Two - The Loyalty Test
The chapter opens with an anecdote about a company that has pandered to investors' needs for short-term profits by trimming payrolls. Insiders were well aware that behind the glowing profit report, overtaxed employees were making more billing mistakes and devoting less time to customer service, and that customers were becoming annoyed and exasperated, and that it would only be a matter of time before they became frustrated enough to dump the firm for other vendors, and the short-term boost in net profit would come at the cost of a long-term loss of customers.
While investors often care a great deal about short-term profits, what customers really want is a long-term relationship with a firm that cares about serving their needs and can be counted on to maintain quality of service. Moreover, customers are keen to the "tricks" that brands have used in the past: to paint a rosy picture of what doing business what them will be like that evaporates the moment the contract is signed, or to treat new customers well during a honeymoon period and then take them for granted afterward. As such, customers are reluctant to engage, and often are ready to bolt at the first sign that they have been deceived.
The author suggests that people understand that companies need to make a profit, but expect them to earn that profit by providing adequate value in exchange for the dollars they are given. To keep their promises, and ensure that the customer is satisfied with each exchange, and to invest in maintaining the relationship rather than taking them for granted.
The notion of "warmth" is a bit vague and describes a wide array of admirable qualities - but chief among them is having a genuine concern for the welfare of others. A firm who is always interested only in themselves is not trustworthy or valued, and a friend who will render help at their own inconvenience is highly valued. This is true of companies as well.
The most admired companies are those that establish long-term trusting relationships with customers by showing an interest in serving their needs, and even to be willing to go the extra mile to help customers in times of need, even if it is contrary to their short-term financial interests - and in return customers are willing to continue to do business with those firms even when it is not in their own financial best-interest.
Consider that "brand equity" is the extra amount of money a customer will be willing to pay for a product of a specific brand, as opposed to a generic product that satisfies the same needs. The difference in cost is, in a very real way, the financial sacrifice that a customer is making in order to maintain a relationship with the brand. And they expect reciprocation.
The author mentions the Nordstrom's chain of department stores and the stellar reputation they have for customer service. In particular, there are a multitude of legends about its liberal returns policy: refunding without a receipt, even for merchandise the firm doesn't sell, being willing to take back an item of clothing that the customer has worn but no longer fits. Many other stores have rigorous returns policies and seem to assume that the customer is cheating them, but being willing to give trust to customers earns Nordstrom's trust (and loyalty) in return.
Companies with an eye toward efficiency gravitate toward practices that deliver the least value for the most amount of money, which is diametrically opposite to what the customer demands of a vendor. Those that seek to have impersonal transactions find that they are considered to be impersonal. The "tit for tat" rule of exchanges, giving and receiving in equal value, is a minimum expectation and not grounds for loyalty.
Friendships and other human relations involve exchange, but it is not specific, exact, or immediate. Loan a neighbor a cup of sugar and she will return to you some of the cookies she baked, rather than a cup of sugar. Or imagine how awkward it would be to pick up the tab for lunch one day and the next time you dine together the colleague insists he buy you a lunch of the exact same value, to the penny. Or even a friend who needs the loan of a trifling amount of money insists on a repayment schedule and an exact rate of interest. These relationships involve give-and-take, but precise scorekeeping is not only unnecessary but inappropriate.
Granted, the commercial world involves money and accounting, and a business cannot sustain itself offering "some" product for "some" money to be paid at "some" date. They have their own suppliers and employees who expect to be compensated regularly, and the business must manage its cash flows in order to remain solvent - so people expect there to be more specificity in their relationships with companies. But the more flexibility that a firm shows in ensuring the customer gets the value he intended from his purchase, the greater satisfaction and loyalty.
Dropped Calls
There's an extended narrative about Sprint's mishandling of the Nextel acquisition. Essentially what Sprint purchased in this acquisition was a large number of subscribers, then promptly set about losing them. The fundamental issue was an incompatibility of networks, such that Nextel customers switched to the Sprint network experienced dropped calls. The way Sprint handled that problem was to cancel the accounts of subscribers who complained or attempted to get help from their customer support center.
(EN: What follows here are details of steps taken by the new CEO to resolve the problem - to get enough staff to handle the calls, to actually solve customer issues rather than trying to close calls quickly, etc. It's an interesting story, but doesn't provide much in the way of knowledge.)
Competence without Warmth
Investors are generally concerned only with increasing the returns of their investments and are concerned with the accounting profits of a firm. Particularly during times of economic difficulty, they consider the financial performance of a firm, and are very much in favor of maneuvers such as layoffs and cost-cutting, which reduce expenses and prop up the price of shares.
The problem is that while this appeases investors, it often disgruntles customers - who get less value for the money they pay for products and services and eventually defect. This is compounded by the fact that the cost-savings are almost instantaneous whereas the customer defections take place later, as customers who were previously pleased tolerate a little disappointment, until it becomes clear that the negative experience is not just a temporary problem, but the new way of things.
The author speaks of some obvious issues: the way in which cost-cutting makes products and service worse. Layoffs, in particular, put more strain on the people left behind, who must make shortcuts in order to handle the load, which result in diminishing quality of product and service.
(EN: Here it turns into a bit of a rant, so I'm cutting short on the notes.)
A Question of Loyalty
There's a great deal of research that shows the ways in which loyal customers are more profitable: they will pay full fare, will go out of their way to keep doing business with you, will refer others, forgive minor flaws in service, etc.
