Rob started off with a painful Bad Profits story about his experience with a car rental company. In addition to the refueling fee (on a car that was returned full!), he recounted the painful process they put him through to “try” to give feedback, and then to reclaim the charges.
Despite laughter in the room, you couldn’t help but marvel at the amount of time and effort that errors like this (combined with inflexible and bureaucratic processes) cause to customers. And all for a $25 fee.
Rob made the point that the $25 is like junk food: a way for companies to fill their hunger for cash in the short term, even though it can kill you in the long run. And this addiction is even more widespread when the economy contracts.
Loyalty Leaders avoid Bad Profits
Loyalty leaders find ways to avoid Bad Profits, and this gives them some long-term advantages.
They not only grow faster (2.2-2.6x faster), but they also have costs 15% below that of the competition.
One such company is Vanguard Group, a leading mutual fund company. 2008 was a terrible year for the mutual fund industry. The industry overall had net outflows of 225 billion in the US, while Vanguard had net in-flows of 71 billion.
How do they do this?
They give good value for all investors, but give even better value for their best customers, including those who are long-term investors. Because of this business model, they end up with a cost advantage that gives them stability in a downturn and helps them acquire new customers when others are scrambling for more “junk food” fees.
How many companies offer their long-term customers the best deals? Very often, the opposite is true…companies offer incentives to get new customers in the door, and often the tried and true customer gets a worse deal. Vanguard turns this idea on its head, which helps in down markets.
3 Common Traps to Avoid in a Downturn
When companies come under pressure economically, they need to be careful to avoid three common traps that can destroy long-term performance:
1. Chasing customers indiscriminately.
2. Cutting costs across the board, without regard to what is important for the best customers.
3. Cutting innovation budgets
On the last point of innovation, Rob pointed out that companies who innovate when others are distracted can get huge benefits as the economy rebounds. Two examples he offered were the iPod and the X Box, both new products that were launched in late 2001, in the middle of the high-tech meltdown.
How Do You Think of the “Design Target” Segment
Be picky, and choose the target customer segments you want to do business with and focus even more intensively on them when you are in a tight market. How do you try to identify these customers?
Your design target should have three key characteristics:
1. Has attractive economics
2. Loves what you can do best
3. Is representative of other attractive segments
Once you can clearly identify the design target, go about designing experiences to delight them. First of all, make sure you fix any problems that may be creating Detractors within this segment. Then, identify ways to delight them at the moments of truth that matter most, so you can create Promoters at every opportunity. Because most companies will find that they actually save money by creating more Promoters.