I met you last week, at a conference. I decided to write this for you. You’re not alone. It’s not only you who will benefit. My gift to you is a top-to-bottom analysis of how growth is misunderstood. It’s not a generic gift. Most of us can tell the difference between a gift that meets an obligation and a carefully thought out gift that was meant especially for you.
Business Growth 101
Marketing and sales are responsible for customer acquisition but not customer experience. They persuade prospective customers to buy products and/or services. This is where most companies focus on growing their business. It’s a mistake.
The Cost of Acquisition (CAC) is critical. Add all the costs spent on acquiring customers. Then divide by the number of customers acquired in that period. For example, if ABC Company spent $100,000 on marketing in a year and acquired 1,000 customers their CAC is $100.
Gross Margin is the percentage of profit that remains after paying costs. If gross margin is 40% and ABC Company’s average sale is $500 their gross profit is $200,000. It costs them $100,000 to generate $200,000 in new sales.
Every responsible business owner and executive worries about CAC and Gross Margin.
Peter F. Drucker wrote, “The purpose of business is to create and keep a customer.”
Creating a new customer is fundamental. It’s sexy.
And keeping a customer is also fundamental. It’s not sexy.
Customer retention, keeping a customer, gets less attention. The actions companies take to reduce the number of customer defections aren’t celebrated.
Customer lifetime value (LTV) predicts the profits of the future relationship with a customer. Customer retention directly affects lifetime values. If ABC Company spends $100 to attract a new customer it makes a $100 in gross profit on the first transaction. If they make $100 every month for five years they make $6,000. The longer the relationship continues the better the Return On Investment (ROI).
Customer equity is the total of lifetime values of all your current and future customers. It’s the sum total of all the value you’ll ever realize from customers. Customers create all value. Customer Equity is the same as the “going concern” value of your business.
Value of a Business = Customer Equity + (Assets – Liabilities)
Transactional vs. Relational Buyers
Every person has a transactional mode and a relational mode of shopping. Transactional buyers are those whose greatest fear is paying too much for something. They love the shopping experience. They will shop many companies and sites in search of bargains.
They aren’t loyal to any brand or business, they seek only the best price.
Relational Buyers’ greatest fear is buying the wrong thing. They see shopping as part of the cost of the purchase.
They seek out expert help and pay a premium for trusted guidance. They rely on relationships, with brands and people, to help them make choices.
Every person has a transactional mode and a relational mode of shopping. So don’t be surprised when you see yourself in both descriptions. You are extremely transactional in certain product and service categories. You’re also wholly relational in others. At any given time and in any given category, about one-half of all shoppers will be in transactional mode. The other half will be in relational mode.
Shoppers in transactional mode will shop everywhere. They love to negotiate. Businesses often conclude that most shoppers are in transactional mode, because they are so much more visible and vocal. But in truth, more purchases are quietly made by customers in relational mode.
Customer Acquisition Cost is dependent on Customer Retention
Consider that Amazon Prime customer visits convert to sales 74% of the time. They spend 3-5x more than non-Prime members. Approximately 60% of North American households are Amazon Prime members.
Can you see the impact that focusing on retention can have on acquisition costs?
Focus On Customer Experience For Sustainable Growth
The Rockefeller Corporation study found that 68% of customers leave because they believe that companies don’t care about them.
Bain & Company surveyed 362 firms. They found that 80% believe that they deliver a “superior experience” to customers. When they asked customers, they report that only 8% are really delivering.Bain & Co. calls that the “delivery gap”. We call that tragic!
Now take a look at this:
When it comes to growth, customer experience clearly matters!
Now, let’s be generous and give that 80% of executives the benefit of the doubt. They genuinely believe that their companies are customer-centric Nobody ever argues when we explain the Four Pillars Of Amazon’s Growth.
These are Amazon’s four unifying principles.:
1. Customer Centricity,
2. Continuous Optimization,
3. a Culture of Innovation and
4. Corporate Agility.
What Gets In The Way? Think of the following as the four disunifying principles.
