Does Losing a Customer Matter?

"There is nothing more vulnerable than entrenched success." - George Romney

When a company loses a customer, is it important to understand the reason?  Is business ever so good that it doesn't matter?  Although these seem like ridiculous questions, I've had a few instances lately where companies knew they lost me as a customer and did not ask me why I was taking my business elsewhere.

I recently switched my television service from one provider to another.  When I called to cancel my service, I was told how to return my equipment but never asked why I was canceling.

In another instance, the virus/spyware subscription for my computers was within a month of expiring and the developer, for some reason, decided to renew my subscription (and charge my credit card) without my consent.  I do not like this tactic and, after consistently using their product for several years, decided to call them to complain.  After being on hold for about ten minutes, the recording said that any product can be refunded via their website within thirty days of purchase.  I connected to a representative via the live chat link on their site, canceled my subscription, and asked for a refund.  I was given the refund but not asked why I canceled.

Do They Care?

When I thought about it, there were actually several similar instances over the last few years when a company knew I stopped doing business with them but did not ask why (e.g., newspaper subscription, internet service, web hosting, etc.).  The first thought that came to mind about these situations was that business is going so well for these companies that they truly don't care when they lose a customer.


Although this may be the case for some companies, I'm guessing that the most common reason for the apparent lack of concern over losing a customer is related to resources.  Companies are so thin these days, and, to keep costs down, call centers are so focused on meeting volume targets and time-per-call metrics that there is no time to ask customers why they are leaving.  Combined with the disconnect between marketing, sales, customer service, and quality, and the ability to collect - much less do anything with - the information becomes virtually impossible.

It's Important But Not Difficult

It's always important to know why a company loses a customer.  The companies referenced above were actually lucky because they knew I was leaving.  In most industries, it's difficult to know that a company is losing customers until business has dropped so much that it's difficult to turn things around.

It is absolutely critical - and not necessarily difficult - to know why customers are leaving, and the customer service representatives are in a great position to collect the information.  It should not take too long to ask the question, listen to the response, and check a box on the screen to classify the issue.  With little effort, a company can begin to collect extremely valuable data regarding trends and high-level issues that its customers are having.

Have companies like the ones mentioned above learned nothing from the experience of the U.S. automakers over the last 30 years or so?  No company is so successful that it can afford to lose touch with its customers.  Since the effort may take an extra one-to-three minutes of a call center agent's time, however, some companies may not see the value in such an exercise.  And to be honest, if the company is not going to take action in response to the data collected, they're probably right.

The World of Fashion Evolves

Designs Aren't the Only Thing That's Changing in the Apparel Industry

According to a story in the July 16 Wall Street Journal (link), the apparel industry is facing a number of challenges that are affecting the entire supply chain.  After three years of excess inventories and idle labor, companies throughout the industry are taking steps to reduce the risk of similar exposure in the future.  Instead of reinventing themselves, though, it appears that the companies are dealing with the changes by attempting to push the risk to their customers and/or suppliers.

When industries face a changing environment, companies throughout the supply chain need to work together to respond to the change in a positive manner.  The immediate reaction to drive risks to customers or suppliers has effects that, although not immediately visible, have longer-term effects that are destructive to everyone involved.  It does not help a company to improve its own profitability at the expense of its suppliers or customers.

The New World of Fashion

Among the issues faced by the apparel industry include:

• Smaller orders placed by retailers to test demand before committing to larger runs;
   
• Increased material, freight, and labor costs;
   
• Delays in ramping up production capacity because of a lack of confidence in long-term demand.

If smaller runs and increased costs sound familiar, it's because these are issues that have been faced by many industries over the last 30 years.  Change happens in every industry, and those companies that are flexible and able to adapt to (or drive) the changes quickly will be the most successful in the years ahead.

The Focus Still Needs to be the Customer

One of the problems I noticed from the information in the article is that the impetus for change within the industry is profitability rather than the consumer.  As has been proven over and over again in business, changes made without regard to the end customer can have devastating effects.  While a focus on value can increase profits for the company, a focus on profitability will not lead to increased value for the customer.

