S P I R E

1. S P I R E G R O U P "Fitting All The Pieces Together" Christopher Hart, Ph.D. www.spiregrp.com

2. Objectives • To explain the concept of “customer sacrifices” • To present the results of a study on customer loyalty I recently conducted • To understand the customer-satisfaction leadership challenge – and to develop a personal action plan

3. “Breakthrough” Perspective of Customer Satisfaction Every day that goes by in which you have dissatisfied - or less than totally satisfied - customers who are forced to make sacrifices to do business with your organization, you’re working hard to put yourself out of business!

4. Quote “If a customer says there is a problem, 99.5% of the time there really is; companies shouldn’t let the other .5% be a reason to mistreat everyone else.” - Carl Sewell Owner, Sewell Village Cadillac Source: Sewell, Carl and Brown, Paul. Customers for Life: How to Turn that One-Time Buyer into a Lifetime Customers (New York, NY: Doubleday, 1990).

5. What are “Customer Sacrifices”? Customer sacrifices are what your customers are forced to put up with to do business with your organization.

6. My Client’s Perception of Unmet Customer Needs • Comfortable seating • Cleanliness • Cheerful Employees • Wider Selection of Food (still crappy and overpriced) What did their analysis of unmet customer needs miss?

7. Key Questions #1: How many of you, after all this mental effort, have ever put the movie section aside and said, “Where’s the TV Guide? I wonder what’s on the tube tonight?” #2: How many good movies that would have left you with great memories have you missed because of the customer sacrifices just described?

8. What Sacrifices are Your Customers Forced to put up With? What sacrifices are customers forced to put up with to do business with your organization (or your part of the organization)?

9. Idea for Action: Challenge People in Your Organization to . . . brainstorm a list of sacrifices your customers are forced to put up with to do business with your organization (or your part of the organization), and... formulate and implement breakthrough approaches for eliminating them.

10. Cross-Cultural Differences in Satisfaction Perceptions “How satisfied would you be if you heard a single mistake made by a pianist who was giving a one-hour piano recital?”

11. Cross-Cultural Differences in Satisfaction Perceptions Piano Recital One mistake in a one hour recital ... 5 4 3 Average Satisfaction 2 1 0 US Ca Au Fi NL UK Gr It Ja Country

12. Results of Commercial P&C Company Loyalty Study

13. Dissatisfied Satisfied Loyal (7-8) (9-10) (1-6) Satisfaction’s Impact on Repurchase Intent 100% 86% 70% 75% Repurchase Intent 52% 50% 25% 0%

14. Satisfaction’s Impact on... 75 50 Account Share (Mean) 2x 25 0 Dissatisfied Loyal Satisfied Only 1500000 Account Revenue (Mean) 1000000 3x 500000 0 Satisfied Only Dissatisfied Loyal 200000 Account Gross Margin (Mean) 150000 5x 100000 50000 0 Dissatisfied Satisfied Only Loyal

15. Mini-breakout: What are causes of the loyalty boost?

16. Causes of the Loyalty Boost? • Lower Costs... • Lower administrative costs (e.g., credit checks, order entry) • Lower operating costs (e.g., know customers’ needs from working with them over time; they know what you offer) • Employees less hassled  better morale  lower turnover • Higher Customer Net Present Value... • Longer tenure customers  more purchases over time  keep customers longer  lower sales and marketing costs • Greater share of customers’ purchases • Greater customer receptivity to purchase a broader range of new products and services • Possible price premium

17. The Effect of Satisfaction on Price Sensitivity All Respondents 150% 125% Defection Proof Missile Silo Willingness-to- Pay As % of Price 100% 75% 50% 0 2 4 6 8 10 Customer Satisfaction (ACSI Data)

18. 5 10 15 Account Gross Margin 200000 Dissatisfied Satisfied Only Loyal 150000 100000 5x 50000 Time in Years 0 2.5 5 20x! 10

19. Firms’ Satisfaction Scores and Stock Market Returns 4.7% Average Market- Adjusted Return from 8/94-1/95 1.7% -0.20% -0.80% Lower Quartile 3rd Quartile 2nd Quartile Top Quartile

20. Customer Satisfaction Distribution 100% 62% 75% Percentage of Customers 50% 29% 25% 9% 0% Dissatisfied Satisfied Loyal

21. 200000 Dissatisfied Satisfied Only Loyal 150000 100000 5x 50000 0 0 7.37 10 Average Customer Satisfaction

22. Mini-breakout: What could account for the low percentage of loyal customers?

23. Reasons for Low Percentage of Loyals • It is difficult to be that good. • Benchmarking shows that we lead our industry, which is good enough. • If you were never in love, would you know what you had missed? Translation: If you don’t know how much highly loyal customers are worth, would you know how much you are losing by not having more of them? • Does accounting measure profits that could have been made if your customers had been more satisfied? (Does accounting measure profits lost from customers who defect?)

24. Every day that goes by in which you have dissatisfied - or less than totally satisfied customers - you’re working hard to put yourself out of business. You are feeding your competition.