An Organizational Focus– keeps them from Customer Centricity. Internal teams are focused on their own team’s “performance”, not the customer’s reality
Risk aversion—maintaining the Status Quo— keeps them from Continuous Optimization. People don’t perceive their process as broken
A Competitor Focus—watching the industry leaders—keeps them from having a Culture of Innovation. Companies see themselves relative to competitors but not relative to the gaps in customer expectations
Misplaced Accountability—the need to place blame—keeps them from Corporate Agility. Internal teams meet or exceed their internal benchmarks but that data doesn’t reflect the customer’s’ reality
Intentions Matter, But Actions Speak Louder Than Words
We judge ourselves by our intentions, but customers judge us by our actions. Judging yourself by your intentions isn’t a danger among friends. A friend knows your heart. But it’s a very real danger in business. What happens when a prospective customer makes contact with your company? Do they meet your best employee on that employee’s best day? Of course not. They meet an average employee on an average
Or worse, they meet a below-average employee on a below-average day. And then you are confused by those negative reviews.
Sad, isn’t it? Your intentions and motivations and personal commitments never quite made it to the party.
You have a growing business. But it could grow more quickly.
You need to know your customers better. Recognize that customers have their expectations set by companies not even in your category.
As a leader, there are a lot of demands on you. It’s hard to prioritize and maintain a long-term focus when the urgent disrupts the important.
Instead of focusing on only on growing sales, competitors, technology or all the changes in your marketplace we’d like to help you focus on the things that won’t change. You can build healthy sustainable growth if you focus on your customers’ priorities. Please believe me. If you deliver a great experience, maintain a reasonable margin, stay focused on your priorities then growth is inevitable.
The sales team is having a hissy fit. They proclaim we’re 11% ahead of goal and we’re in the slow season! Why are you making life more difficult for the sales team? This change project is unrealistic! None of our competitors do better than us! It’s not broken, why fix it?
There’s a disturbance in The Force.
Ten seconds into our call I hear that Chuck, our client who owns a thriving $28 million business, is shaken up. We’ve been working together for almost three years. It’s not the first time we’ve met resistance to what the organization calls The Customer Rules Initiative.
In almost three years we’ve rolled out eleven important changes and dozens of small improvements. The Customer Rules Initiative has helped our client grow beyond their expectations.
Chuck is second guessing his twelfth change. The pushback on this change project is almost as hard as the first project where we decided to put all the information a customer needed on the website. The sales team was in open rebellion. They couldn’t imagine why anyone would call if we answered all their questions online. They were wrong then, they’re wrong now. Being wrong is human, acknowledging it and pushing beyond it is hard.
How Do You Stay On Track?
My job is to remind Chuck why the Customer Rules Initiative matters. First I listen. I listen for about half an hour. This has the desired calming effect.
I remind him of his favorite quote: “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” – Sam Walton
Chuck is listening, that’s good. The problem is real. We have to fix it.
Chuck is committed to what we teach as The Four Pillars of Amazon’s Success:
Culture of Innovation
If you’re a growing company it’s hard to argue with any of them. Intuitively every business owner knows they need all four pillars, they are unifying principles.
Chuck’s the guy that pointed out that The Force that propels this flywheel is Customer Centricity. The gap between customer expectations and customer reality is what needs to inform change.
The Force = Customer Centricity = Caring about the customer’s perspective
What Caused The Disturbance In The Force?
After almost three years of continuous improvements, why don’t they just trust us? If it were only that simple.
We came up with the twelfth change the first month we engaged. We’ve been putting off taking action on it since then.
A few months ago while visiting with Chuck and his senior executives at an offsite retreat we needed to print out several documents. The hotel couldn’t accommodate us. Bryan, my business partner, ordered a printer using Amazon’s Prime Now. Less than an hour later we were printing.
Bryan decided to point at the elephant in the room. We can get a printer here in an under an hour, why exactly can’t the sales team always respond to an inquiry within two business days? What do your customers expect?
