Chapter 32
The Invisible Consumer: Customer Retention, Big Data, and Customer Service

The customer is always right, because they supply the money. Customers used to be relatively predictable, consistent, and loyal. Now given the number of options available to the consumer, the ease which they can be accessed and the low cost of switching, consumers can change directions like squirrels on amphetamines. The age of digital information has made consumers much better informed, more mobile and more demanding of shopping when and how they want to than in the past. The dispersion of media audiences, in some ways, have made customers harder to reach, but the move to diversified and mobile communication sources has created more ways for businesses to reach them. All of these factors, in many cases, have made consumers’ attachment to a product or a service more fleeting and this has impacted how you have to value a customer when analyzing a corporate investment.

As an example, consider consumers of news media. Centuries ago they started reading news sheets that eventually grew into newspapers, this was the dominant medium of news for a few centuries. During the time newspapers dominated the media, people tended to have “their” newspaper and were loyal to it. This transitioned to listening to radio as a news source and newsreels in theaters. This lasted for a few decades until consumers began watching television news. Now they can take television with them wherever they go and can choose when and where to watch it. Ironically, now many consumers have gone back to getting much of their news by reading. However, they are not reading one newspaper, they are getting their news from a multitude of sources that can be downloaded. A customer that you know would be there every day to read your paper is more valuable than one that is jumping between twelve different media outlets to get the same information. This proliferation of options for consumers is happening in almost every business. It is obviously not just in media. With more easy access to more choices, all consumer brands seem to have less loyalty because of how easy switching has become. A company can compete for customers through pulling a few levers: price, quality, and service. Brand loyalty is created by trying to capture some combination of these characteristics. Price is an extremely tough way to compete in the modern world. People can walk into a store, scan a bar code on an item with their phone and see immediately if it is cheaper elsewhere or on the internet. They can go shopping in a store but make the purchase when they are home. Some start-up companies can put significant pressure on pricing and undercut the competition. If a start-up can attract capital and get healthy equity valuations without being profitable, they can feel free to cut prices almost to cost as long as they are gaining market share, or hitting whatever other metrics their investors care about, they do not need to worry about profit margins. New companies may also have cost advantages against incumbents because they are using the latest technology. Quality is a way to compete, however, in many cases technology has decreased the differences in quality between products. With better global logistics, so many components of products being outsourced and technology being able to replicate higher levels of craftsmanship there seems to be less differentiation of product. A high end Ford automobile now appears to resemble a high end Mercedes sedan much more so than any time in the past. Unique design can still make a difference and increased complexity or service interconnections can create switching costs that can help retain customers, all of which have been meaningful factors in the longevity of the success of Apple. Service can make a difference, but what service means is changing. Sometimes it is the ease by which you can return products or sometimes it can be the ease by which you can find products. The biggest factor in service is that if it is bad, a customer can be lost for life and with social media that impact can multiply.

Increasingly many companies are trying to create communities of like-minded people to retain customers, to do this requires a high quality and consistent level of service. Some of the gaming companies, like Activision and Take-Two Interactive, may be the most successful at this right now. For the gamers it is creating a shared common experience among people with the same interest (this is not dissimilar to what sports teams do). This type of business is typically dependent on subscriptions but benefits from its subscribers making connections with other subscribers. Newspapers, cable companies, and software services have all used the subscriber concept to retain customers, however, none of them have the same unique bond among their subscribers that is seen within the gaming communities. For businesses like cable television, mobile phone services, music streaming, and on-demand video, subscribers have been a huge factor in the valuation that the stock markets put on these businesses. However, these types of businesses do not appear to have the same subscriber stickiness that communities in gaming have created. All of these subscriber style businesses tend to face the risk of customer loss when greater flexibility and choice are offered by competitors

Businesses have also been undertaking a huge effort to gather data on customers and try to use it to retain them either through targeted advertisements or product offerings. Customer retention techniques have moved from couponing to affinity groups and now to scanning data trying to capture and monitor how people buy things. Some systems try to predict what individuals want to buy before they know it themselves. How well these techniques truly work over time is still yet to be seen. Forcing customers to give up too much information could backfire on any company trying to capture data. The information is often gathered under the guise of making the “customers experience better” but it is a tool for retention and upselling. These tactics face the risk of creating a “big brother” backlash, especially if security breaches occur.

To win and retain customers, proximity and timeliness can still be an advantage that is hard to beat. There are some products where proximity is critical; few people will order a cake or a spicy tuna roll through the mail and when needed they want a plumber or an electrician to be accessible. Logistical strengths are critical too. A bad experience in getting an item delivered can cause a company to lose a customer forever. Niche services may be able to maintain greater customer retention through the use of hyper-specialization; companies with focuses on services for special needs may become more valuable, like a concierge service for wealthy shoppers or specialized services for elders or a website for left-handed mandolin players. If there are more specialized niche services that are successful, this may make it more difficult for giant conglomerates to retain regular large segments of their customer base and another round of customer fragmentation may occur.

Perhaps there is no customer retention anymore. All customers fly to the best deal and the best “rated” product. There certainly seem to be fewer businesses that have customer loyalty. As customers have more choice and are more mobile it seems ill advised to think companies can easily retain them without constant investment. As an example, Netflix has been adding customers in a very competitive market, but it is doing so at an enormous cost as it invests heavily in new content and burns through cash each quarter. The investment to retain customers can squeeze profit margins and cause issues for individual companies, even in a strong economy. The less loyal consumers become the harder it is for investors to give a company a high valuation for their customer base, especially if the cost of customer retention is regularly rising.

Selected Ideas from Part 7