Two key areas that companies in the apparel industry need to investigate in order to survive and grow in the years ahead include:

1. Lean Manufacturing  Smaller production runs require improvements in quality, setups, and changeovers.  Lean (when done correctly) gets everyone focused on eliminating the waste that forces longer leadtimes and larger lot sizes.  Lean will also address the issue of increased labor costs;
    
2. Closer Factories  Increased freight costs and leadtimes will force retailers to have production capabilities closer to the point of sale.  Although oil prices have leveled out since the initial drop at the start of the recession, it is only a matter of time before they start rising again.  As a result, the benefits of having factories in areas with low labor costs will be offset by increased freight costs.

In an industry that thrives on change at the consumer level, one would think that the fashion retailers and producers would have no problem adapting to changes themselves.  Unfortunately, this does not appear to be the case.  The environment has changed and, as has been the case in so many industries over the years, it's time for a new business model.  The sooner the apparel companies realize this and make the necessary changes to adapt, the sooner they can once again turn their designs into financial success.

When Cost Cutting Becomes the Focus

The recent media coverage regarding the Gulf oil spill has reminded me of countless industrial accident and product recall news stories over the years that point in some way to misplaced cost-cutting as a fundamental cause of the problems.  The scrutiny that results from a major incident, however, tends to highlight the companies involved as if they are the exception when, in fact, arbitrary and misaligned cost-cutting is much more common in business than many realize.

It Happens Everyday

I have seen many examples throughout my career where attention was focused much more on cost-cutting than providing value.  In one instance, I was contracted by an energy company to help improve their processes for project planning and execution.  After spending time with some of the people involved in projects, however, it became obvious that the problems were not related to the skills of the employees or the processes and systems used for projects.  The problem was directly caused by an excessive focus on costs.

There had been so much emphasis throughout the company on cost-cutting that people worked as if the company's purpose was to control costs instead of producing oil and gas.  When conflicts arose between cost and production, cost won out every time.  There was virtually no analysis regarding the benefit of getting a well operational ahead of (or even on) schedule.

In another example, a plastic products manufacturer regularly missed its deadlines for new product introduction due to cost overruns.  The company had strict earnings targets and had gotten into the mode of, what many in the organization referred to as counting paperclips.  High-level meetings, as well as measures and rewards for managers, were heavily focused on meeting cost targets.  Because of this, whenever a product development project fell behind schedule for any reason, no consideration would be given to providing additional resources to get back on track.

Value as the Driver

Several years ago, study published by McKinsey & Company showed that a new product introduced on-time but with a 50% cost overrun negatively impacted profitability from the development by 3.5% as compared to a 33% loss in profits for a product introduced six months late but within budget.  There are obviously a lot of assumptions associated with the study, but the point is that getting investments - whether in new products or operations - to produce more quickly is beneficial to the company, even if it involves additional expenditures.  I believe the same philosophy applies to oil and gas producers as it does to product manufacturers.

The most successful companies focus on improving the value their processes provide rather than cutting costs.  Improving in this context does not mean finding shortcuts.  If value is the driver, improvement refers to reducing waste (i.e., anything that does not add value).  If only cost is emphasized, there will be a tendency to cut corners and implement changes that reduce costs without consideration as to the effect on quality, safety, or cycle time.

Value, Value, Value

Getting into a cost-cutting mode most likely occurs because it is much easier to focus on cost reduction than it is on increasing value.  Business leaders need to remember, though, that increasing value is what leads to success.  When the company focuses on continually improving the value it provides, it becomes much easier to keep costs under control.

Instead of a Layoff

Those who have read my book, articles, or blog posts know that I do not believe in laying off employees to cut costs.  The long-term damage to the organization resulting from a layoff often outweighs the short term savings in payroll costs (see exhibit 1)

I will admit, though, the last few years has shown that the complete collapse of a company's products or services can dictate drastic cuts as a means for survival.  The questions that need to be asked before implementing something as destructive as layoffs include:  (1) how long do you expect the downturn to last; and (2) has everything possible been done to prevent a layoff.  In other words, a layoff should never be among the first cost-cutting steps.