Sales Team Response Time
In our first draft of our Buyer Legend, the narrative originally read that the customer was delighted because sales team responded in four minutes. That draft was abandoned. Two business days was substituted. They didn’t know their actual response time but anecdotally we estimated it averaged 2-4 days. We didn’t win this battle but we did insist on compliance with updating Salesforce. We now know that they respond to 87% of leads within two days. Of course, there are automated emails that are intended to follow up.
Yet, customers are human. Humans want what they want now. Not later, not even in five minutes. We want it now!
A New Goal – 5 Minute Response Time
After a long discussion, we agreed to tackle the twelfth change. We agreed that customer expectations could be unrealistic but we could meet that challenge. It helped that this time we had internal data to back us up. Leads that were reached by phone the same day closed a little over 3x the leads that took more than a day to respond to. Leads are expensive! We also reminded them of The Lead Response Management Study by Professor Oldroyd, a Faculty Fellow at MIT.
The new buyer legend says: “John (the prospective customer) is delighted because the inquiry was responded to immediately. John says “if they respond that quickly to an inquiry I bet they do that for customers too.”
Let’s examine why this change makes sense based on the unifying principles of Amazon’s Four Pillars Of Success:
Customer Centricity – immediate response is what the customer wants and expects
Continuous Optimization – be better today than yesterday is always the way towards our new goal
Culture of Innovation – find solutions and embrace change to improve customer experience
Corporate Agility – work to become more nimble and react to changing customer expectations
The Sales Team Rebels
This change is what the sales team was up in arms about. They missed the part where the sales coordinator, a new position, made the call answered a few questions, asked a few questions to qualify the prospective customer and scheduled a follow up with a sales person.
What we had was a failure to communicate. Chuck assumed the sales team reread the Buyer Legend carefully. The did not. Crisis averted.
Publishing a new Buyer Legend means employees scan quickly for changes. There are always minor changes highlighted but major ones are deliberately not. That is supposed to encourage careful reading.
Disturbance In The Force A Post Mortem
There are four forces that pull against the unifying principles of Amazon’s Four Pillars of Success:
Maintaining Status Quo
We could call them disunifying principles.
Let’s examine how they almost derailed the twelfth change:
Organizational Focus – the sales team metrics were focused on their own team’s “performance”, not the customer
Maintaining Status Quo – the sales team didn’t perceive their process as broken
Competitor Focus – the sales team saw themselves relative to competitors but not relative to the gap in customer expectations
Misplaced Accountability – the sales team was exceeding sales goals, an internal benchmark, but that data didn’t reflect the customer’s reality
Happily Ever After?
The sales team was asked to reread the Buyer Legend and some minor edits were made and agreed upon. The twelfth change is underway and initial results are positive. We’re nowhere near the 5-minute goal but our motto is #BeBetterToday. Nearly every lead is having a conversation within the same day as their inquiry. The hero of a Buyer Legend is always the customer. Chuck is unshaken in his faith that when he takes the customer’s perspective things work out well in the long term.
Shep Hyken interviews Bryan Eisenberg co-author of the book, Be Like Amazon: Even a Lemonade Stand Can Do It.
Shep Hyken’s opening comments focus on how any company can improve their customer service, by thinking about how they can become more convenient for their customers. The reason that Amazon has become so successful is that they have developed a way to create customer convenience. Shep gives an example of how, in areas where Amazon offers two-hour delivery, a product could arrive at your home faster than the time it would take you to drive to the mall to purchase it.
Shep begins the interview by asking Bryan Eisenberg about the four secret ingredients to making a great presentation, which are:
1. Provide entertainment – tell a story.
2. Present a Big Idea.
3. Give the “How to’s.”
4. Give the audience or the reader the hope that they, too, can do it.
Bryan continues his “rule of four” by telling you exactly how you “can do it,” by discussing the four unifying principles of how to successfully run your business:
1. You must be customer-centric.
2. You must have a culture of innovation.
3. You must be agile. Execute, test and fail quickly, so you can keep learning.
4. You must continually optimize by shaving costs and adding value.
• Don’t “water the soup.” Putting a little water in the soup may give you more soup, but it takes away from the great taste. It’s not smart to do things that produce an immediate profit if what you are doing isn’t in the best interest of the customer.
