Friday, November 18, 2005

True loyalty does not require bribery

Companies should strive for monogamy, not polygamy

One day, just for grins, I decided to do a test. I wanted to know how many “loyalty cards” I had in my wallet. Here is what I discovered: I had 19. Now, if all of these cards were for different categories of products, I’d be telling you a different story. However, they aren’t. I had cards for five different restaurants, five different airlines, three different hotel chains, two different driving ranges and a few miscellaneous ones. In the world of “loyalty”, I am more of a philanderer than a loyal monogamist.

What is loyalty anyway?

To be loyal is to feel a devotion, duty or attachment to somebody or something. Yet, with 19 cards in my pocket, how “loyal” am I? When I fly to Atlanta, I am likely to use my Delta card. Yet, when I fly to Boston, I fly JetBlue. Am I loyal? I don’t think so. Would the industry describe me as loyal? Again, I don’t think so. Then, why do we insist on calling the card in my wallet a loyalty card if it doesn’t make me loyal? I think the better term would be to call it a bribery card because that is how it is perceived and used. The airline provides an incentive, a bribe, that if I buy from them, they will give me some undeserved benefit – such as a free ticket. I willingly accept this incentive. However, I am not sure it materially changed my mind as to which airline I would fly. I fly enough that I can get tickets on multiple airlines.

Why does corporate monogamy matter?

Many industries are zero-sum games where any gain in sales is 100% at the expense of another brand. Every time a company can win a sale, they win twice. First, they gain the profits from that transaction. Second, they keep the competitor from having the profits from that transaction. In flat markets, growth is always at the expense of the competition. Also, monogamy is a sign that customers truly value the services you provide more than they do the competition. When value is high, customers are more likely to share their positive opinions with others, lowering sales and marketing costs and improving overall marketing effectiveness. It acts as a virtuous cycle.

Conditioning the customer

These so-called loyalty cards are a very negative tool for most businesses as they tend to de-value, not build corporate value. An analogous example would be the use of coupons. After decades of using coupons to drive sales, P&G, the giant consumer package goods company realized that couponing was hurting the brand and devaluing the products. Therefore, they moved away from using this technique. They realized it was merely a price discounting tool. The couponing conditioned the customer to wait for the special. The same is true with loyalty cards. We are conditioning the customer to expect some reward simply for buying their service. This builds costs into the system and doesn’t build as much brand loyalty as would be expected. It is merely a price discounting method.

Where does true loyalty come from?

We are loyal when we feel connected to a brand, a service, a product or a company. When we value what they do or stand for. Yet most companies don’t know how to engender this connectedness. We build value when customers experience a result, a level of service, etc. that exceeds their expectations. Therefore, in order to exceed expectations, we need to uncover what they are first. Once we know the customer’s expectations, we need to shape them in a way that makes it possible for us to exceed them.

Thursday, November 17, 2005

Stop comparing the ideal scenario

My VERY SMART friend Raj Setty has it right when he says "It is good to compare to an ideal scenario when the objective is to improve and perform better. However, most of us carry out this comparison to complain or to feel miserable."

Unto Death Do Us Part

In this article, Computing Business columnist Bryan Glick got it wrong. Unfortunately, he's not alone.

Here's the traditional view of loyalty creation: Find out what the customers expect and give it to them. Sounds simple. But, let me paint two pictures. First, this assumes the expectations are economically possible to exceed. Second, that exceed those expectations will result in sustained loyalty.

The problem is neither of these assumptions are necessarily true. For example, cell phone performance is up 174 times over the last 20 years, yet customer loyalty is extremely low. Walker Information did a study recently that found 31% of wireless buyers are at risk of switching. Obviously, something is amiss. The problem is customers expect land-line performance from their cell phones - which is economically and politically (cell towers, etc) challenging to deliver. That is why the INDUSTRY, not just one company is facing the problem.

The second assumption is exceeding expectations will result in sustained loyalty. The problem with this idea is it presumes customer expectations are static. They aren't. In the study we just completed, we found that improvements in performance don’t always lead to loyalty and retention. We learned that half of those people who expect to switch IT outsourcing brands in the next three years currently believe their service is staying the same or getting better. Moreover, we found that 13% of those customers who expect they will switch vendors if performance stays the same over the next two years are from customers who are satisfied with their vendor’s current performance.

Forcing people onto what we call The New Feature Treadmill (to be discussed at a later date), will only lead to fatigue and frustration. Sound like how you feel? Well, now you know why.

The Soup

Over the last several days, we have been talking with executives involved in IT Outsourcing about our recent release. What is astounding to us that these executives don't consider it news that less than 40% of customers expect to be with their primary vendor three years from now. Not news? They already knew this and don't seem concerned?

What ???

Yes. It's true. In each discussion, we received ho-hum, yeah...we knew that...kinds of responses. Like this news wasn't news to them. We were shocked. And still are. Dave and I started to talk about it more and we think the underlying problem is what we call "The Soup."

"The Soup" is where we live. It is our environment, our circumstances. We live in "The Soup" so we don't see that we and the soup are separate. Ask a fish to descibe water. They can't - it's just there (also they don't speak very well). However, because they don't live in "The Soup", outsiders can see it for what it really is - a smelly, hot environment that will get you eaten up if you stay in it.

This is where the IT Outsourcing firms are right now. They have no awareness that they're living in "The Soup." As outsiders, we can see they are in trouble. Come on, only 38% of current revenues are safe! This is trouble with a capital "T". Yet, don't we all fall into the same trap? Don't we all become unaware of or comfortable with the status quo in our own environments. To loosely paraphrase the Bible, "How can you say to your brother, 'Let me take the soup out of your eye,' when all the time there is soup in your own eye?"

Wednesday, November 16, 2005

Commoditization is on the rise

We just released a study of IT Outsourcing customers and found that only 11% of these customers see their current, primary IT Outsourcing vendor as highly differentiated or unique. This is an astounding figure given the investments these companies are making in people and systems. Most executives are misguided as to how to combat their rising commoditization. They could benefit from a reading The Paradox of Excellence, our new book on the topic.

People who want to read the entire press release can find it at IT Outsourcing Press Release

Tuesday, November 15, 2005

Credit Card Solicitations Reduce Brand Value

What is it with these credit card companies and their sponsor brands? Don't they see they are hurting their brand image? I have always been fascinated by this. After I graduated from UC Irvine, the first 5 communications I got from the school were all credit card solicitation requests. What value did I have for UCI? I was a piece of data to be sold to the highest bidder. Not an alumni who might give money at some point.

All kinds of companies are on this bandwagon. My smart friend Mike Kelly, CEO of Techtel ( and I were talking about this today. Undesired credit card solicitations are not benign communications - they are negative communications. Every time we receive these communications, we think less about that brand. At home, my wife and I receive almost two solicitations every day. Ask my wife what she thinks of Chase! I can't image what kind of investment that company would have to make to restore their tarnished image in her eyes.

Today, I received a solicitation from Nordstroms thanking me for being a valued customer. So valued, they sold my name to a third party credit card company (wasn't even for a Norstrom card). What does that do to my feelings about Nordstroms? Don't bet they went up. One of the key ideas behind The Paradox of Excellence, our new book, is this notion having positive, brand-reinforcing communications, not continuously bombarding customers with negative experiences.

You'd think they would have learned by now. Guess not.