Economic downturns can wreak havoc with customer relationships.
Deep cost cutting compromises service. And to make up for lost revenues, companies sometimes add new charges and fees, which make customers feel they are being gouged. The negative effects of lost customer trust can be deep and long-lasting.
On the other hand, the advantages of customer loyalty are more pronounced in a downturn. Loyal customers cost less to serve. They typically concentrate more spending with companies they trust and are less likely to defect. Their referrals to friends and associates provide a company with more like-minded customers, laying the foundation for growth when the economy turns around.
These powerful advantages of customer loyalty help explain why the biggest changes in market share occur during downturns. When spending drops, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilize their businesses. They may even attract new customers, as competitors falter.
Low-cost IndiGo airlines, for instance, has been highlighting its check-in kiosks, stair-free ramps, and “Q-Busters” (hand-held devices that print out boarding passes to minimize queues) to grow customer loyalty in a troubled aviation sector.
But maintaining customer loyalty in a downturn is difficult. The situation requires new strategic thinking. How have your customers’ preferences changed? How long will those changes last? How can you appeal to their new needs without diluting your long-term competitive advantage?
Companies that answer those questions effectively and strengthen loyalty in a downturn share some common characteristics.
Let’s take a look at them one at a time.
Leaders steer clear of three traps. Trap No. 1 is chasing revenues by appealing to every potential customer group, often through aggressive discounting. But new customers attracted only by lower prices often fail to buy more when prices recover.
During the 2001 recession, US retailer Saks Fifth Avenue implemented deep price cuts that temporarily boosted revenues but undercut its luxury status for many longtime customers.
Nieman Marcus assumed the luxury mantle, and when the economy rebounded, Saks’s sales were slower to recover.
Trap No. 2 is indiscriminate cost cutting. The most effective companies cut costs with a scalpel rather than an axe, focusing on their most important customers. One retailer indiscriminately slashed the number of products offered, only later to learn that the absence of some specialty products such as artisanal cheeses was sending high-spending customers to competitors.
Trap No. 3 is reducing investment in customer-focused innovation. Breakthrough products and services such as the iPod and JetBlue’s low-cost flights were all introduced during recessions.
Avoiding traps isn’t enough. A company also has to implement practical disciplines for keeping its most important customers. It’s not easy. In a downturn every company faces difficult choices about which customers to keep and which to pass up.
To make the right trade-offs, management teams first need to identify an attractive customer core that becomes the prime focus of their energies and investments. We call this group the design target. They’re the customers your company can serve better than any competitor.
These customers tend to have three vital traits. They are disproportionately valuable in the amount of business they do with you now and potentially in the future. They are highly loyal through good times and bad. Finally, they are especially influential in the marketplace.
The design target itself may be small but it represents a broad range of customers. BMW, for example, designs its cars for the relatively small group who treasure high performance and attention to detail, all for a reasonable price. The auto maker calls them the “active affluent”. Yet its products appeal to a broad range of buyers. In India, BMW has been aggressively targeting the segment by launching new editions of popular models such as the 3 Series and completely new models such as the X6 sports coupe. Its strategy seems to be meeting success: For the first time, BMW has taken the lead in the Indian luxury car segment in January-February.
A simple way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes, and behaviours.
Next, sort your current customers in each segment by profitability and potential value. Then group them into promoters, passives, or detractors by asking them to rate on a scale of zero to 10: How likely are you to recommend our company’s products or services to a friend or a colleague? Those responding with scores of 9 or 10 are promoters, your company’s biggest boosters. Those answering with a 7 or 8 are passives, lukewarm at best.
Those giving a score of 6 or less are detractors. This group is dissatisfied and can drive away potential customers through negative word-of-mouth.
Subtracting the percentage of detractors from the percentage of promoters yields a company’s net promoter® score (NPS), which measures the degree of loyalty among a company’s customers.
Concrete metrics such as net promoter score sharpen a company’s focus on loyal customers. The metrics help to identify what loyal customers like most about today’s products and services as well as actions that drive them away. Loyalty leaders use this understanding to probe deeper into their behaviours and emotions.
Customer-focused companies take pains to identify the critical moments of truth that have the greatest potential to delight customers—or to drive them away.
One way to determine which touchpoints matter most is to ask customers directly. Contact them two or three weeks after a purchase, a warranty repair, or other direct interactions with your front line. Invite them to rate how likely they would be to recommend the company and give them an opportunity to explain why they gave that rating. Then feed that information back to the front line.
Auto insurer Progressive Corp. learnt it could improve loyalty by shortening the payment cycle for claims. A 35% reduction in payment time helped increase its NPS score by at least 50 percentage points. At a time when companies are seeking every possible advantage they can wield in a tough economy, keeping loyal customers front and centre can make a critical difference—both now and in the long term.
Sandeep Barasia is a partner in Bain & Co., New Delhi, and a member of the firm’s Consumer Products and Retail practices. Rob Markey is a partner and leads Bain’s Global Customer practice. Darrell Rigby leads the firm’s global practices in Retail and Innovation. This is the fifth in a series adapted from the forthcoming book Winning in Turbulence by Bain and Co. that is being published by Mint. Respond to this column at firstname.lastname@example.org