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Don't treat your customers equally Add to ...

When juggling new clients, or simply balancing between current accounts, companies often fail to prioritize the right customer. They focus on the squeakiest wheel, or just default to the biggest client, rather than the customer with the greatest long-term potential. Or worse, they strive to treat everyone equally.

In fact, when a small firm has one or two customers that promise to dwarf the others, tough decisions need to be made. Ian Gordon, a principal at Convergence Management Consultants in Toronto, believes small businesses balancing competing accounts shouldn't attempt to treat all their customers the same, even though he admits this may sound like heresy.

"Some clients are just vastly more important than others," he says. He cites the example of a printing company that landed a large, fast-growing customer. The printer opted to cultivate the relationship, offering this one customer a range of new services that produced a tenfold increase in revenues, says Mr. Gordon. "They treated that one important account as a market."

Ian Gordon works for Convergence Management Consultants Ltd. , and helps companies to develop strategies to accelerate their revenues and build more profitable customer relationships. Over the past twenty years, he has consulted with owner-managed, family-owned and publicly-traded companies in sectors such as technology, financial services, manufacturing, distribution, retail and not-for-profit, as well as governments and industry associations.

Mr. Gordon took your questions Tuesday afternoon.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Matt Frehner, globeandmail.com: Hi Ian, thanks for joining us today. Let's get started.

In your opinion, where does customer service rank in the list of factors influencing purchase decisions? I know it may be impossible to generalize, but if a client was trying to figure out selection, pricing, customer service or location, where does customer service fall in that list of key considerations?

Ian Gordon: As you rightly suggest, purchase criteria do vary according to the industry sector within which the company participates, and it is vital that companies understand - and measure - what factors determine customers' purchase decisions, as well as the company's positioning in respect of these criteria. It's not hard for smaller companies to do a small survey or focus group to identify criteria and their ranking. The important thing to recognize is that customers buy on value, and sometimes customer service will be an important part of that, and sometimes not -- say when price is key when visiting the local big-box mass merchandiser.

Having said that, in many markets, product or service differentiation has declined over the past number of years, so that companies are perceived as providing customers with more or less similar value. In an environment where goods and services are almost commodity-like in nature, small differences can mean a lot to customers. All else being equal, better performance in respect of any one purchase criterion -- including better customer service -- should keep customers, build loyalty and drive increased sales. The problem is, many companies are doing their best to provide customer service excellence so focusing here may no longer be a game-changer in today's marketplace but a necessary activity to at least be in the "strategic set" from which customers make their purchase selection decision. Still, there are opportunities in some marketplaces where products are similar but service could be a lot better -- companies listening to their customers will know if their firm falls into such a category.

Rather than thinking about customer service, it is important that companies think about customer relationships. Service is what a customer receives at the time of the transaction. A relationship is built one transaction and interaction at a time to keep customers, grow the value of the connection over time and get referrals to other customers. That is, a focus on relationships rather than transactions can help build profitability over time. Many companies say they focus on relationships but few have plans to actively improve the quality of their relationships and measure the improved business performance that comes from deeper relationships that attract, retain and develop customers. And as the old saying goes, without a plan, any road will get you there.

globeandmail.com: It may be fairly easy for most companies to identify their biggest customers - the ones who spend the most money - but how can identify their best ones? It may well be the client who spends only a little now, but who could scale up considerably in the months and years ahead. Your thoughts?

Ian Gordon:Yes, customers who spend a little now and could be more important in the future could be considered strategic accounts or customers. Strategic customers might also merit focused attention for other reasons, such as because of their referral network or because they help the company test out new products. While essentially all companies understand the profitability of their products or services, fewer understand customer profitability below the gross margin line. The opportunity for many companies is to start identifying the cost of serving customers that are not always allocated to customer profitability such as late payments, lengthy communications and bad debts. Sometimes it turns out that customers that looked to be quite profitable are actually not. The key is to differentiate among customers according to their lifetime value, the margin they represent and the cash flow they generate.

An interesting opportunity for many companies is to categorize their customers as "best", "average" and "worst" and decide how to manage each group to improve profitability. A major retailer has trained their sales force to identify customers as "angel" or "devil" customers so that they focus their sales time on customers entering the store who are likely to engage in the highest value transactions, while steering sales time away from customers that are disruptive -- say customers who buy products, take off barcodes, apply for rebates, return the original product for a refund, and then come back to the store to buy the returned product off the sales table.