Traditionally, companies have figured that anyone who purchased frequently is loyal - and so they went about it the wrong way, offering constant discounts and perks to incent people to purchase often. Couponing, sales, rebates, and the like all work the same way. But bribing a person with price incentives to get them to purchase more often does not turn them into a loyal customer.
Again, loyalty means that a customer regards the brand as being warm and competent, which gives them a sense of attachment that will cause them to remain loyal to the brand even if price increases. Price cuts and discounts merely make the firm's product cheap - and if those special offers stop, the customers will no longer purchase.
Rewards programs
Rewards programs, which the author refuses to call "loyalty programs" are another example of bribing customers to purchase. There has never been any proof that enrolling a customer in a program that offers them rewards (product discounts, merchandise, cash back, etc.) ever caused people to change their behavior significantly, and the perception among customers was that these programs gave them a reward for buying the things they were going to buy anyway.
(EN: No source is cited, and my sense is that this may be a bit overstated. I don't expect a person would buy a product they didn't need to get reward points, but I do suspect that a person might purchase one brand over another because of their enrollment in a specific "points" program. I agree this is not loyalty, but it is an incentive to give greater share-of-wallet to one brand over another.)
One problem is that the "rewards" are not often attractive or convenient, as evidenced by the massive amount in unredeemed points. Consider that the "value" of unclaimed frequent-flier miles was once estimated at over $700 billion - if this were paper currency, it would be the largest currency on earth.
Another problem is that these programs constitute a significant cost in terms of labor and materials to implement the program, track point balances, and the like. In essence, the company must create an internal "bank" to track and redeem the points - and its estimated that in some instances this cost results in a net loss to the firm, and benefit to very few customers.
Points programs are also not a particular competitive advantage, particularly because it is so easy for competitors to imitate a loyalty program. These programs become commoditized - such that there is not a significant difference in the rewards a customer can get from choosing one brand or another, so the choice is moot.
It's also suggested that a reward program detracts from the esteem of a brand: when we purchase a brand we like, we are aware we are making the purchase because we like the brand. When we purchase a brand that offers a reward, we have the sense we want the reward, and are maybe compromising a bit on the brand in order to earn it.
There's also the impression that the rewards are hard to redeem - there is always a lot of fine print and special requirements, which makes a brand seem sneaky or manipulative. There's even a term for it in marketing: "slippage" is the percentage of rewards that the issuer expects will never be redeemed, and some programs are designed to increase slippage because it lowers the cost of operating the program.
The author gets a bit dreamy about proprietorships, in which a good customer was recognized because the seller recognized them and saw them on a regular basis. A merchant would offer special deals to his best customers, offer them a few tokens of appreciation, give them preferential treatment, and so on. It was a personal gesture of appreciation - which reward programs have made impersonal.
(EN: This goes on for quite a while - all suppositional and anecdotal, nothing more of specific interest or value.)
From Acquaintances to Advocates
There's an extended case study of a dentist in Utah, whose patients fly in to see him from all over the country and even overseas. He doesn't accept insurance, advertise, or promote and is not a superstar practitioner - but he takes great care of his patients. Having worked in a traditional practice, he noticed that dentists were working on patients like production-line veterinarians. He takes time to talk to them, counsels them about their dental care, books and keeps his appointments, and otherwise treats them as people, not mouths to be worked upon. He's booked, and while he is not making massive profits his business is profitable and sustainable, and there's a long waiting list of word-of-mouth referrals.
Switch to Mercedes Benz, which the author misidentifies as a luxury brand (EN: they are merely a premium brand, but have elements of the luxury experience). Mercedes has the highest rate of customer loyalty among similar brands, and attributes this to their customer focus. Naturally, their factory seeks to make great cars, but their dealerships are not merely outlets where vehicles are sold, but the interface with the customer throughout their ownership experience, holding special events for their owners as well as coordinating special offers (such as special treatment at resorts). This experience turns loyalists into "zealots" who go well beyond mere brand advocacy, but who have strong emotional experiences that are tied to the brand.
Mercedes recognizes that everyone in the automotive industry is focused on better product quality, and in terms of product theirs is really not that much superior to competing brands - and especially as the mass-market cars continue to improve, there seems to be little difference between their vehicles and those that cost half as much. Their advantage "really boils down to experience." Their welcoming program for new owners and relationship management with existing drivers ensures repeat purchases and a high level of advocacy.
One sales manager put it best: "If you don't satisfy the customer, someone else will." But further, customer satisfaction is really not that difficult: listen to them, determine what their needs are, meet those needs, and stay in touch.
This stands in stark contrast to the mass-market dealerships, which are primarily sales centers that lose interest in the customer the moment they drive off the lot - until it's time to sell them something else. From an efficiency perspective, you don't have to do anything extra to get a person who needs a car to buy one from you, and this lavish attention seems an unnecessary expense. But Mercedes understands that these "extra" measures are necessary to selling not just one car, but every car a person will buy for the rest of his life. Measured that way, the return on investment is enormous.
(EN: I'm not quite sure that the author satisfactorily addresses the notion of "advocacy" as opposed to mere "loyalty" - which is a tricky subject. It's been observed that loyalty does not guarantee advocacy - but my sense is that the way in which the author defines loyalty as being a positive emotional connection rather than merely purchase frequency, it's clear that the two are more closely connected. It's just that the purchase-frequency assumption of loyalty is flawed.)