Even during the last few years, the worst economic period since the Great Depression, there were several well-known companies that did not layoff employees.  Scottrade, AFLAC, Devon Energy, and The Container Store are among the organizations that have never implemented a layoff.  Imagine the loyalty and trust created within these companies by resisting headcount reductions during such a severe downturn in business.

Everyone has a stake in the company.  When a company has a history of layoffs, though, people feel powerless, disconnected, and expendable.  The organization's leaders send a very clear message that employees are not important when jobs are cut in response to a crisis.

Some of the steps every company should take before considering a layoff include:

1. Shortened Work Week:  Although akin to a pay cut, a shortened workweek forces everyone to participate without the loss of jobs.  Also, receiving time off helps compensate for the reduction in pay;
    
2. Unpaid Holidays:  Similar to the shortened workweek, implementing unpaid holidays allow more flexibility in choosing the extent and timing of the cut back;
    
3. Hiring Freeze/Attrition:  Although an obvious step, I have worked with companies that laid off in one part of the company while hiring in another.  Any positions that are critical to fill should be done by transferring and training existing employees;
    
4. Elimination of Bonuses:  Nobody should receive a bonus during a period that people were laid off.  I was in a meeting several years ago with a large division of a Fortune 100 company where managers decided to implement a layoff in order to protect their bonus accruals - a totally unacceptable action;
    
5. Elimination of Dividends:  In spite of what many people believe, the resulting damage to the organization caused by a layoff does not protect shareholders.  By protecting its workforce, companies are actually actually protecting future returns for shareholders.  Studies have shown that companies that resist deep cuts during downturns recover much more quickly than competitors (in terms of earnings and share price);
    
6. Focused Kaizen Activity:  Improvement activities should be focused entirely on reducing costs (while improving or maintaining existing quality levels).  Kaizen activities focused on cost reductions will prevent employees from being idle during downturns and assure that the savings achieved will be sustained once business returns;
    
7. Pay Cuts:  As a last resort, pay cuts should be implemented to save jobs from being eliminated.  I believe in implementing across-the-board percentage cuts with executives being asked to volunteer a larger percentage.

When people see that company leaders are doing everything possible to navigate a crisis without layoffs, they will become much more motivated and engaged in the organization.  The espirit de corps that results will make the company stronger and ready to take advantage of the recovery much more quickly than others that opted to cut workers as an initial step.

The Power of Marketing

Does your company have a marketing function?  Do the people involved in it actually do marketing?

I continue to be amazed at how few people in business truly understand the concept and value of marketing.  In many organizations, marketing activity consists of nothing more than handling the company's advertising, website, and product literature activities.  This is unfortunate because of the huge potential that marketing can have on the company's overall success.

What is Marketing?

Companies are in business to create value for customers and, because of this, they can't succeed without effective marketing.  Marketing enables an understanding of the customer's needs to determine the type and mix of products or services that will create value.  In effect, the more effective marketing is performed, the more successful the company will be.

Marketing has the potential to have an enormous impact on the organization.  It drives sales by aligning the product or service offering to the needs of the market.  It drives manufacturing by providing direction on cycle times, inventory levels, and target costs.  It drives new product development by providing information on what customers want and need.

Buried in the Organization

One sign that a company may not understand or value marketing is having it lumped into the sales function.  Often a company will have a "Sales & Marketing" department that is mostly (if not completely) staffed with salespeople.  I have worked with companies in the past where people were actually hired into "marketing" positions, only to have their responsibilities gradually shifted toward sales.  This is unfortunate because marketing drives sales - it is not the other way around.

I have also worked with companies that, except for advertising or promotions, had no marketing function at all.  Marketing strategy in these companies weas informal and inconstant.  And these were not small companies - one in particular had revenues of almost $1 billion.

When a leader does not understand what marketing encompasses, he or she will not see the value of having one or more full-time people responsible for marketing (unless, as mentioned above, those people are involved in advertising or promotions, which can produce fairly quick results).

It could be the inability to easily measure the effectiveness of marketing that keeps it from getting the emphasis it deserves.  Other functions like manufacturing, procurement, engineering, and sales are much easier to evaluate with traditional measures (although, as I have argued in previous posts, many of these "traditional" measures are ineffective and, in some cases, destructive).