Of course, knowing which customers are best, average or worst starts with knowing who your customers are -- that is being able to identify them by name and their previous interactions and transactions with the company. This usually means applying some technology for customer purposes. From this starting point, customers can be differentiated from one another according to the current and potential value they represent to the company, leading to the formulation of customer-specific plans to make the relationship mutually rewarding for both the company and the customer.

While every business should be prepared to respond to profitable opportunities, opportunities remain for many companies to proactively allocate their time to serve their best customers and seek out other great customers who have many of the characteristics of their best customers.

globeandmail.com:If you know that a customer service experience has gone badly awry, how can you best rectify it? Where do you draw the line between making amends and sacrificing too much?

Ian Gordon: Complaining customers are not necessarily problematic but an ineffective approach to complaint resolution might be. There is much research to show that complaining customers who have their issues effectively addressed become more loyal.

Now, because most businesses have been trained that the customer is always right, there is often an expectation on the part of customers that they are entitled to effective issue resolution, whether they are right or wrong. The fact is, only the right customers are always right and this goes back to the issue of categorizing customers according to whether they are best, average or worst for the firm. The best customers generally would not complain unreasonably -- after all, they've been categorized as "best" in the first place and this categorization would likely have considered the frequency and duration of the complaints, and the costs to remedy. On the other hand, customers who are complaining unreasonably and who might be considered to be in the "worst" customer category, might merit treatment that is less costly for the business, even if it puts the connection at risk. This is not to say that any custom of merits anything other than dignified, respectful treatment, but the objective of the resolution may be quite different for good customers than for bad. For example good customers who complain should have their issues attended to in real-time or near real-time. The longer the complaint festers, the more problematic it becomes. And a company might choose to fix a "best customer's" complaint even if it makes that particular transaction unprofitable because, over time, other transactions will more than offset this. Bad customers might meet with less success in achieving high-value outcomes for unreasonable complaints. And whatever decisions are made, they always need to be in the context of the company's integrity, fair treatment and marketplace positioning -- it's just that good customers might merit going out of one's way to keep them satisfied.

CN from Canada writes: Is there a danger in focusing the majority of a company's resources on one or two customers? What is the right balance between focus and diversity?

Ian Gordon: Well, there can be significant danger in focusing on just one or two customers. Obviously, if your business is completely dependent upon a single customer or two, their failure or unreasonable requests can make your business unprofitable or even challenge its survival in these uncertain and volatile times.

Everybody would wish to have a balanced portfolio of valuable and strategic accounts but quite frequently, especially in business-to-business marketplaces, the portfolios of accounts are unbalanced and companies have to make do and prosper with the few key accounts they've already got.

This means making sure that connection with these few valuable accounts is not only carefully managed, but has some sort of formal governance and mutual expectations in place - in case small problems become big ones and don't lead to termination of the relationship. In addition, the challenge is not just to manage the existing relationship but to constantly renew it. This can mean joint planning -- working with the account and sharing mutual plans so that the supplier is prepared to serve the new areas the customer is working on -- and also treating each area within the target account as a separate and distinct marketplace.

By catering broadly to its key customers, it's common that the company broadens its scope of service and the relationship becomes more complex. Complexity makes it hard to unravel and leads to a better appreciation of mutual interdependence. It can also make the total relationship more profitable for the supplier, because new areas are usually more profitable than mature ones. It's also important to think about blurring the lines between where your company ends and they begin. One engineering firm, for example, has located their engineers on site at the customer so it's hard to tell which engineers work for the customer or the supplier.

When relationships are one-sided, especially when a supplier wants and needs the relationship more than its key customer does, business continuity can be perpetually threatened and relationships may be weak. Over time, companies usually do need to find new accounts that can become just as significant as some of its largest present accounts. Sometimes, there can be material factors inhibiting growth through new account development. This may be the case when a company has been substantially dependent on a single account for a long period of time and has aligned its processes, people and technology in support of the account. Some sales forces in these situations are better at taking orders than getting them.

globeandmail.com:What is the single biggest mistake companies make when it comes to customer service?

Ian Gordon: I don't know if there is one single big mistake but there can be a number of things companies don't do when it comes to customer service. Hopefully companies pay attention to customer service in the first place - if they don't, there are obvious implications. But less frequently, companies don't think of customer service as part of relationship management, and so, without relationships as a touchstone, every customer is treated as though they are equally valuable.

As suggested previously, each customer should be treated within the context of the value of their relationship with the enterprise as well as the reasonableness of their request. Many companies spend heavily on training their staff in customer service and this is usually an appropriate to focus. Now the interesting opportunity is to be able to differentiate among customers and treat each one uniquely, if at all possible.

