Even when times are good and the livin' is easy, senior executives must struggle with a complex array of asset management challenges. Executives are tasked with developing and deploying the right tools to measure and manage the company's assets in order to create real shareholder value.
Chief among these management tools are the systems required to gauge and grow the relationships a company has with its customers. In fact, "customer loyalty" was cited as the top management challenge in this year's Conference Board survey of 506 CEOs. And that was before the latest market downturn and the intensified focus on maintaining margins -- which is one of the clear benefits of a strong tie between a company and its customers.
Taking the customer's pulse
Although many companies measure their customer relationships, all customer relationship measures are not created equal. The real strength of a customer relationship derives from more than mere "satisfaction." Satisfaction reflects a degree of stated happiness with a current choice, but it says little or nothing about the customers' feelings about alternatives. Brands rated No. 1 in "customer satisfaction" aren't always No. 1 when it comes to actual repurchase rates.
Analysts at The Â鶹´«Ã½AV Organization have found that single-item overall satisfaction measures don't provide a very powerful link to actual customer retention or to growth in sales, in share or in profits. Loyalty indices that combine attitudinal satisfaction with behavioral intention measures are much better indicators of business outcomes such as these. Satisfaction is only part of the puzzle. Measuring satisfaction isn't wrong, but it provides an incomplete measure of a customer's attachment to a product, service, or brand.
Many companies have mistakenly emphasized only the rational attributes that appear to underlie the customer relationship. These companies view the customer experience as a sort of simple, linear combination of individual controllables: Clean bathrooms and hot hamburgers. Service in less than five minutes. Answering the phone in three rings and stating the customer's name. Folding the sweaters and keeping the dressing rooms neat.
Companies dwell on such activities not because they have a proven relationship to important business outcomes, but because these objective service features lend themselves to regular monitoring (compliance audits) and to processes that promise consistency in customer contact. Lacking reliable metrics, companies have overlooked what is difficult to measure, focusing instead on that which is easy to manage.
But in turbulent economic times, the search for the "right" customer relationship measures takes on fresh urgency. The search for tools that can help anticipate future market conditions in time for managers to take corrective action is particularly challenging. In fact, the search for these kinds of powerful management tools is the Holy Grail of business management for the new millennium.
The missing linkage
Â鶹´«Ã½AV research has shown that there is an essential ingredient in any customer relationship -- an ingredient that companies have typically overlooked when attempting to assess the strength of their customer relationships. This ingredient can be reliably measured. This critical component is the emotional connection or "attachment" the customer feels for the product, service, or brand.
Â鶹´«Ã½AV's most recent research, conducted among more than 3,000 customers in six different product and service categories, has revealed a customer engagement metric (CE11) that reliably taps the strength of the emotional connection between company and customer.
Is emotion important? It is, indeed -- for banks and hotels, for airlines and autos, and for credit cards and department stores. Customers who are emotionally bonded to the brands they use -- who are "fully engaged" -- pay companies back in important ways. They give a hotel chain two-thirds of their total business, instead of just a third. Their total banking relationships average $9,000 per customer more than their less engaged counterparts. They return more often, they spend more, they share their experiences with others -- and they stick with the company longer. Fully engaged customers make for powerful profit performance.
To market, to market
Companies that have forged strong emotional bonds with their customers reap additional benefits that would bring joy to any stockholder. The stock values of such companies appear to be better insulated from the impact of severe economic fluctuations. In contrast, the stock values of companies whose customers are less emotionally invested appear fragile in the face of market volatility.
Companies whose products, processes, and people deliver excellence at every touchpoint of customer contact are simply less vulnerable in the marketplace. These companies exhibit resilience, and this "stress resistance" translates into an ability not only to withstand transient economic downturns, but also to maintain consistent levels of market capitalization in the longer term.
To examine this issue, Â鶹´«Ã½AV researchers analyzed the CE11 Customer Engagement scores for 17 companies. These companies compete in five different industries -- airlines, automotive, mass retail, consumer electronics retail, and online retail. Our research compared each company's CE11 scores to the change in the company's stock price from its closing values on September 10, 2001 to its closing value after the market close on September 17, 2001 (the first full day of trading following the September 11 terrorist attacks).
The results of this analysis were astonishing. CE11 scores captured from customer surveys conducted one year earlier (during August 2000) proved to be powerful predictors of each company's vulnerability to this significant market fluctuation. The higher the company's August 2000 CE11 score, the smaller the percentage decline in the company's stock price on the day the markets reopened. In fact, the correlation between CE11 scores and stock price change on September 17 was a whopping 0.70.
For example, Southwest Airlines, whose CE11 score of 4.06 (out of 5) topped the airline industry in Â鶹´«Ã½AV's research, suffered a 24% reduction in its stock value. In contrast, United Airlines, whose CE11 score of 3.21 (out of 5) was the lowest of any company measured in Â鶹´«Ã½AV's research, suffered a whopping 43% reduction in its stock value on September 17. Lest we be too quick to conclude that the magnitude of United's stock decline was simply the result of it being one of the two airlines (along with American) directly involved in the September 11 attacks, it is worth noting that neither United nor American suffered the greatest percentage stock losses among the major U.S. carriers. Four other airlines (including Delta Airlines) posted declines that were significantly larger than either American's or United's. For example, Northwest Airlines, whose CE11 score of 3.28 was also among the lowest of the companies measured in Â鶹´«Ã½AV's research, suffered a 37% reduction in its stock value on September 17.
Interestingly, the damage done to Southwest's stock on September 17 was about half that suffered by its seven largest competitors (whose stock declines ranged from roughly 37% to 65% and averaged 47%). Moreover, as of this writing Southwest has yet to reduce either its schedule or its workforce as all of the other major U.S. carriers have been forced to do.
Subsequent analysis revealed that this effect was not simply due to the negative impact of terrorist attacks on airline stocks. When airlines were removed from the analysis, the strong effect, although somewhat attenuated, still emerged for automotive and various retail companies. And when we examined historical stock performance, CE11 scores were also significant predictors of stock price changes stretching as far back as September 2000.
The customer speaks. Are you listening?
Do the company's customers ultimately control the fate of the company's stock? Yes and no. Whether a company engages its customers or leaves them ambivalent -- or, in some cases, antagonistic -- certainly helps determine whether those customers will continue to patronize the brand. That has a clear and direct impact on the company's bottom line.
But there is more to the story. Customers' expressed emotional connections to the brands they use represent an important reality check on the true "health" of the brand. These emotional responses measure how well each brand delivers on its most basic promises and reflects the extent to which it is building long-term relationships with its customers. Customer perceptions are thus an essential bellwether of future company performance. Some would say that markets are driven by emotional reactions. Â鶹´«Ã½AV's research suggests that customers are, too. And companies would be wise to pay close heed.