• Don’t think short term. An example Bryan gives is when Starbucks payment system went down, they gave away the coffee. Most coffee shops would have shut down until they could take payment for their coffee. But, not Starbucks. They knew the cost of free coffee was better than losing customers – and it showed how committed Starbucks is to taking care of their customers.
Bryan Eisenberg is the co-founder of BuyerLegends. He is the co-author of the Wall Street Journal, Business Week, USA Today and New York Times bestselling books “Call to Action”, “Waiting for Your Cat to Bark?”, “Always Be Testing” and “Buyer Legends.”. Bryan is also a professional marketing keynote speaker.
Shep Hyken is a customer service and experience expert, best-selling author and your host of Amazing Business Radio.
You can read Bryan Eisenberg’s contribution below:
Plan A Customer Journey That Is Channel Agnostic
Charlatans are endemic to all forms of marketing but they are especially attracted to digital. I’d like them to go away but there is always somebody willing to buy what they are selling.
ALL business is becoming digital!
Connected customers engage in many ways (foreseen and unforeseen) with brands in and out of stores, offices, call centers, social media, catalogs and websites.
Those customers don’t care what channel they interact with or what department gets the credit. Customers think of every interaction with a brand as THE brand experience.
Then they happily share the best and worst of those experiences. Wonder why customer experience isn’t what most CEOs focus on for differentiation?
Customer satisfaction and customer experience appear not to have budged at all.
According to Bain & Company, 80% of surveyed companies claimed to be delivering a superior customer experience, but only 8% of those companies had customers that agreed with them. What a dangerous blind spot!
That leaves an awful lot of companies actively disappointing customers while smugly congratulating themselves on their “superior customer experience.” Couldn’t be you, right?
Most companies don’t have a map. They haven’t mapped out the customer journey, either in terms of what it is now, or what it ideally ought to be. And without that map, they can’t plot the data to determine what’s actually happening — or what they ought to do about it.
Jeff Bezos said it best “If you’re customer-focused, you’re always waking up wondering, how can we make that customer say, wow?
We want to impress our customers — we want them to say, wow. That kind of divine discontent comes from observing customers and noticing that things can always be better.”
Why do so few companies bother to plan and then validate the buyer journey with accountable metrics?
Is it inertia?
“We often miss opportunity because it’s dressed in overalls and looks like work” – Thomas A. Edison
Or perhaps it is…
“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” – Andy Grove
There is some hard work on your business involved. There is the careful navigation of people’s territories, channels, and silos, There is the inherent career risk that comes with greater accountability.
There is also a great opportunity. Plan a great experience, deliver a great experience and then improve on it. That is a challenge all businesses face. Some will live up to that challenge and most won’t.
My son Zack went to Tennessee to carve a rocking chair.
He’s into that sort of thing.
When all is said and done he is going to have hours and hours and a couple of thousand dollars invested in his chair.
You can buy a rocking chair at most Cracker Barrels for less than $200.
The man teaching the class made the observation that if they actually were interested in selling their chairs … they couldn’t sell a chair.
They were selling ART.
And when people buy ART … they are buying the STORY that is wrapped around it.
What does this have to do with AMAZON?
When I went through the article I thought … Amazon is selling the stories in the books with stories about the books.
They are providing a satisfying way to find a book that fits amidst the almost limitless number of books you can get.
That Bezos’ guy is a clever guy.
Tom Grimes is a clever guy too. He recognized why Amazon will succeed in retail. Amazon’s is showing that curation and presentation remain the primary reasons for retail to exist. They’re just showing the world what happens when bookstores go through a digital transformation of the customer experience.
What retail categories do you think are ripe for digital transformation?
Customer-centricity is like “excellent customer service” — everyone thinks they’re doing it, few actually are.
And one reason for that is that there are right and wrong paths to pursuing customer-centricity. Her’s a quick chart of the three most prominent wrong paths vs. their right path counterparts:
The first “wrong path” towards customer-centricity is taking customers’ (or worse, unqualified prospects’) spoken wishes at face value.
