The financial benefits of having a loyal customer base
As first published in CEO Today, November 2019 edition.
Why is Persimmon the lowest ranked major housebuilder in the Home Builders Federation annual customer satisfaction survey – and it’s nothing to do with customer service?
According to a recent Times article, the decision by Persimmon, “Britain’s most profitable housebuilder,” to put customers first, has hit revenues and profits. The company cites “additional spending on customer service” as an explanation for a dip in its financial performance in the six months to June 2019.
I am not sure who this message was aimed at but the real reason that Persimmon’s growth has stalled is nothing to do with its recent spend on customer service. It is plainly the result of a reputation for poor build quality, poor sales and after-sales processes and a bad health and safety record stretching back many years. Persimmon has been ranked the lowest major housebuilder in the Home Builders Federation annual customer satisfaction survey and this month the company appointed an independent team of quality inspectors to ensure its homes are built to required standards – only after Channel 4 aired its Dispatches documentary featuring Persimmon’s poor build quality.
The company should be worried about its brand reputation. As the Times reports, “the government has indicated that if Persimmon does not improve its standards, it could strip the company of its right to sell Help to Buy properties, which accounted for half of the homes it built last year”.
By focusing on the short-term cost of customer care – without any reference to the benefit – Persimmon is perpetuating a myth that there is a trade-off between customer service and profits. Increase one and the other goes down. This myth is promoted by those who do not understand the economics of customer loyalty.
In the rest of this article I will look at the financial benefits that flow from creating a loyal customer base. I will also outline how to measure the return from loyal customers – as well as the cost of disloyal ones – and how to identify which factors drive loyalty. Despite the growing importance of customer experience in recent years, most companies do not know how to do this.
The benefits of loyalty
There are two types of loyalty benefits that companies should be interested in because of their impact on profitability and growth.
The first relates to the buying behaviour of customers – how much a customer spends with a company over a given period. We all know that organisations with strong brands can hold on to their customers longer. These companies earn a larger share of the customer’s wallet, can command higher prices and sell more add-ons than their less well-regarded competitors. Apple is an example that most readily comes to mind. A study some years ago by Satmetrix, the customer loyalty measurement firm, found that Apple earned between $648 and $729 more from every customer than their competitors in the computer hardware sector because of the loyalty to its brand.
The second benefit of customer loyalty relates to the referral effect – the impact on the buying behaviour of potential customers as a result of word of mouth (WOM) comments from existing customers. WOM can be positive or negative.
Many organisations, particularly in situations where customers buy their products or services infrequently, focus their efforts on marketing to bring customers through the door and the sales process to get them to sign on the dotted line. The cynical, ill-informed question around big ticket sales is, why bother focusing resources on product quality and post-sale customer support when the customer has already made a commitment to buy? The answer is because negative Word of Mouth can wipe out the profit earned from the initial sale.
Based on Persimmon’s history of poor quality and their naïve comments about customer service spend, it would seem they do not understand much, if anything, about the economics of buyer behaviour. DFS, the furniture store understands that although customers only buy a sofa every seven years their goal is to create delighted customers who tell their friends to shop at DFS because of their value-for-money products and the great service they received.
Unfortunately for Persimmon, bad news tends to travel faster than good news.
In the study into the consumer computer hardware market referred to above, Satmetrix found that the ‘referral impact’ of every highly satisfied customer was over $800. With an average spend of $1615, every two customers spreading positive comments have the ability to bring in one new customer every year. (The comparable numbers for Apple are even more impressive). Conversely, the impact from customers who made negative comments was lost revenue totalling $1,352. Every highly dissatisfied customer making negative comments ‘destroys’ almost as much revenue as they created through their initial purchase.
How to measure the return from loyal customers
The financial recording and reporting systems that exist in all companies to track revenue, count costs and manage cash – important though they are – do not help us measure the value of loyalty.
To be able to calculate the return from loyal customers requires a different measurement system and a commitment to the collection of customer data to feed that system.
Understanding the economics of loyalty requires an organisation to know the distribution of its customer base between loyal customers (advocates), those who are disloyal (detractors) and those that are in the middle (passives).
By mining these three groups for insight and developing a profound understanding of their buying and referral behaviour, an organisation is able to determine the average spend by group and calculate the revenue gain generated by positive WOM and the revenue loss from negative comments.
Strategically, our advice to clients is to focus most attention on the advocates and to either find ways of serving detractors in order to increase their satisfaction or, if that is not possible, ‘exit’ them. As we saw in the computer hardware example, these customers are ‘costing’ the company as much in reputational damage as they are bringing in by way of revenue.
Persimmon, in common with many other companies, does not know the impact that increasing the number of loyal customers would have on their financial performance. They therefore see any spend on customer service as a cost to be avoided (or at least minimised).
The company that has the infrastructure in place, insight about the value of loyal customers and a clear view of the primary drivers of customer loyalty is in a better place than most organisations we have worked with or studied over the last 20 years. Whether such a company turns this advantage into a plan that drives competitive advantage and profitable growth, will depend on the quality of leadership.
cp2experience is a specialist customer experience consulting and training company. We help clients improve their customer experience in ways that drive profitable growth. We know that organisations which put customers and their people at the heart of their business outperform the competition. These enlightened companies create better places to buy for customers, better places to work for employees and better places to invest for shareholders. We are committed to sharing our knowledge, experience and insight with clients, friends and partners. To that end we hope you find this guide of value.
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