Do Your Clients Get An Automatic Thumbs Up?
Compass On Business Feature

Are your customers always right?
It may depend on their ultimate value

If you walk into Stew Leonard's, a unique grocery store on the East Coast, you will immediately notice a sign engraved in stone. This sign, which represents the company's philosophy and is meant as much for its employees as its customers, highlights two rules. It reads, "Rule #1: The Customer Is Always Right. Rule #2: If the Customer Is Ever Wrong, Re-Read Rule #1."

A focus on customers is not unique to this company. For years, owners and managers all over the world have reiterated the need to focus on customers, provide them with good value and improve customer satisfaction. In fact, metrics such as customer satisfaction and market share have become so predominant that many companies not only track them regularly but also reward their employees based on these measures.

So how do business owners determine the value of their customers and how does that show up in policy and execution? How do you measure true lifetime customer value? Short-term profitability shouldn't trump lifetime value, but time horizons are becoming shorter.

"Just say no" and customer selectivity
In her memoir, My Life in France, Julia Child recounts a revealing customer service lesson she received while dining out with a friend in Paris. "Once, a French friend took us to a wonderful little café on the Right Bank and introduced us to the proprietress," Child recalls. "I've brought you some new customers!" our friend proudly said. With hardly a glance in our direction, Madame waved a hand, saying, "Oh no, I have enough customers already." While Child goes on to say that, "such a response would be unimaginable in the USA," conversations with company owners today reveal that the proprietress" huffiness notwithstanding, sometimes it can make good business sense to say no to a customer for both the customer's sake and the business".

"Insurance companies have long said no," says Dr. John Sibley Butler, a professor of entrepreneurship and director of the Institute for Innovation and Creativity at The University of Texas at Austin. "They tell you if they want you to be their customer, or not," he adds. Ditto for credit card companies and mortgage providers, who largely base their decision on whether or not to serve you based on your credit score. The financial stakes at hand justify these companies' customer selectivity, but only to a point, Butler points out.

David Kenney, the CEO of Efficient Forms, LLC, in Littleton, Colorado, has come up with a quid pro quo-type philosophy in terms of customer selection. "We believe it does not make sense to engage if the engagement does not benefit both the customer and our company," he says. "The quest for loyal customers can be a complicated, time consuming and expensive effort," he adds. We have taken a different approach. We believe the traditional customer loyalty program approach misses an important concept—the value of a customer to the company, and the value of the company to the customer."

Three-year-old, 30-employee Efficient Forms makes software that automates the process of filling out typically cumbersome and extremely detailed forms for customers like insurance companies. Contracts are typically complex and large-scale—involving hundreds of thousands, and potentially millions, of users—making any possible undertaking a big decision for both Kenney and his clients.

Even though Efficient Forms is young and eager to sign up clients, Kenney says he has already encountered instances where he has had to tell a customer "no." The requirements of one potential client, for example, were too small to justify automating them with Efficient Forms' software. "We determined it wasn't the best use of the customer's money to buy a Cadillac when a moped would do," Kenney concedes. What's more, serving this customer would not have advanced Efficient Forms' strategic agenda. "If we signed the customer, it would only have a dollar value associated with it and no strategic value," Kenney explains. "Don't get me wrong; profits are very important to us, and we must constantly be evaluating each opportunity based on the monetary and strategic rewards we will reap. The ideal customer brings a combination of both monetary and strategic rewards," he states.

This candid, honesty-is-the-best-policy approach has been standardized across the company and has numerous, quantifiable benefits, Kenney says. The goodwill it generates translates into greater customer satisfaction and retention. This, in turn leads to rave customer reviews and positive word-of-mouth, which in circular fashion, translates back into happier, more motivated employees, who become more likely to remain excited about solving customers' problems and keeping the positive process going.

One of the best things about this positive recurring cycle is it eliminates the need for gimmicks and incentives. "Our employees understand that the power of our technology applied correctly will change an industry. With this power comes a sense of pride from all employees; they realize that they are changing the way an industry does things and they take the extra steps, without additional incentives, to make sure the customer is heard and taken care of," Kenney says. Efficient Forms customer agreements always have a 30-day out clause, for example. "We never wanted to lock customers in if they were unhappy," Kenney says. So far, the company's historical retention rate is an impressive 96%.

A bird in the hand
Like David Kenney, Anne Stanton is an entrepreneur who has given a lot of thought to customer satisfaction and loyalty, particularly as they relate to time horizons. Thirty-nine years old and already a veteran of four startups, Stanton says that a recurring challenge for her has been the tradeoffs between long-term and short-term goals. "As an entrepreneur you struggle between the need to pay your bills, make payroll, take a decent salary and building your vision," she says. "There are huge conflicts between the long and the short term," and this can affect how one selects and values customers. She's convinced that where practitioners fall on this continuum completely depends on how long they have been entrepreneurs.

