Customer Loyalty Problem Solving

A three-level model helps focus improvement efforts. 

Customer retention is critical for companies with business models that rely on recurring revenue. The “leaky bucket” that is customer defection robs 

companies of precious revenue and profit. In cloud computing, cutting customer churn in half over the typical customer life cycle doubles company cash flow and gross margin.¹ Even a small churn reduction pays off in the long term when millions of dollars in revenue are in play.

Obviously, improving customer loyalty is the key, but how? Where should managers start? I propose a simple, three-level model to concentrate on the customer benefits that lead to loyalty: Implicit, Explicit, and Experiential.

Implicit Benefits

Customers take certain things for granted, such as reliable wireless phone service, accurate bank statements, and bug-free software. People assume basic attributes come with the service, and when companies fail to deliver on these minimum expectations, customers have little patience. Chronic problems providing what quality expert Dr. Noriaki Kano calls “must-be” quality² leads to customer defections in every industry. In Software-as-a-Service (SaaS) companies, churn can lead to the loss of half of a firm’s customer base during each renewal cycle.

This is why managers must make delivering the fundamentals a company’s first priority. In cloud computing, that means system uptime, secure data, error-free code, and basic product support. SaaS executives must get and maintain control of their technology development and operations processes or prepare for a rapid demise.

Explicit Benefits

Companies promise things during the sales cycle. When deciding between competitive options, customers evaluate each company’s “value proposition” and choose the best option. If promises don’t materialize, customer expectations go unmet. For example, a SaaS company may state that their software creates a certain type of report, but the customer later discovers it can’t. Customers may not return if the issue is severe and the dissatisfaction high enough. If a competitor offers comparable benefits, and changing providers is simple and cheap, potential for churn grows.

Marketing masters Michael Lanning and Lynn Phillips say companies should make strong value propositions their strategic foundation.³  First, managers must choose a winning value proposition, one that focuses sharply on a target market and offers a compelling alternative. Second, executives must deliver the chosen value proposition by translating it into design requirements, bringing it to market, and then providing it in day-to-day operations. Finally, the company must communicate the value proposition clearly and consistently in marketing, sales, and customer service. When promise-making and promise-keeping are in close alignment, customer expectations are reliably met and churn is reduced. An effective strategic management system ensures value propositions aren’t empty promises.

Cloud computing companies competitive in delivering Explicit and Implicit benefits will typically retain 80-85% of their customers from one renewal cycle to the next. But to raise performance to world-class levels of 95% or higher, companies must become proficient delivering a third type of benefit.

Experiential Benefits

Customers prefer to do business with people they know, like, and trust. How a company does business is as important to customers as the product or service they receive from them. When customers have lackluster experiences, churn increases. Just one unhelpful tech support interaction can end a business relationship, especially when the customer feels ignored, devalued, or unfairly treated. On the other hand, service companies that form strong relationship bonds enjoy significantly higher customer loyalty.⁴

Customer Experience Management (or Customer Journey Management) is a technique used to analyze and improve customer interactions. Managers collect data on myriad customer “touch points” (website visits, phone calls, e-mails, blog entries, social media, etc.) and plot each interaction against time. Patterns emerge where gaps and problems exist, and managers can use process improvement techniques, such as Lean Six Sigma, to resolve them.

While addressing functional gaps is the first place to start, research suggests a more mindful approach is the secret to achieving the highest levels of customer loyalty. Underlying all human

relationships are reflexive responses to subtle, social cues that can have a profound effect on conscious feelings and decisions.⁵ For example, our subconscious mind is sensitive to certainty, the ability to predict the future. When a Customer Success Manager begins an onboarding call by saying, “We’ll have you up and rolling in just fifteen minutes,” she provides subliminal assurances to the customer, producing a rewarding dopamine burst in his brain. If additional, beneficial cues accumulate during the call, the brain assigns a positive marker to the memory.⁶  Later, the brain reactivates the marker as it recalls the experience, allowing subliminal emotions to “weigh in” on the evaluation. When companies understand and proactively manage simple social cues through employee training, refined user experience (UX) design and other means, the resulting positive interactions lead to richly satisfying relationships and more loyal customers.

Loyalty troubleshooting is easier when managers focus on Implicit, Explicit, and Experiential benefits. When customer turnover is high, executives should attend to the basics. When it’s moderate, the priority becomes clearly articulating and consistently delivering competitive distinction. And when managers strive for world-class loyalty, being mindful of the customer experience is the path to success.

Excel-lens is a publication of Service Excellence Partners. We increase customer loyalty and business performance in the cloud computing industry. Contact us today.

Sources:

1. Skok, David (2013). “SaaS Metrics 2.0 – A Guide to Measuring and Improving What Matters,” For Entrepreneurs blog
2. Adapted from Noriaki Kano, Nobuhiku Seraku, Fumio Takahashi, Shinichi Tsuji (April 1984). "Attractive Quality and Must-Be Quality" (in Japanese). Journal of the Japanese Society for Quality Control 14 (2): 39–48. ISSN 0386-8230. 
3. Lanning, M. and Phillips, L. “Building Market-Focused Organizations,” (Gemini Consulting White Paper, 1992).
4. Gremlera, D. and Brown, S. (1996) “Service Loyalty: Its Nature, Importance, and Implications,” University of Idaho and Arizona State University, USA
5. Rock, D. “SCARF: a brain-based model for collaborating with and influencing others,” NeuroLeadership Journal.
6. Damasio, A. R. (1996) “The somatic marker hypothesis and the possible functions of the prefrontal cortex,” Philosophical Transactions of the Royal Society B, 351, 1413-1420. 

