Atticus White Paper

[Or –A treatise on Unicorns, the Alchemists Stone and Loyal Customers]

Legend has it that before the flood Unicorns roamed the earth, they were fierce, independent, beautiful to behold and impossible to tame. Only rarely did they give their loyalty to humans and when they did it was always to an innocent virgin. Despite these difficulties Unicorns were highly prized for their fabled ability to bring enduring prosperity and eternal happiness to those whom they befriended.

In the Middle Ages alchemy was a respected science. Alchemists, sorcerers and soothsayers were mainstream businessmen who ranked alongside pardonners and priests in the ranks of the professional classes. Alchemists spent most of their time and energy in a fruitless search that spanned the centuries, trying to find the ‘Alchemists Stone’ which could turn base material into untold wealth.

So if Unicorns are extinct and the Alchemists Stone remains undiscovered, what sure-fire thing is left that will make a fortune for a budding entrepreneur?

Well according to all the gurus the answer is Loyal Customers. The problem is that for many businesses, consistently loyal customers have become as just as elusive.

Put very simply Loyal Customers are the Unicorns of the third millennium, as they wander the world electronically, independent of suppliers, fierce in their decisions and impossible to tame. They alone can ensure an ongoing flow of orders, cash and profitability to anyone who is running a business. Finding and sustaining them is the alchemists stone for every business that wants to continue trading.

Loyal customers spend more, contribute more to profitability and cost less to manage than any other category of customers.

Why are Loyal Customers so valuable?

	It costs 5 times as much to win a new customer as it does to retain and service existing ones [Jan de Soet former KLM President]
	If a customer’s repurchase rate from her supplier is 80% then the length of the relationship will be 5 years. If the repurchase ratio is 90% then the length of the relationship will be 10 years [Elling & Jorgensen]
	This means that if the repurchase rate increases by 10%, the duration of the relationship is doubled and so are the number of sales, the income, the cash-flow, the margin and the profit
	Put another way if the repurchase ratio rises from 50% to 90% then the turnover from this ‘Loyal’ customer goes up by 377% [ibid]
	Ford found that satisfied customers are twice as likely to repurchase the same make of car and three times as likely to return to the dealer who sold it to them.
	Reducing customer defection can boost profits by up to 85% [NOP Survey]
	In a typical medium sized company bad customer service, translated into customers switching their buying elsewhere, can result in lost revenues of £1.8bn over 5 years and lost profits of £267m.[Henley Centre]

There are endless reasons why customers switch to other suppliers. New products become available, competitors offer discounts or special promotions, new entrants break into the market and so on.

In addition the impact of customer service is critical. 97% of ‘Multiple Switchers’ [those changing major suppliers more than 5 time a year] said that they would not tolerate poor customer service. 75% of people who switched suppliers once said that they would be likely to do so again [Ventura Study]. And a Forum study showed that customers are 5 times more likely to switch suppliers due to poor service than for price or product reasons.

It seems extraordinary but there are some businesses where the potential impact on profits of customer service has been recognised but the commitment to do something about them is lacking.

4,000 managers in Europe, Japan and the USA, representing 60% of world output and 50% of world trade were surveyed. 90% thought that customer service would be more important over the next 5 years; 80% believe that it is the key to competitive success and 92% see it as one of their personal responsibilities.

However, only 50% think it is a clear and accepted priority in their business.

The view that customer service is not an accepted priority is supported by specific findings:

	Only 51% of organisations eliminate bureaucracy that gets in the way of customer service
	Only 50% prepare regular reports on customer satisfaction
	Less than 50% provide any service training for their staff

W Edwards Deming could have been referring to this short-sighted approach when he said

The plethora of loyalty cards in the retail market is evidence that many organisations are taking the issue of customer loyalty seriously. Indeed, some guru’s views on micro marketing via customer loyalty data-warehouses are quite scary. From what they predict it would be easy to imagine a future which would bind the customer so tightly to the supplier, with invisible bonds, that the result would make Orwell’s 1984 predictions seem positively attractive.

Entrants for the Management Today/Unisys Annual Service Excellence Awards are clearly obsessed with providing excellent service to their customers. And recent winners TNT Express Delivery Services and Birmingham Midshires Building Society provide clear examples of organisations that achieve the standards that they set for themselves.