A leader should never get so hung up on measures that an activity is not given proper focus.

Marketing Needs to Drive

Marketing is not just another function.  In fact, it is so critical to the company's success that it really needs to be elevated above "functional" status.  Rather than burying it deep inside the organization, it needs to reside at the highest level and drive the company.

Placing marketing at the organization's highest level will assure it has the authority to influence all aspects of the company's operation.  Organizationally, marketing should provide direction to operations, sales, and product development because of the direct impact it has over each of these functions.  Since this would be too much of a change for some companies, the idea of separating marketing from sales and elevating it to the senior executive level should at least be considered.

Continuing to ignore the importance and power of marketing will hurt the company and keep the business from ever reaching its full potential.  Without the development and implementation of an effective marketing strategy, any level of success achieved will be short-lived and the company will forever be in the shadows of the likes of Apple, Samsung, Pepsi, and others who understand how to use marketing to achieve success.

Television Advertising: The Internet's Next Victim

"[Companies] must be prepared for major change in the future, and you must start now.  If someone else's revolutionary innovation catches you unawares, you must abandon what made you successful and take an entirely different course immediately." - Peter Drucker (1973)

I'm continually amazed at the way the internet has changed - and continues to change - the world of business.  Many of the changes appear to happen fairly slowly and are not readily apparent until well after the shift has occurred and left companies that didn't see it coming in serious trouble.

Lately, I've noticed a change in advertising that is affecting ad agencies, producers of consumer products, and television networks.  The internet is providing virtually free access to existing and potential customers - a situation that with the exception of a few isolated instances, had never before existed.

Seeking Out Commercials

Companies are starting to take their ads to sites like YouTube and, if successful, can reach millions of people for free.  As an example, a recent Coca-Cola Happiness Machine ad has had almost 2.4 million hits since being uploaded.  And since people are actually seeking out this video (and others like it), it's really falls into the category of indirect advertising, because it entertains as much as it sells.

This situation has many implications for those involved in making and airing commercials.  Television networks now face a serious threat that will most likely put downward pressure on rates for air time.  Advertisers now have somewhere else to go to air their commercials and, although the ads have to be creative and produced well enough that people will want to watch them, the money saved in airtime charges can more than pay for extra production costs.

For the television networks, it can mean a serious hit on revenues in the future, which is one of the reasons that has led to the battles between the networks and television subscription providers.  The networks can not count on ad revenues into the future to cover their costs and meet earnings targets.  To make up for lost future revenues, they are asking for more money from the subscription providers that want to carry their channels.  To read a blog post on the increasing tensions between the networks and subscription providers, click here.

Length No Longer An Issue

Another result of the birth of indirect internet advertising is that it no longer limits commercials to 30 or 60 seconds (the Coca-Cola video runs 2:03).  Fashion house Donna Karan has produced a "mini-film" entitled, Four-Play with Christina Ricci that is really nothing more than a 2:09 commercial.  The ad, which has not (and was never intended to) run on television, has had several hundred-thousand hits on a variety of fashion websites since its "release."  This type of advertising is becoming very popular in the fashion industry.

A final thought that comes to mind about this situation is the fact that it's much easier for advertisers to track the number of views its commercials are getting.  Television ratings services and subscription providers can report the number of television sets that were tuned to a particular station at a particular time a commercial aired, but there is no certainty that people didn't walk off or even paid attention during the commercial.  The growing use of DVRs has also made it very easy to skip ads to get back to the show.  When someone hits a video on the internet, on the other hand, it is pretty well certain that they are watching it.

Staying Ahead Of The Curve

Although it has been reported recently that television ad rates have returned to pre-recession levels, there's no telling what lies ahead for the networks.  One thing for sure, though, is that the television advertising industry is changing.  Just like other changes that are occurring - or will occur - because of the internet, it's vital for companies to pay attention to the world around them and be extremely sensitive to the subtle shifts that without warning can turn into whole-scale changes to the business environment.  And as fast as things are changing in today's world, falling behind is not something that a business wants to do.