This means much more than being friendly or greeting customers with a smile; it means that the company ought to help their front-line personnel with technology as well as tools and techniques to engage with each customer effectively. Many companies have focused more on efficiency when it comes to customer connections -- such as how many calls the call centre completes -- but the opportunity is to be more effective -- connect for longer with valuable customers, ask useful questions, listen to them, and track their responses in a database so customers can be profitably managed in the future. Of course, this makes most sense in industries where a relatively small percentage of customers represent much demand, but in more fragmented industries such as mass-retail, more focus should be placed on engaging customers in real time and managing each one effectively so, at the very least, they get what they came to buy. And much more focus should be placed by most companies on measuring customer perceptions and, because even satisfied customers defect, going beyond customer satisfaction measurement to other metrics that focus on relationships and likelihood to recommend.

GG from Ontario writes: Mr. Gordon, I'm not sure that any business can afford to brush off any customers in the current economic environment. Just look at the way Air Canada has rediscovered the value of customer service as WestJet gains ground.

Besides, how does a small business owner decide that a customer does or does not have "long-term potential" if he or she doesn't spend a decent amount of time with that customer. Today's "unimportant customer" could be a much bigger player down the road -- just look at the success of so many entrepreneurs who started small and grew. If I found myself on any company's B-list, I would go to some other company that valued my business. Isn't good customer service a key to survival these days?

Ian Gordon: I would rather not engage the specifics around Air Canada and WestJet but you do raise good questions about customer selection, especially considering the economic climate in which we find ourselves.

Profitable business is good business at any time, and that would apply particularly at the present time. I'm certainly not suggesting that companies brush off customers or that they should ever or in any circumstance treat them poorly. But there is a difference between being proactive in pursuit of building valuable relationships and growing the value of customers and responding to less valuable customers.

I think it's a useful question for companies to consider what a great customer and relationship would look like, and then think of these customers as core to the future of the enterprise. After all, we are seeing in this economic climate that physical assets do not necessarily drive wealth creation and that the most important predictor of the company's future success is the relationships it enjoys with valuable customers.

Would it be a good idea to size the enterprise to core accounts or key customers rather than have production or sales capacity geared to a product or service? Would it be a good idea for the company to consider whether "bad" customers in the context of its present business model might be "good" customers in the context of another model? For example, could price-sensitive or low-volume customers be served over the Internet while service sensitive customers receive more personal treatment?

You say that you would go to some other company that valued your business if you perceived you were on their B-list, and I can understand why you would want to defect in that circumstance. The question is, would a company be better off in the long term to organize around valuable customers and know the individual needs of each important customer so that service, communications content, media and even product can be tailored to that important customer. Other customers should never see themselves as being on a B-list -- there's no reason for this. There are many examples of companies that have grown their businesses dramatically by narrowing their customer focus and sometimes broadening the scope of what they provide rather than seeking to grow the business exclusively through product focus. As I've suggested previously, customer service, while important in many marketplaces and usually necessary, may not be a sufficient differentiator to drive improved business results. We shall see what happens in the airline industry.

ML from Toronto writes: You're approach is very pragmatic Mr. Gordon. But how would you respond to the idealist who insists that all clients deserve to be treated equally, regardless of their value (either short or long term) to the company?

Ian Gordon: Thanks for the friendly comment and I understand the place from where you come. Clearly, the public sector at all three levels of government and in Crown corporations has a duty and obligation to treat everyone equally. But elsewhere it's not unreasonable to distinguish among customers to treat each one uniquely -- this applies in most business sectors, not-for-profits, and even political parties.

To my mind at least, it is as idealistic to create new and mutual value for individual customers as it is to treat everyone equally. If every individual can have their needs met by the company according to what each customer considers to be important, presumably each individual - and in aggregate everyone - will be better off.

Of course, this depends on the company's customer selection and focus decisions, and, as you say, not every customer will receive equal treatment from each enterprise. But I don't necessarily regard this as a bad thing. Those customers that are not core to an organization will over time choose suppliers that address their individual needs better. There is a real potential that this approach will result in more complete attainment of the Marketing Concept for society as a whole. Customer differentiation - and mass customization of interactions, transactions and customized and personalized products and services, for example - can help enable this.

Matt Frehner, globeandmail.com: That's all the time we have. Thank you, Ian, for taking the time to talk with our readers today.

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