Fantastic must-read article in the June 2007 issue of Harvard Business Review: "Companies and the Customers Who Hate Them" by Gail McGovern and Youngme Moon.
McGovern's thesis is that many otherwise great companies have drifted into a situation where their most-profitable customers are the ones who have the most reason to be dissatisfied -- customers who are trapped by a contract, or pay too much because of complex service plans and penalty fees.
Sounds all too familiar, doesn't it? But I'm raving about this article because of the clarity with which the situation is presented, and the thinking it triggered for me. McGovern suggests this situation is the result of drift, not malice:
"Without ever making a deliberate decision to do so, they have, over a period of years, taken great advantage of their customers. In most cases, there's no defining moment when these companies crossed the line. Rather, they found themselves on a slippery slope that led to an increasingly antagonistic strategy."
The industries that exemplify this approach are cell phone service, retail banking, and health clubs. Service plan contracts, for example, may appear customer-centric at first glance, but in fact take advantage of the "customer's difficulty in predicting their usage." If customers use too much, they pay more. If they use too little, they paid for something they aren't using. Regardless of the direction of the error, the house always wins.
Competitors that enter this kind of environment with transparent offerings often do well, rapidly growing their customer base: Virgin Mobile in cellular, ING Direct and President's Choice Financial in banking, for example.
McGovern & Moon's diagnostic questions:
McGovern offers four diagnostic questions to discover how seriously affected your business is by this approach:
⇒ Are your most profitable customers those who have the most reason to be dissatisfied with you?
⇒ Do you have rules that you want customers to break because doing so generates profits?
⇒ Do you make it difficult for customers to understand or abide by your rules, and do you actually help customers break them?
⇒ Do you depend on contracts to prevent customers from defecting?
I'd like to add a few more diagnostic questions to this list that are a little more granular. All of these are based on personal experience as a customer or a consultant:
⇒ The cost of doing business WITHOUT being in a service plan is prohibitively high. A lot of calls to your bill-payment lines result in back-dated conversion to a service plan, and reversal of 'pay-as-you-go' charges. The staff in this area are rewarded for sales of this nature. Good example: bandwidth charges on mobile phones
⇒ You have complex online tools to help customers select a service plan. They need to be able to accurately predict their usage to use them. The tables and charts have footnotes explaining the exceptions. Examples are abundant: bank and telco web sites
⇒ You recommend that customers bring several statements in to your offices to talk to a specialist to help them select a service plan, because it's too difficult to do without accurate data. Commonly seen with: banks, phone companies
⇒ Your own staff find the whole area confusing. The good ones offer to switch the customer's plan with no charge in a few months if they find they have chosen the wrong plan. Commonly seen in: new customers selecting a bank account
⇒ The cost of 'making a mistake' is so high that you are able to sell insurance against 'making a mistake' even to those who have never made one, or are unlikely to. Good example: overdraft protection
⇒ You can accurately predict the 'breakage' on typical products. In fact, you count on this ability to build profitable new products. e.g. Minimum balance requirements, credit card insurance with low claim rates
⇒ You rely on customer inertia and hassle-avoidance to reduce churn. Hello cable companies with bundled channels and complicated high-definition set-up
There are abundant examples in these industries. In fact, it is so entrenched, you might find it difficult to even think of alternative approaches.
How to start fixing the problem
Changing service-fee strategies usually means someone has to prepare a business case. Resolving the kind of issues that the McGovern and Moon article is discussing is going to mean a drop in revenue from fees. Regrettably, that drop in fee revenue will be easy to quantify, while the resulting gains in loyalty and brand equity are likely to be much harder to quantify.
If you want to start addressing this situation in your organization, you are going to need metrics that help put some numbers on the other side of the equation. You would be well-served to get the support of whoever is managing loyalty, retention and churn, as well as brand equity.
When I'm conducting research in any of the industries named above, a recurring theme is the feeling that the deck is stacked in favor of the company, not the customer. And I have a news bulletin for you: training your staff in being friendly isn't going to get you past this issue.
If you've had some success changing this game, please tell us about it in the comments.
Harvard Business Review does not provide free online access to its material. Individual articles can be purchased, however, and it provides a short summary of articles. Companies and the Customers Who Hate Them by Gail McGovern and Youngme Moon can be found here. (Product# R0706E)