The Basis of Business Survival

by Rod Johnson of AMR Research
This article is excerpted from an article that originally appeared on our sister site, www.crm-forum.com


"As long as repeat business is important, and as long as customers have a choice to go somewhere else, companies must deliver the highest levels of customer satisfaction in order to stay in business."

This simple-yet-powerful observation by University of Michigan Business School Professor Claes Fornell, one of the world's leading experts on customer satisfaction measurement, rings truer today than ever.

Today's forward-looking organizations realize that they can no longer rely just on price, product quality, or distribution to keep customers coming back. Why? Because companies can quickly duplicate their competitors' price, product, and distribution strategies. For example, due in part to advances in communications capabilities – such as the widespread use of email, which enables the instantaneous exchange of engineering plans and technical documents – manufacturing and technology companies are able to match competitors' offerings in a fraction of the time required just a decade ago.

Easy access to extensive online information also enables companies to quickly learn about – and with equal speed, copy – their competitors' pricing moves. And the addition of virtual distribution channels – coupled with buyers' ability to easily search for competitive offerings – increasingly undermines captive distribution channels as a basis of competitive advantage.

Therefore the only way to ensure the loyalty of customers is to consistently provide 100% customer satisfaction. That means being able to do business with customers in any way they want – anytime, any place, in any language and any currency and through any communications channel. This fundamental fact of business applies in all market conditions.

Be a hero

In a recent cover story entitled 'Managing for the Slowdown', Fortune magazine pointed out that a slowing economy will test managers' ability to sustain and grow revenue and earnings. Among the '13 moves to make before your competitors do', Fortune urges companies to 'be a hero to your customers'.

A big mistake

Of the many opportunities that economic trouble presents, this is one of the greatest. Some companies allow service and quality to degrade during a slowdown, which is big mistake. Instead, take the lead in building relationships and in cementing those you've already begun.

Whether the economy is expanding or contracting, companies must keep their customers satisfied in order to drive customer loyalty and repeat business. In other words, doing business the way customers want is not an option – it is a matter of business survival. This kind of customer focus can be achieved only by having the capability to manage and synchronize customer interactions across all touchpoints – face to face, the call center, the web, retail outlets, and partner and dealer networks – via a single, unified eBusiness system.

Such a system enables an organization to maintain a seamless, continuing dialogue with its customers – the ability to recognize the customer, and the customer's history, at every point of contact – so that customers feel they are receiving the very best care. The effect on business is straightforward: satisfying customers better than the competition results in better financial performance.

Compelling data

In fact, a growing body of research by Mr. Fornell and others demonstrates that increasing customer satisfaction leads to improved financial performance. Mr. Fornell, who is Director of the National Quality Research Center at the University of Michigan, has extensively studied the empirical relationship between customer satisfaction and financial performance.

"For a large capitalization company," says Mr. Fornell, "a five per cent increase in customer satisfaction is related to an average US $3.25 billion increase in market capitalization. Or, looking at it another way, a one percent increase in customer satisfaction relates to a three per cent increase in market cap."

Mr. Fornell is responsible for the development and design of the American Customer Satisfaction Index (ACSI) – a national economic indicator of customer satisfaction with the quality of goods and services available to household consumers in the United States. The ACSI is the only cross-industry national indicator that links customer satisfaction to financial returns. Faculty research at the University of Michigan Business School shows that Market Value Added (MVA), stock price, and return on investment are highly related to ACSI.

In the most recent year for which ACSI and MVA data are available, firms scoring in the top 50 per cent on the ACSI scale generated an average U.S.$60 billion in shareholder wealth, while firms in the bottom 50 per cent created only U.S.$25 billion. In addition, since 1994, changes in ACSI have correlated with changes in the Dow Jones Industrial Average.

Happy customers = profit

Mr. Fornell and several of his colleagues have also found a strong correlation between customer satisfaction and financial performance using data from Sweden. Moreover, the research shows that improving customer satisfaction has a cumulative effect: organizations that maintain a steady rate of improvement in customer satisfaction over a period of several years realize an increasing rate of improvement in their profitability.

A firm that improves its customer satisfaction scores by one per cent a year over five successive years will on average achieve a cumulative increase of 11.5 per cent in return on investment over the period.

