning case studies. There is a huge need to evangelize with top management: the science of marketing to power customers. Marketing to individual customer segments is an expertise which needs far more “left brained” thinking than usual forms of marketing. Even today the best marketers would much rather produce a winning advertising campaign which is hugely visible than invest energies in the analytical methods required to market to power customers. An example of this is how a Retailer can use the huge volume of customer data that he has to device profitable “customer paths” within his stores.
2. Manage customer migration not only attrition
An important insight from some Mc Kinsey research is that by far the greatest profit lever is to focus on customer migration – the change in customer value over time. Managing customer migration is a powerful new approach that we have used very successfully at Cequity. In the credit card industry, for example, the annual value lost from customers who defect is only one-third of that lost from those who remain customers but use their cards less. The implication for marketers is that the opportunity is substantially larger than traditionally reported by even top loyalty research – but that focusing on defection alone misses most of it.
Managing customer migration is more powerful than other approaches for several reasons. It captures much more of the total opportunity than narrower measures like defection. And it is a leading indicator that allows marketers to catch customers before they are gone for good. Also managing migration is highly actionable because it relies on readily available customer behaviour data.
Of course this does not mean we do not look at attrition! “Customer loyalty is declining” so customer retention is under pressure in many markets and the problem is exacerbated by the web which allows you to get comparative quotes for almost any product on-line in seconds.
All the more surprising then that most marketing budget is disproportionately allocated to acquisition. This makes perfect but unprofitable sense when you consider that if little money is spent on retention and there is no formal strategy focusing on this, then you will lose large volumes of customers and therefore be compelled to ever-increasing new customer targets to top up a very leaky customer base.
It has been widely documented that new customer acquisition is nearly 5 times costlier than retaining an existing customers, still most marketers end up apportioning lower marketing budgets for customer retention.
Customer attrition (and its complement, customer retention) has gained considerable attention from managers and researchers in recent years after demonstrations of the relationship between a firm’s customer retention rate and its long-range profits (Reichheld 1996). Customer retention is a basic component in the computation of customer lifetime value (Kumar and Shah 2004) and its antecedents and consequences for service firms have been the focus of much research attention in recent years.
Solving the problem of customer retention is not complex, but it does require the development of a specific customer retention plan and the ability to observe and measure customer behaviour.
One of the great challenges in retail is identifying customer attrition and retaining customers that may leave your brand. Retailers are extremely savvy in measuring Gross margin returns on three vectors: GMROI (Gross margin return on Inventory), GMROF (Gross margin return per square feet) and GMROL (Gross margin return on labor). At Cequity we do a lot of work with retailers on the overall Customers strategy and one vector that we have added to this troika is GMROC (Gross margin return on customers).
Retail attrition is silent: customers do not need to close an account or terminate a service. They simply walk out and never return.
3. Creating “Experience brands”
The third paradigm shift the marketer needs to make is to look beyond advertising to build the brand.
Years ago a successful birthday party centered on the cake Mother made from scratch. Today, a “successful” birthday party must be staged at some special place like McDonald’s. And we are willing to pay a thousand times more for such a birthday “experience” than we are for the raw ingredients of a birthday cake!
Historically, our economy has had three outputs — Commodities, Goods and Services. “Staging Experiences” has become a fourth, previously unarticulated and higher value economic output. While Commodities are fungible, Goods tangible and Services intangible, Experiences are memorable.
Staging experiences is about engaging customers. The richest, most memorable engagements involve all Four Realms of an Experience — Entertainment, Education, Escape, and Estheticism plus the five senses.
Not surprisingly the notion of “experience brands” was developed in the context of the retail market, specifically Retail & Banking.
According to the theory, a brand is a promise to consumers that they can rely on to guide their choices and there are four general approaches to developing such a promise. While not necessarily mutually exclusive, these approaches represent different levels of ambition and can have different levels of financial/bottom-line implications for the company
The simplest approach (level) is called “threshold branding”. This is limited to communication and requires promoting name recognition and image of corporate strength and stability. This being the lowest common denominator of branding, can foster brand awareness, but does not offer any differentiation in the market place.
The next level of branding is “functional branding”. Here the focus is on product features. Brand promise needs to emphasize specific functional benefits and distinctive attributes. Advertising is then used to communicate these differences. This works well for pharmaceuticals where differences in product specifications are important to consumers/physicians. The vulnerability in this lies in fast-moving me-too players.
The third approach (level) of branding can be termed “image branding“. The focus is not only on product features and benefits, but on communication of an image that is appealing to consumers’ ego and is consistent with personal aspirations of targeted segments. Image brands are most applicable for products with visceral appeal, such as cars, perfumes, etc. This is fairly applicable for retail organizations as well (e.g. Niemen Marcus and Saks Fifth Avenue in USA, Harrods in UK).
The final and highest level of branding is “experience branding”. This, although the most challenging to achieve, once established, is the easiest to defend. Also, this is most applicable for organizations that are in the service industry and has large number of customer-facing employees. The focus is on the “experience” that the customer has. Not only is this experience required to be of highest quality but it also needs to be consistent over multiple occasions (e.g., shopping on Feb 10th and shopping on Feb 12th) and across multiple touch-points (e.g. the sales person on Feb 10th and the check-out counter person on Feb 10th).
Note that the first three levels of branding can be executed via marketing initiatives. However, experience branding requires the “people” to “live the brand.” It requires a strategic high-level commitment in the organization, followed by measurement, communication, and training to all employees at all levels.
One example of this is US-based retail organization Nordstrom. Through years of research and training, every employee (customer facing or not) believes in the Nordstrom value of “customer delight” and is truly customer focused.
Note that for certain types of companies, it may be optimal (cost versus benefits) to create a functional branding or an image branding. Although even pharmaceuticals are moving from functional branding to image branding (e.g. Pfizer’s corporate ads) and in some cases to experience branding.
In the context of retail business, ultimately all retailers will need to push for an experience brand.
Building a Successful Experience Brand
A successful experience brand delivers effectively on its promise of a particular experience. The steps to building such a brand are straightforward but require thorough application and consistency. They are, first, to define an experience that your customers will value; second, to deliver that experience in through everything that your company does with particular emphasis on front-line employee behavior; third, to measure the impact of that delivery on the customer (using Power customer frameworks); and, fourth, to lead and motivate the organization to deliver the experience consistently.
Most service organizations are far too focused on purely customer acquisition at this stage. Progressive and profit focused companies have already started using Analytics to create Business impact. But as the market for Services evolves companies will need to deliver relevant value to “power customers” and build “experience brands” to survive and grow in a competitive environment.