25. “We Need to Institute a Loyalty Improvement Effort!” Therefore …

26. The Objective: Increase loyalty 2% / year. How? Eliminate customer sacrifices.

27. Question to Customers “What is your #1 concern with InsureCo?”

28. Better customer service 47% ! Error-free delivery 6% Flexible and customized product/service packaging 9% Product fit with my needs 12% 9% Pricing Other (e.g., salesperson quality) 17% 0% 10% 20% 30% 40% 50%

29. Loyalty Improvement Plan

30. GAP Gross Margin Increase - Cost of Loyalty Effort - Taxes The Bottom Line LOYALTY IMPROVEMENT PROFIT INCREASE IF LOYALTY TARGETS REACHED ? Stretch Goal Profit Projections Realistic Goal 1999 2000 2001 2002 X P/E Ratio = Incremental Profit = Additional Shareholder Value

31. Major Lessons • It is easy to lower your customers’ satisfaction, but once lowered, moving it back up is very hard. • A customer-retention strategy is every bit as important – if not more important – than a costumer-acquisition strategy. • Stock-market analysts do not plug increased retention rates into their financial models. They will. When they do, your retention rate must be better than your competitors’. • You are in the business of creating defection-resistant missile silos. The impact of customer service on your ability to do so is enormous.

32. Question: How do you create the desire among the troops to do what is required to increase customer loyalty/persistency?

33. Answer: Start with your leadership.

34. 15-Minute Break

35. The Customer Satisfaction Credibility Gap

36. Objectives • To understand the customer-satisfaction leadership challenge • To understand the causes of this challenge • For you to “look in the mirror” and identify actions that would be strong signals of your commitment to customer satisfaction - that fit your leadership style • To create an action plan that holds your “feet to the fire”

37. Line Employees Beliefs About Senior Management’s Commitment to Customer Satisfaction Grade A B Credibility Gap ? C D Middle Management Senior Management Group Reporting

38. Mini-breakout: What are possible causes of the customer-satisfaction credibility gap?

39. Credibility Gap -- Causes • Incremental approach -- it takes time • Signal loses strength as it travels through the line • Lack of tangible examples of customer-satisfaction emphasis • Lack of instances of “stopping the line” in the name of the customer • Living with the “legacy of past customer sins” • Trade-offs made that compromise customer satisfaction • Unaligned incentives • Management doesn’t believe in the financial return • Viewed as a BOHICA program-of-the-month

40. How Do Employees Develop Perceptions About Where You Stand on Customer Satisfaction? • Through your words and actions • Through their perceptions of what you spend your time on

41. What personal actions could you take to demonstrate your commitment to customer satisfaction?

42. To What Extent Do You ... • Create customer-focus legends by telling great illustrative stories? • Publicize your own failures pertaining to customers to help employees get over their fear of failure and blame? • Make visible your decisions that are based on creating customer satisfaction, not cost containment? • Continually ask questions related to customer satisfaction?

43. Mini-breakout: What questions could you ask that signal your commitment to customer satisfaction?

44. Questions You Could Ask Regularly • If you were boss, what would you do to build our focus on the customer? • If you could, what could you do differently that would positively impact customers’ perceptions of our organization? • What makes improving customers’ perceptions of our organization tough for you? • What have you done today in the name of improving customers’ perceptions of our organization?

45. Possible Leadership Actions, 1 • Set up a “hotline” with service providers (direct line to the boss) • Write personalized letters to key customers asking for their opinions, views, and suggestions, followed by phone calls • Send thank-you letters to front-line personnel who have taken visible actions that positively impact customers’ perceptions (and post them) • Regularly have lunch with people from selected major accounts and line personnel

46. Possible Leadership Actions, 2 • Give rewards, recognition of customer focus to start off every meeting • Send a regular stream of e-mails stressing the importance of customer satisfaction • Ask customer-related questions on a systematic and regular basis • Publicly reward those employees who best demonstrate the essence of a customer-satisfaction focus • Link compensation and promotions to meeting specific customer-satisfaction objectives

47. Possible Leadership Actions, 3 • Institute "excellence" and "mediocrity" awards for service your employees receive from other firms • Give mini-speeches on customer focus and satisfaction • Create customer-focus legends and tell them repeatedly • Publicize your own mistakes that pertain to customer satisfaction, to help drive out employees' "fear of failure." Foster a climate of "blameless error" • Make decisions based on customer satisfaction, not cost-containment. Build employee credibility by explaining customer-satisfaction trade-offs when they occur

48. Personal Action Planning What specific action or actions might you take personally that will build the momentum of effort to build customer-satisfaction in your organization? • What will you do? • How often will you do it? • Where will you do it? • When will you do it? • • How will you hold your feet to the fire?

49. O.T.S.U. Analysis It's January 1, 2001 ... "Looking back, I thought the ideas that came out of my work at the ICAE conference had terrific potential. I really thought I was on to something. If only [fill in the blank],it would have worked."

50. THE END