While in her 20s, for example, Stanton ramped up a discount guide company from her Harvard Business School dorm room as fast as possible. Shortly after graduating, she raised more than $20 million in funding, rolled the business into a dot-com and grew it to 200 employees—all within a period of six months. "My long-term view at that time was about two years," she confesses. The venture grew rapidly during the Internet Boom, but by 2001, in the middle of the dot-com bust and with needed funding scarce, Stanton ended up dissolving the company.

The day after liquidating the assets of that company, Stanton launched Enjoy the City in Birmingham, Alabama, which produces and distributes coupon books that raise funds for schools, churches, sports teams and civic groups. With more than 80 employees and distributors, 3 million coupon books in 80 markets throughout the U.S. and a projected $10 million in revenues for 2007, Enjoy the City is growing well by any measure. But Stanton, who now is the mother of two toddlers, says lately she has been making some short-term sacrifices for important customers for the sake of long-term viability of her company.

Recently for example, she signed a five-year deal with a large wholesaler with terms that were very favorable to this customer. "I could have held my ground and had them pay 50 cents more per unit," she says, which would have netted Enjoy the City an additional $500,000 per year. But she ultimately decided that pleasing this customer, who represents millions of dollars worth of business, was more valuable to the company in the long-term. The 29-year-old Stanton would have done things otherwise, but the decade-older version says she's "learned to give up some of the higher-number sales that achieve growth quickly and instead grow your business plan more safely and conservatively." She also has a new rule of thumb about an entrepreneur's definition of long term. "If you're an entrepreneur, pick a number and double it," Stanton quips.

Putting a Tangible Value on the Customer Relationship
John Nordstrom, whose grandfather founded the fashion retail chain that has become synonymous with exceptional customer service, loves to shock listeners with a business question: "What do you suppose it costs to go the extra mile for customers?" Nordstrom stores across the country feature live piano music, friendly and outgoing sales staff and a no-questions-asked, generous return policy for all of its merchandise. The additional cost of all of these perquisites? "Zero," Nordstrom answers. His point is that the pluses of such a policy—including good will, customer loyalty, motivated employees and brand differentiation from its competitors—far out weighs its costs.

So is the customer always right? The Nordstrom example notwithstanding, Jared Thompson, vice president of business development for ABCO Contracting, Inc., in Denver, isn't quite so sure. "There is certainly merit behind the motto, "the customer is always right," but much more so in a retail environment than in the construction industry," he says. In contrast to a static transaction like buying a Barbie doll, he suggests, construction is a dynamic industry where the rules of the game always change. "Being awarded a contract is just the beginning, with the actual sale of the final product bringing both the contractor and the owner through a fluid process that presents numerous challenges throughout the project." With a typical project ranging anywhere from one week to one year, "we are constantly selling the same customer every day during construction," he continues. "If we were to adhere to a strict policy that the customer was always right, we would simply be bankrupt by now."

Thompson describes the process of working with a customer over the life of a project as one of "constant negotiating, bringing about suitable solutions to problems for both parties involved." While this requires give and take, putting a value on whether or not to undertake this special dance is in fact crystal clear to Thompson. Since most of ABCO's business is generated throughout the bidding process, he notes, "We can actually put a tangible value on what a customer and their project is worth to us." ABCO, which has been in business for 20 years, assigns a risk premium to certain clients, includes that in its bid and also offers its best prices to its preferred client list. "These are the clients who are easy to work for, are fair when negotiating project changes, are proactive in their approach to the project, have schedules streamlined and most importantly, pay on time." Thompson explains. "In a cash-poor industry, the latter is very important and therefore we would rather just not have the work than wait forever to get paid."

Over the years, as it has grown, ABCO has increasingly factored macroeconomic trends into its customer valuation and selection. "Understanding the ebbs and flows of the market is crucial when determining how we value a customer's worth," he notes. "This certainly does not mean that we write off our customers who we feel won't be producing the same amount of business in the near term as they had for us previously; it just means that we keep our interests diversified in an attempt to hedge against fluctuations in the broader market."

One-stop shopping and customer satisfaction
The flip side of diversifying to hedge customer risk is to offer one stop shopping and aim to serve all customers. This is closer to the strategy chosen by Compass Bank, notes Rafael Bustillo, president, Denver. When we work with clients, we want to offer them the entire spectrum of services, Bustillo says. Compass Retail Banking division targets individual consumers, as well as small businesses. Its Corporate Banking caters to mid to large sized businesses. While it segments out different size and type customers, it doesn't try to overly determine which of the bank s services any particular customer may want. Loans may be of equal interest to the individual consumer, or the large corporate client, for example. Compass tries to educate all of its customers about its entire range of services from loans, deposits and treasury management, to insurance offerings, to wealth management services and more.

To gauge customer satisfaction, Compass Bank relationship managers sit down in face to face meetings with their clients annually, or more frequently as needed. "What could we improve?" and "Tell us about your needs for the coming year," are typical topics of discussion. Invariably, the more services a customer uses, the more satisfied he or she is, says Bustillo. This is why Compass strives to be a one stop shop where we can offer all financial services to our clients, he says.

Opinions expressed are those of the author(s) and do not necessarily represent the opinions of Compass Bank.

February 2008