Your Customers: Use Them or Lose Them
http://hbsworkingknowledge.hbs.edu/item.jhtml?id=4267&t=marketing
by Martha Lagace, Senior Editor, HBS Working Knowledge
It's easy to deliver lousy service. Examples are too numerous to mention and let's not ruin the
day, shall we? But imagine this: How about living in a world where companies treat you, as a
customer, nicely and it benefits them as well as you? Such companies exist, says HBS professor
Frances X. Frei. Their customers are better off and the organizations earn a disproportionate
share of the profits over their competitors.
Frei, who spoke with HBS alumni on June 4 in a session titled "Capitalizing on the Power of the
Customer," said three successful strategies are used to differentiate on service and do it in a
sustainable manner. These organizations do one or more of the following, she said: Defy
conventional wisdom, reduce costs, and minimize demand.
"I believe customers are very smart and customers are desperate to be helpful to the company,"
said Frei. "How do you get customers to act in the best interests of the firm? Of my mantras,
number one is: Your customer is probably your most powerful asset."
To explain how certain companies jump to the head of the pack through good service, she shared
highlights of her research as well as insights gained from her course for Harvard MBA students,
Managing Service Operations, which explores interactions between firms and customers.
Defy conventional wisdom
Commerce Bank entered a mature industry where the overall level of customer satisfaction was
"pretty low," Frei observed. The conventional wisdom for banks was that in order to grow they
should offer the best rates of deposit or buy another company. Instead, she said, Commerce
Bank offered the worst deposit rate in every single local market. It has never made an acquisition.
Yet it is the fastest-growing bank in the country, she said. Reason: Commerce Bank decided to
differentiate on service.
For starters, it offers seven-day branch banking, giving customers extra convenience. In addition,
every branch includes so-called penny arcades, coin changing machines that are free for
customers and non-customers.
"There are genuinely friendly employees," Frei continued. "The employees are friendlier in part
because Commerce Bank only has four checking accounts; others may have forty checking
accounts. So the bank can train employees on service, not on compliance."
Newspapers, coffee, coin machines, friendly staff—all of this costs money, Frei said. Commerce
Bank pays for it by paying lower rates on deposits compared to the giant banks.
"Think about it," she told the group. "Would you trade half a percentage point on your account to
have what is truly exceptional service?"
When the bank put branches in Manhattan two years
Would you trade half a ago, Commerce Bank grew faster there than
percentage point on your anywhere else, she said. Other banks can't afford to
stay open until 11 p.m. while managing forty
account to have what is truly accounts. Other banks can't respond because they're
exceptional service? not set up to differentiate on service.
"Commerce Bank basically figured out how to get customers to pay for the service in a rather
clever way: It turns out that a lot of people don't care if they get half a percentage point less on
interest." It was a "palatable" way to have customers pay for their own service, Frei said.
Reduce costs
Not every industry, however, is set up so it can persuade customers to sacrifice more money for
better service. Customers of most auto insurance plans, for example, are extremely price-
sensitive. People will go with the best price, "full stop," said Frei.
Another confounding factor for the insurance business is that companies lose money on auto
insurance, she added. "Every company with the exception of maybe five loses money on auto
insurance. They make up for that loss and make a little bit of profit by investing the pre-paid
premiums. So they lose money on insurance but make up for it by investing premiums."
By contrast, she said, Progressive Casualty Insurance Company makes money on insurance and
spends more on service in the provision of insurance than any other company, she said. They do
it in two ways.
One, if a Progressive customer gets into a minor accident, he or she can phone the company
from the scene and will be met by a member of its Immediate Response fleet. "It's not unusual for
them to show up at the scene of an accident before the police do," said Frei. Fleet management
is expensive; so is wireless technology. But in the end Immediate Response is a cost saver for
Progressive. The staffer may write the customer a check on the spot and such quick
assessments end up reducing lawyer fees. It also substantially reduces the potential for fraud,
she said. "The Immediate Response fleet is their fraud buster."
A second Progressive service is called Comparison Quote, said Frei. If a potential customer logs
on to the Web site, Progressive will give a quote for Progressive auto insurance as well as similar
insurance from all their nearest competitors, she said. The quotes are accurate, Progressive's are
lowest less than half the time, and if they are not the lowest then the customer usually goes
elsewhere.
"So how does that make sense? What they're capitalizing on is that
Progressive is better at data analysis than all of their competition. Comparison
Quote is their clever service design that takes advantage of their data analysis
superiority. They can get at the true 'riskiness' of a customer in a more refined
way than anyone else can, so they know the true risk better than the
competition," she said. If a potential customer is such an apparent risk that the
quoted Progressive rate is higher than the competition's, Progressive is happy
if that customer goes elsewhere to buy cheaper insurance. "They are happy to
have the competition get those customers," said Frei. Frances X. Frei
Minimize demand
Software giant Intuit offers free cradle-to-grave service on a financial software product that costs,
at most, $50, said Frei. If Intuit fielded the same number of customer service calls as its
competition, it would be out of business, she said.
"The entire organization is geared toward minimizing the need for customer service. So their
strategy is to minimize demand. Many [other] organizations have the strategy of hiding the phone
number so deeply on the Web site that you can't call them: That's their way of minimizing
demand," she observed.
At Intuit, customer service is excellent and the need for it is rare, she said. People answering the
phone are part of the product development team and they are expected to talk with the engineers
about the calls they receive. These employees are paid more than their counterparts in other
companies.
"Intuit wants engineers who will design products that their mothers could use. Engineers who do
whiz-bang things are not welcome at Intuit. Intuit's philosophy is to increase the customer
willingness to pay via e-commerce; the other is take operational savings and wrap it up in a
stealth kind of way in service features," she said. Intuit found a way to make customer service
excellent by removing most of the need for it.
What's next
"These are celebrated companies and they are not the norm," Frei acknowledged. Many other
industries are ripe for customer-friendly interlopers, she said.
"A great example of all of these things not working in a spectacular way is the cell phone industry.
It sees the customer as an adversary, [asking the customer to sign] contracts for the next fifty
years so they don't have to take care of you. It's like they don't trust themselves to deliver good
service. For their long-term service contracts, customers have to guess their usage. The
companies make money when you guess wrong, when you pay for capacity you don't use. The
company has set up the customer in an adversarial role; the company benefits when customer
does not."
For their part, cell phone companies complain their
A great example of all of customers are price-sensitive and won't pay for
these things not working in service. But the cell phone industry is like the
banking and insurance industries: it's waiting, she
a spectacular way is the said.
cell phone industry.
"Will the cell phone industry become like Commerce
Bank or Progressive in five years?" she asked. "Will there be other new entrants?"
"If you think about companies you know, there are more on the customer-as-adversary than
customer-as-advocate side," said Frei. She added, "If you win when your customers lose, then
you're leaving the door open for someone else to come in and champion the customer."