Loyalty, by Design

Most customers defect because of how they were treated, notably during the initial business relationship (see "What Starts Right, Stays Right"), but product and service design can also be a major factor in customer churn. In the cloud computing business, there are few barriers to entry, competition is increasingly fierce, and the cost to switch providers is low. Since customers can cancel subscriptions any time they perceive greater value elsewhere, Cloud Service Providers (CSPs) must create compelling solutions, treat customers exceptionally well, and always stay one step ahead of the competition.

But in many ways, CSPs are no different than any other business. Fast-moving, high performing manufacturing companies have long known that better product and process design yields better results. Often CSPs don’t do the basic market research, solution definition, and validation required for developing exceptional, well-differentiated products. As a result, inadequate design approaches hinder a CSP’s own ability to retain customers for the long term.

So what makes a good design? It’s simple: innovating when customer requirements are known, not assumed. Engineers are natural problem-solvers. Presented with challenges, they’re quick to come up with solutions. Add to that time-to-market pressures and their answers come even faster. But knowing exactly what problem developers are trying to solve is essential, and collecting more information in the beginning often feels unproductive.

Left alone, software engineers develop products based on what they presume to be customer needs and desires, which can spell disaster down the road. The top reasons for IT project delay are unclear customer requirements: expansion of functionality or “scope creep,” and “gold plating,” or over-engineering things that don’t matter.¹ In start-ups, this can spell certain death. The Startup Genome Project says building a product without a validated product/solution fit is a common failure point stating,"It's widely believed amongst startup thought leaders that successful startups succeed because they are good (re)searchers and failed startups achieve failure by efficiently executing the irrelevant." ² Senior leaders must keep their engineers’ natural impulses in check by instituting a process that places intense focus on understanding market needs well before any coding begins. A little more time doing it right up front means much less time, cost, and risk fixing it later.

Great product designs come from:

1.       Market Requirements Analysis. Using secondary research to size market opportunities, select attractive market segments, and evaluate competitive position. Using qualitative, primary research to uncover unmet or under-met needs. Using quantitative surveys to further clarify and prioritize needs.

2.       Solution Design. Brainstorming and creating an exciting, realistic, achievable, solution concept at a block diagram level that is distinctly better than the competition, addressing market needs with new technical capabilities.

3.       Value Proposition Refinement. Summarizing the design’s compelling benefits, competitive differentiation, and tradeoffs (such as cost or conversion) customers must make when buying the solution. Testing the design concept, feature and pricing options, and Value Propositions with target customers to set the final design details.

4.       Requirements Definition. Converting the final solution design into very explicit features, system capabilities, software modules, and specifications for the development project’s scope of work. Establishing performance goals for potential technology partners (e.g. cloud applications, APIs, and managed infrastructure) intrinsic to the solution. Creating process requirements, metrics and goals for internal service delivery capabilities, including onboarding and customer care. 

5.       Development. Assembling and integrating capabilities, writing and testing code to meet requirements and fulfill the Value Proposition. Creating channel and marketing partnerships to communicate the Value Proposition. Developing internal processes and negotiating Service Level Agreements (SLAs) with technology partners to deliver the Value Proposition.

So how is greater customer loyalty achieved? It begins in Market Requirements Analysis. Leading companies conduct a deep investigation into customer challenges using carefully chosen, open-ended questions to surface underlying needs. Then they use tools like Kano surveys to classify potential solution attributes into “must-have,” “more-is-better,” and “delighters”— unexpected features and benefits that elicit emotional response and attachment, resulting in greater loyalty. Knowing what truly matters to customers helps engineers not only target the right problems but consider breakthroughs. Project teams then test final design features, benefits, and pricing using discrete choice surveys. They summarize with clear, compelling, and competitive Value Propositions, explicitly stating what customer promises the company will make and how it will keep them. Well-crafted Value Propositions articulate why customers will buy, renew their subscriptions, and refer other customers. Only when all of this is done do top-performing companies begin writing code.

CSPs that jump to the obvious miss opportunities to develop anything other than “me too” solutions, creating an offering ripe for high customer churn. Given the significant economic impact defecting customers have on revenue and profit in subscription-based models, using a more market-centric design process is the first step for generating high customer retention and loyalty.

Footnotes:

1. Goldratt, Eli (1997). Critical Chain, North River Press, Great Barrington, MA, and McConnell, Steve. (1996). Rapid Product Development, Taming Wild Software Schedules, Microsoft Press, Redmond, WA.
2. Marmer, M., Herrmann, B. L., Dogrultan, E., Berman, R. (2012) Startup Genome Report Extra on Premature Scaling: A Deep Dive Into Why Most High Growth Startups Fail, Startup Genome.