Companies everywhere have reacted to the recession by lowering revenue projections and tightening their belts: delaying purchases, canceling nonessential travel, reducing payroll, freezing or shrinking the R&D budget, closing underperforming operations, slowing production, trimming inventories, reducing perks. And such actions are usually necessary and appropriate in hard times.
But executives also can overdo the cost-cutting, compromising one of their most valuable assets: their relationship with their best customers. Key relationships must continue to be nurtured and grown. The tough times will end. If a company's best customers jump ship during the downturn, the company may never win them back.
This is a universal truth that applies to virtually all businesses, in any country. Customer service, in both good times and bad, is the great intangible that can make or break a business. When others are cutting in this area, the wise executive will consider spending.
One Size Doesn't Fit All In recessions, as we all know, many customers base their purchasing decisions solely on price. But others, even during a recession, want more than just the lowest possible price. They demand service and they're willing to pay a premium for it, and these "high yield" customers are typically a company's most profitable. When you cut the service of price-sensitive buyers, you may not lose their business. But when you cut the services you offer to high-yield customers, you may not only lose the yield but the customer as well. Worse, you may lose this customer to your competitor, who might use the enhanced margin to capture even more of your customers.
In a crisis, of course, it's common to seek simple one-size-fits-all solutions, such as cutting costs across the board on the theory that "all customers want is a low price." And if you're in a pure commodity business, that might be the right approach. But most companies don't sell pure commodities. They sell industrial goods, information, technology, consumer goods and services.
Consider the travel and tourism industry.
When you pay business fare for a flight on a scheduled airline, you may pay as much as 10 times more for your ticket than the lowest-paying passenger on the same flight. The profitability of virtually every flight for the major airlines is directly related to the number of high-fare passengers on the plane. It's easy to fill planes—just cut the price—but it's much harder to make money. Typically, 2% to 3% of an airline's total customers account for approximately 25% of its revenues, mostly because they are paying far more than other passengers.
Given the poor economics of the major airlines, it's easy to see why they would focus on cutting costs. But when they cut services to their high-yield customers so they can reduce their own costs they are, in essence, needlessly commoditizing their own product. And as major carriers, with substantially higher costs than competitors such as Virgin America and Jet Blue (JBLU), they are putting themselves into a death spiral—something no company should or can afford to do.
United Targets High-Yield Fliers Some airlines understand this and have found ways to provide enhanced service to high-yield customers. It's easy for the airlines to identify their most profitable customers from their existing databases. From their frequent-flier programs, they can identify customers who board the most flights during a given period of time or log the most miles. From the record of ticket sales, they know how much each customer pays for each flight. Combine the two databases and they can identify customers who fly often at high prices.
They also know how to reach these customers, what their flying patterns are, and how often they buy one-way tickets, which indicates that some of their premium travel dollars are going to another airline, since customers usually return to their place of origin, and therefore some of their premium travel might be up for grabs.
These are the high-yield customers every airline should be fighting to attract and keep.
At least one U.S. airline is now aggressively courting such passengers: United Airlines (UAUA) has created a new benefits program called Global Services, which is based not only on the number of miles customers fly but on the amount of money they spend on their tickets. These latter customers are the ones United is targeting.
To keep Global Services customers coming back, United provides separate check-in counters at major airports, and even separate check-in areas in some cases, away from the crowded ticket counters. These special areas are overstaffed to minimize the time it takes to check in. Customers are then escorted to the front of the security lines. The advantage to Global Services customers is that they can arrive at the airport later than other customers—and get to the lounge or boarding area sooner. The service continues in the air, with better seating preferences, meal choices, and far more personal attention from flight attendants.
United also routinely goes the extra mile for its high-yield customers (even those who aren't yet part of the Global Services program), especially in cities where it faces stiff competition, such as Chicago. For example, if a high-yield customer hasn't checked in 55 minutes before departure, United will call the customer and, on arrival at the airport, have an agent personally speed the customer through security. (And yes, United is one of the airlines I fly on.)
Avis' Quick Lesson What this means in bottom-line terms is that a full-fare customer who's running late will fly on United, rather than missing the flight and taking a fully refundable ticket to a competitor. If United can make itself the high-yield flier's airline of choice, it creates an annuity stream for itself and removes one from its competitors. The costs of a program such as this are very small relative to the margin on the high-value ticket.
Providing high-quality service in a recession to your best customers is also being done in the rental car business. Avis (CAR), for example, really is trying harder. When the recession hit and profitable business rentals declined by 50%, Avis cut customer service, reducing staff and redeploying to the counters many of the people who previously had checked in returning customers as they were getting out of their cars. It all made good sense, except… Avis learned quickly that even its best "Avis Preferred" customers could make other choices—and would. Choices abound, even at smaller airports.
Avis realized its mistake and reversed course within a few months, restoring return check-in at the drop-off lot for customers who didn't need to see an agent, allowing them to stop spending valuable time waiting on lines at counters. Today, Avis Preferred customers, who are often running for planes, still get special treatment—and even while paying less than they did before as price pressure has reduced rates for corporate customers.
Power Hours at Home Depot The travel and leisure industries are not the only ones to realize the value of special services for their best customers.
Home Depot (HD), for example, after years of bad ratings on the University of Michigan's American Customer Satisfaction Index, has put customer service guru Marvin R. Ellison in charge of its U.S. stores. Ellison, a onetime hourly employee of Target (TGT), quickly instituted a policy known as "power hours," weekdays from 10 a.m. to 2 p.m. and all day on weekends when employees are supposed to spend all of their time on the floor helping customers.
Customer service is critical to the success of all companies, whether they are selling paint and hardware to do-it-yourselfers in suburban America or selling multibillion-dollar power plants to public utilities in rapidly developing markets. Indeed, a recent survey by the Daniel Group for Caterpillar (CAT) found that more than 40% of all "highly satisfied" business customers had referred other potential customers to the same company.
With the importance of customer service in mind, here are three things you should do:
1) Identify your best premium customers, recognize their importance to your overall profitability, and understand who your competitors' premium customers are.
2) Figure out what would most please your best customers and bind them tighter to your business. Also figure out what might attract your competitors' best customers to you. Determine what approaches would create the greatest economic payoff for you.
3) Build the capability, test it, adjust it, roll it out, and further build it. Ask questions. Talk to your customers. Get their feedback. Make them part of the process. This is about their relationship with you.
A Cycle to Avoid Belt tightening in tough times is understandable. But across-the-board cost-cutting is not a solution if it negatively impacts customer service and causes your company to miss opportunities or lose good customers to your competitors. The company focused only on cost loses important customers; margins erode, forcing further cuts in customer service. A destructive cycle begins for the cost-cutting company while its competitors are presented with the opportunity of a lifetime.
In the dog-eat-dog world of globality, managers should seek to be the hunters, not the hunted. Customer service can be the most effective weapon.
The author would like to acknowledge and thank two BCG colleagues who have done pioneering work in the area of customer service operations: Andy Maguire and Ian Walsh, both based in London.