Mr. Fornell's findings are exceptionally relevant in the current economy. In today's highly competitive business environment, customers hold the balance of power. The fact that competition is now 'just a click away' – one of the most profound effects of the Internet revolution – has intensified organizations' interest in customer service and satisfaction. Leading companies in every industry and all parts of the world are increasingly focused on customer satisfaction to establish and sustain a competitive advantage.

In a recent survey of Global 1000 executives by AMR Research, 87 per cent of respondents said that during an economic downturn they will sustain or increase their eBusiness investments in initiatives aimed at improving customer relations and increasing both revenue and profits.

No spectator sport

"Our survey shows eBusiness and its supporting technology are too important to let an economic downturn derail current plans," says Tony Friscia, President and CEO of AMR Research. "Even in a down economy, eBusiness is not a spectator sport."

According to AMR, customer acquisition and retention will be an even greater challenge in a declining economy, noting that eBusiness capabilities will be 'strategic differentiators'.

These global companies understand that the strategy of competing on the basis of superior customer satisfaction is a business imperative – whether the economy is expanding or contracting. But especially in a slowing economy – when customer spending is falling and companies are therefore looking to take market share from competitors – organizations must make concerted efforts to guarantee the loyalty of their customers. The alternative is to lose customers to competitors – which not only means losing repeat purchases from those departed customers, but also having to devote additional resources to acquire even more new customers. Customer satisfaction, therefore, is not only the basis for gaining a competitive edge in challenging economic times – it also is a key component in optimizing an organization's use of resources.

Leading organizations invest

In a recent survey of Global 1000 executives by AMR Research, 87 per cent of respondents said they will sustain or increase their eBusiness investments during an economic downturn.

"Our survey shows eBusiness and its supporting technology are too important to let an economic downturn derail current plans," says Mr. Friscia.

Ultimately, customer satisfaction drives customer loyalty – and repeat business from loyal customers is more important to an organization's survival today than ever before. For the typical company, repeat sales account for 70 per cent of total revenues. Therefore, improving capabilities to satisfy customers – and keep them from defecting to competitors – is one of the most valuable investments than any organization will make. Indeed, research reported in the Harvard Business Review shows that improving customer retention by just five per cent can increase profitability by 25-100 percent.

And according to AMR Research, "Loyalty measured in customer retention has the single best impact on the bottom line."

For example, an automotive original equipment manufacturer reported that every one per cent improvement in retention resulted in an additional U.S.$14 million in profit.

Keep your customers

Most organizations are aware of the high cost of acquiring new customers – typically five to ten times more than keeping current ones satisfied. But Rob Yanker, a partner with McKinsey & Company, points out that "the cost of trying to win back lost customers is absolutely stratospheric. Winning back a lost customer can cost up to 50-100 times as much as keeping a current one satisfied."

Despite the powerful findings by Mr. Fornell and his colleagues, many studies also indicate that in the aggregate, the level of customer satisfaction in numerous industries is lower today than it was just a few years ago. Clearly, many organizations are losing on the customer satisfaction front – and they are paying the price in higher rates of customer defection, lower rates of growth relative to their competitors, and sagging profits.

A greater challenge

Whether it is called the New Economy, the service economy, or the information economy, today's business environment is more challenging than ever – particularly as potentially slowing market conditions drive companies to compete more intensely for market share. To survive, organizations must focus on customer satisfaction as the foundation for long-term business success. This can only be accomplished by adopting customer-focused eBusiness technology and establishing the processes necessary to measure and monitor customer satisfaction.

"Quick & Reilly has always believed in the power of customer satisfaction," explains Ed Garry, assistant vice president for CRM solutions at Quick & Reilly, one of America's oldest and largest brokerage firms. "We've stood behind this idea since 1992, when we were the first brokerage firm to offer a money back guarantee on providing an excellent customer experience."

As the experience of Quick & Reilly makes clear, high levels of customer satisfaction have a major affect on a company's bottom line. But in addition to producing greater customer satisfaction and, therefore, greater customer loyalty and retention, customer-focused eBusiness technology also delivers other measurable benefits that directly affect an organization's effectiveness, productivity, and revenue. These benefits also impact an organization's financial performance, in two primary ways:

  1. First, eBusiness applications dramatically improve the organization's effectiveness in sales, marketing, and customer service, resulting in increased revenue from factors such as more selling time available to sales personnel, higher average order sizes, and improved close rates for new leads.
  2. Second, eBusiness applications increase the productivity of the organization's sales, marketing, and service operations, thus amplifying the effectiveness of revenue-producing resources. Online self-service for routine transactions, for example, can dramatically reduce the burden on a company's call center, enabling the company to dedicate service agents for higher value transactions.