In other words, relying solely on surveys of potential customers as insight into “what the customer wants” is a bad idea. You might expend company resources creating exactly the offer people say they want, only to watch all the actual, paying customers actively choose someone else when it’s time to buy.
Businesses that achieve epic success through customer centricity take great pains to “see their customer real.” We’ll get into depth on techniques for this in my next post, but it involves tracking actual data on customer actions and understanding the context of buying decisions.
The second “wrong path” is to focus on the Peripherals at the expense of the “Hard Stuff.”
Imagine a dentist who focuses on being customer-centric by improving his waiting room with more comfortable furniture, a cappuccino machine, fast & free wi-fi, and plenty of power charging stations. That’s a focus on peripherals.
A focus on the hard stuff would be finding a way to reduce wait time to (nearly) zero.
The difference between peripherals and “hard” items is that
Peripherals change with the times, hard stuff does not, and
Hard stuff has the power to make peripherals irrelevant
The factors that make a better waiting room change with the times; for example, better magazines have given way to wi-fi. Whereas reduced wait time is always desirable, and a significantly shorter wait time makes the quality of the waiting room irrelevant.
The third “wrong path” is to over-focus on optimizing existing processes at the expense of re-engineering and innovation.
It’s a good thing to optimize the customer interactions you have in place now. But if you’re not looking at what customers really want — at an ideal interaction, unconstrained by current technology or operations requirements, — you won’t be able to innovate and invent on the customer’s behalf.
You could find ways to optimize the cash register or check-out experience for your store. by speeding up the check-out, keeping more registers open, automatically opening new registers when wait times exceed a certain number of minutes, etc.
Or, you could take advantage of new technology to re-engineer the shopping experience to render the cash register obsolete. Amazon Go‘s new offline store’s payment is handled via tracking and recording what you put in your cart and your card is automatically charged when you walk out the door with your stuff.
So what paths are you taking towards customer-centricity?
This is a post about false accountability and the worship of quantitative idols. Companies looking to be innovative face a dilemma. Policies and procedures that make them efficient at execution also stifle innovation.
On day one a startup is flexible until it discovers its business model and establishes a goal. On day two a mature company organizes around that goal and measures the efforts to reach the goal. Then they strive to find the most efficient ways to reach that goal. They create processes to make execution repeatable and scalable by employees.
These KPIs and processes, which make companies efficient, also impede agility.
That’s a question Ijustgot at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.
“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”
To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.
I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?
Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.
Jeff Bezos is once again describing the Four Pillars of Amazon’s Success:
Culture of Innovation.
Every business (B2C, B2B and others) can make Amazon’s Four Pillars work for them. Leaders can use Amazon’s Four Pillars to refocus on what never changes. Amazon’s Four Pillars help you look beyond data about your company’s performance. They help you see the data that reveals your customer’s reality.
Examine whether what you measure is what you most value
George Eastman organized the Eastman Dry Plate Company in 1881 under four unifying principles:
Keep the price of the product low so the customer will and more uses for it.
Always sell by demonstration.
Be the first to embrace new technologies.
Listen to what the customer tells you.
In 1976, Eastman Kodak sold 90% of all the camera film and 85% of all the cameras in America. By 1988 they had more than 145,000 employees worldwide, and in 1996 they had 16 billion dollars in annual revenue and a valuation of $31 billion. In 1975 Kodak’s Steve Sasson invented the digital camera, they patented it. In 2012 Kodak went broke because they decided they were in the camera film business. That was the result of abandoning their unifying principles in favor of the false accountability of their KPI’s.
What if Kodak had pioneered digital photography? What about they listened to their customers? What if they decided that instead of how many units of film they sold their measure of success would be how many magical moments customers captured?
I certainly hope you are measuring and optimizing the right things.
We can speak at your event. Our fees are $20,000 in North America, and that includes travel. International fees are $20,000 plus business class travel, from Austin, and lodging. Contact us to discuss your event
We kick-off the workshop with a two-day onsite visit. We help you create the Four Pillar foundation for your organization. The entire process takes between 4-8 weeks and the typical investment is $30,000 – $100,000.