Faculty Seminar Series

Why Customers Matter

Professor W. Earl Sasser Harvard Business School

Copyright 2002

Why Customers Matter

W. Earl Sasser

Stew Leonards Dairy

Norwalk, 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.

A Customer Service Story

Chief of Baggage Handlings admission: I am not surprised it happenedI have deliberately understaffed baggage handling to make budget.

Airlines culture stresses making budget at all costs. Not making budget is bad! Making budget is absolutely great!

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, youd better make budget. The customer reigns--as long as it doesnt 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.

KIDNEY STONE MANAGEMENT...

Activity-Based Costing Adaptive Organization Autonomous Management Benchmarking Business Process Reengineering Commitment-Based Management Competitive 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 Management Horizontal Integration Just-In-Time Learning Organization Mass Customization Neural Networks Quality Value Engineering Organizational Delayering Paradigm Shift Performance-Based Compensation Process Value Analysis Radical Restructuring Reengineering Rightsizing 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 Dont Walk the Way They Talk

Inadequate customer satisfaction measures Lack of research linking customer satisfaction to profitability

MBNA

Lifetime Value of a Customer

Profit Customer
1 2 3 4 5 6

Year

MBNA America

Lifetime Value of a Customer

100 50 0 5 -50 -100 3 -150 -200 0 2 1 4

Customers become profitable after five years MBNA America

Profitable Customers Cumulative

Lifetime Value of a Customer

Charlie Cawley: Its 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?

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

Related Sales
Satisfied customers buy more

Referral
Satisfied customers tell friends like customers

Insightful Executives
Very satisfied customers were six times more likely to repurchase.
Wayland Hicks, Xerox

We cant compete with the likes of Microsoftwe need to get it right so that they become apostles.
Scott Cook, Intuit

We werent just selling a car, just selling a service, we were selling a lifetime relationship.
Carl Sewell, Sewell Motors

Sewell Motor Lifetime Value Calculation

$332,000

Retention Exercise
Very Dissatisfied 1 Dissatisfied 2 Neutral 3 Satisfied 4 Very Satisfied 5

Customers by group (100,000 total) % Retention Number who stay

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

Total number who stay = 72,450

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.

Retention Exercise
Very Dissatisfied 1 Dissatisfied 2 Neutral 3 Satisfied 4 Very Satisfied 5

Customers by group (100,000 total) % Retention Number who stay

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

Total number who stay = 80,430

Retention Exercise
Very Dissatisfied 1 Dissatisfied 2 Neutral 3 Satisfied 4 Very Satisfied 5

Customers by group (100,000 total) % Retention Number who stay

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

Total number who stay = 72,450

Retention Exercise
Very Dissatisfied 1 Dissatisfied 2 Neutral 3 Satisfied 4 Very Satisfied 5

Customers by group (100,000 total) % Retention Number who stay

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

Total number who stay = 80,430

Retention Exercise
Very Dissatisfied 1 Dissatisfied 2 Neutral 3 Satisfied 4 Very Satisfied 5

Customers by group (100,000 total) % Retention Number who stay

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

Total number who stay = 80,430

Increasing very satisfied customer numbers to 70,000 still has this company losing nearly 20%. The big deal is not turning satisfied into very satisfied customers, its retaining very satisfied customers. Theyll buy a lot more.

Very Satisfied Customers Behavior Over Time

Spending & Referral

Customer Satisfaction Level

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

100 50 0 5 -50 -100 3 -150 -200 0 2 1 4

Customers become profitable after five years MBNA America

Profitable Customers Cumulative

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
Whats the secret? Finding the right customers and keeping them

Satisfaction vs. Loyalty

High Monopolies

Low
Loyalty measure High cost of switching Value-based competitors
Low

Market competitiveness Potential Substitutes Ease of switching

High Commodities 3 4 5 Completely satisfied

1 Completely dissatisfied

Satisfaction vs. Loyalty

High

Hostage

Loyalist

Apostle

Loyalty

Defector
Low

Mercenary

1
Completely Dissatisfied

3
Satisfaction

Completely Satisfied

Exercise: Analysis of Customers

Answer 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

Hostages

Apostles

Loyalty

Low

Defectors
Low

Mercenaries Satisfaction
High

Different customer needs must be met as you move up the Satisfaction-Loyalty Curve
Ac co u M nt/ an R ag ela e m ti o en nsh t ip

Key Drivers of Customer Satisfaction

ILLUSTRATIVE

Loyalty
t duc Pro ance m rfor Pe

blem Pro
3 2 1 Neither Highly Somewhat Dissatisfied Dissatisfied Satisfied nor Dissatisfied

tion olu Res

Satisfaction
5 Highly Satisfied

4 Somewhat Satisfied

Key Lessons
Acquire with

Product Retain with Service Create Apostles with Solutions