The bottom line of these financial impacts is a significant return on investment. Indeed, according to a recent report by AMR Research, "Customer-facing eCommerce and CRM (customer relationship management) investments have the potential to deliver among the highest returns in terms of traditional Return On Investment (ROI), as well as in terms of newer measurement models driven by competitive advantage and Return On Relationships (ROR)."

The report also notes: "Increasing revenue and improving customer satisfaction are the top two goals driving eBusiness investments, and CRM and sell-side eCommerce applications offer a higher ROI than any other software investments."

Research by independent analysts such as AMR Research, GartnerGroup, and others indicates that investments in eBusiness technology produce these dramatic returns by generating a broad range of specific, direct, and measurable benefits across all customer-facing activities.

  • A GE business unit implemented sales productivity tools, resulting in benefits that included a U.S.$20 million increase in sales volume, a reduction in cost of sales by U.S.$3.5 million, the freeing up of 21,000 annual selling days, and the opportunity to eliminate the bottom ten percent of the unit's sales force.
  • An aerospace company implemented product configuration software, which reduced the product configuration and proposal process from two months to two hours.
  • Another company implemented product configuration software, which reduced quotation time from three weeks to 20 minutes.
  • A financial services company implemented a Web online order management application, which reduced its order error rate from 45 per cent to 3-5 per cent.
  • A large retailer implemented an analytical marketing application, which generated U.S.$40 million in incremental profit and produced a return on investment of 265 per cent.
  • An automotive original equipment manufacturer implemented a marketing automation application, which paid for itself after only three campaigns.

Area of activity benefits achieved from ebusiness technology sales

  • increased selling time per sales representative
  • increased revenue per sales representative
  • shorter sales cycle
  • increased average order size
  • increased close rate
  • increased prospect-to-customer conversion rate
  • improved prospect targeting
  • increased revenue per customer (wallet share)
  • increment revenue gains from new channel capabilities (e.g., online sales)
  • reduced training costs
  • reduced sales overhead
  • improved team selling effectiveness
  • reduced costs for collateral distribution
  • increased order accuracy
  • decreased cost to manage partner / channel interactions
  • increased partner / reseller satisfaction
  • increased salesperson satisfaction
  • more accurate sales forecasting
  • more accurate and complete information to support sales managers
  • improved visibility into the sales pipeline

Marketing

  • reduced marketing campaign overhead
  • increased marketing campaign response rate
  • decreased cost to generate new leads
  • decreased cost to acquire new customers
  • decreased cost to identify potential customers
  • better, more detailed information on lifetime value of customers
  • faster cycle time to create, execute and analyze marketing campaigns
  • faster lead generation
  • improved ability to test campaigns (offers, lists, etc.)

Service

  • increased customer retention
  • decreased cost to retain existing customers
  • increased productivity of customer service representatives
  • reduced customer service costs
  • faster response times to service requests
  • shorter wait times for callers requiring customer service
  • decreased time to resolve service requests
  • higher rate of service issues resolved on first call
  • higher rate of service issues resolved on first field service visit
  • decreased rate of service issue escalation
  • extended customer service through 24x7 self-service options
  • increased customer service representative satisfaction
  • more accurate information concerning customer service operations

Benefits of investment

Research by GartnerGroup further corroborates the specific benefits gained from customer-focused eBusiness investments, citing the experiences of several companies in different industries:

  • A worldwide office furniture manufacturer implemented an application to automate the processing of requests for proposals (RFPs). Benefits included an increase in the company's capacity to process RFPs – from 12-15 per month to 60-70 per month – and an increase of 30 per cent in its win rate.
  • Dow Chemical implemented a comprehensive customer information management system, which produced a significant positive cash flow within 12 months.
  • Ford's fleet sales division implemented configuration software, which streamlined configuration and online order verification, reducing its order-to-delivery cycle by 1-14 days.

Improved productivity

As these examples demonstrate, organizations across a broad range of industries are deriving measurable benefits from eBusiness investments. In all areas of customer-facing activities – sales, marketing, and service – eBusiness technology enables organizations to improve both their effectiveness and productivity, resulting in increased customer satisfaction and significant financial returns.

Examples drawn from Benefits to Be Gained from E-CRM, by B. Eisenfeld and W. Close of GartnerGroup


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