But the standards are constantly rising. Things that seem exceptional when they are introduced, are quickly copied by competitors and rapidly become the entry level standard for mere survival. The Columbus Ohio based banking company is promising to refund fees, in cash, to customers who are dissatisfied with customer service. How long before this becomes standard practice throughout the industry?

GE Capital Mortgage Insurance Company has introduced a streamlined approach that simplifies routine mortgage insurance procedures for lenders. This is part of their ongoing programme to simplify business processes by listening to and working with customers and making GE easier and easier to ‘Do Business With’. How many other businesses already have this as one of their objectives?

Toyota Motor sales USA has embarked on a strategy to transform Toyota into the industry benchmark in customer satisfaction and loyalty. They analysed industry trends and as a result have launched 20 initiatives to improve the way Toyota and its dealers interact with customers, in every step from shopping to ownership. But once that benchmark is set we can be sure that other businesses will seek to match it and improve upon it.

Because the link between customer loyalty and profitability has been clearly established, the ability to generate and sustain customer loyalty is a potential alchemist's stone. There is evidence that many organisations have recognised this but seem unable to get their organisations to focus effectively and consistently on customer loyalty.

Conversely there is evidence that many businesses are addressing the issue energetically and creatively. In so doing they are setting new performance levels that will become the entry-level standards for their own and other industries, and they are trying to do this within a matter of months, judging by the epidemic style spread of loyalty cards!

The criticality of developing and sustaining loyal customers is growing ever more rapidly because other factors are making most markets virtually ‘perfect’. Products are increasingly becoming commodities and the spread of electronic commerce makes it possible for almost any customer to shop freely around the world and to bypass much of the historic supply chain. When performance and price are indistinguishable and when global suppliers are available at the click of a button, differentiation gets to be difficult.

Experience of working with our customers has led us to develop a new way of predicting and measuring customer loyalty – which we call the T ratio.

A low T ratio is like a single thread of twine binding your customer to you it is easily snapped. But a high T ratio indicates that your thread is wound round your customer so many times that it will be very hard for them to breakaway from you. In practice they will help wind the thread around themselves because they don’t want to go elsewhere.

The start point for us is to determine the T ratio between a customer and a supplier. Where the T ratio is greater than 1 we call it the TRUST ratio and where it is less than 1 we call it the TROUBLE ratio.

Customer loyalty is measured by, and is a by-product of, the T ratio.

T =Value/Cost where

• Value = Value of Service Differentiation x Value of Product Differentiation x Value of Relationship Differentiation
• Cost = Cost of Product & Service x Cost of doing business together x Difficulty of doing business together

NB All these measures are made ‘In the eyes of the customer’

We have developed a wide range of potential components for each of the factors that contribute to the T ratio. They are not listed here because it does not matter what we think they should be what does matter is what your customer believes they should be. Kenichae Ohmae wrote about the research he did for a kitchen appliance manufacturer about what products Japanese customers would want. His investigation showed that the prime issue was that kitchens were small and current appliances were too big and wouldn’t stack. So what mattered was not to provide new types of appliance but to provide appliances that better matched the constraints of kitchen size and were stackable.

We have found that the best way of identifying the T ratio is to build a map showing the key interactions between the supplier and the customer. By using our Atticus Enterprise Mapping [TM] methodology we can identify the current

T ratio and the factors that contribute to it. The map reveals the opportunities for improvement and their potential positive impact on the T ratio.

Identifying the gaps and changes that are needed, is of course the essential first step. Growing the Unicorns comes next. This depends on defining and developing the relevant competencies and focusing everyone’s attention and enthusiasm on what has to be done. This in turn depends on the existence of culture, values, goals and measures that support the new way of working.

Sustaining a better T ratio than your competitors is another matter. It is a never-ending commitment because the competition will improve and also it will change as new entrants invade your loyal customer base.

To keep the Unicorn healthy it must be groomed, fed, housed, watered and LOVED. It is a treasure beyond compare and to reap its benefits requires a lifelong commitment.

Colin van Orton
Atticus

January 1999-01-13

For more details of Atticus approach to Customer Loyalty or Atticus Enterprise mapping please contact Atticus on 01256 474074.

Atticus Enterprise Mapping is a registered Trademark of Atticus Limited

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