Call Center Focus: Serving or Selling?

There was an interesting article in the June 7 WSJ [link] about efforts to improve the quality of service provided by call centers.  My first reaction was "it's about time" as the article described efforts by some businesses to emphasize the quality of service more, and the quantity of calls handled per agent less.  As I read on, however, I concluded that some companies still don't understand the concept of customer service.

Focusing on the Wrong Lever

I spoke at a call center conference in Europe last year and was disappointed - although not really surprised - to learn that the industry's main (and virtually only) focus continued to be cost-cutting with little or no emphasis on quality.  The main topic of my presentation was related to increasing competitiveness by focusing on higher quality services at lower costs than their customers (i.e., the companies that contract their services) are able to do themselves.  The basic premise of the talk was, if a call center established a clear and consistent purpose, took care of and invested in its team members, continually improved its processes, and focused on its customers (those whose calls they handled), it would dominate the market.  Based on my personal experiences with call centers as a consumer since the conference, however, I don't think my message was accepted.

I don't totally blame the call centers for this misplaced focus.  These companies have responded to pressure from their direct customers to continually reduce the price of service, and have been forced to cut costs or die.  In Portugal, for example, the entire industry has been under attack by competitors in low cost countries where wages are lower.  The reduced prices offered by competitors is resulting in a loss of business for Portuguese companies on a daily basis.

Whatever internal problems the industry is facing, though, I can't think of anyone who hasn't had at least one frustrating encounter with a call center agent.  In fact, according to the article, 68% of people surveyed had stopped doing business with at least one company in 2009 because of poor service.

As I read the article, I did find it refreshing to learn that some companies are starting to understand the link between customer service and increased business.  As an example, in an attempt to increase customer loyalty, American Express has begun shifting the focus of its agents toward the level of service provided rather than the quantity of calls handled.

Do They Really Understand?

Most people do understand that financial benefits to a company are the result of customer satisfaction.  Statements in the article about increased loyalty leading to "a bigger share of the patient wallet," and increasing call center resources to upsell or "retain customers and sell higher-priced services," however, made me realize that many companies still don't comprehend the importance of, and reasons for, taking care of customers.

Looking at it as a simple cause and effect relationship, the cause is making customers happy and the effect is increased revenue.  Like any cause and effect situation, however, one cannot focus on the effect.  Attempts to increase business will not lead to happier customers and, therefore, will not result in actually increasing business.  High pressure sales tactics from call center agents will not satisfy customers who call, but judging by some of the comments in the article, it's clear that satisfying customers is not the objective of some of these companies anyway.

I can't imagine how angry a customer will get when an agent listens to his or her problem and responds by attempting to sell more of a company's products or services.  The situation could get downright ugly.

Internal or External to the Company - It's Still a System

One of the biggest problems with call centers is that they are often operated as separate entities from the business.  The producer or service provider causes the problems for customers that the call centers are expected to resolve.  When I asked several people at the conference about feeding information about the problems encountered back to their customers, I was told that it was not normally done (to be fair, I only talked to a small percentage of the conference's attendees).  During the discussion, I found that there is often so much pressure to process calls that no valuable information is recorded and fed back to the business to prevent similar problems from recurring in the future.  This practice results in losing a significant amount of valuable information for problem-solving.

Whether a company handles its own call center or contracts it to an outside agency, it is still a valuable part of its system.  Although call centers need to take responsibility for satisfying customers who call with problems, the real improvement comes from providing a higher level of quality in the first place.  The better the quality of products or services provided by the producer, the lower the volume of calls to the call center, making more time available to handle those who do call (provided that lower volumes do not mean laying off agents).

If Only . . . 

To be fair, some of the companies referenced in the article do seem to understand that better customer service from call center agents leads to more satisfied customers which, in turn, leads to more revenue for the company.  Others seem to think that skipping steps will lead to the same results.  Unfortunately, these companies will probably find out the hard way that it won't.

The more I learn about call centers, the more I wonder where we would be today if the obsession all along had been with quality improvement rather than cost-cutting.  My guess is that there it would mean a significantly fewer number of people in the world needing blood pressure medication.