Things have never been more like they are today in history.

—Dwight D. Eisenhower

By the early 2000s, many companies acknowledged the importance of building “relationships” with customers—of improving customer experience, taking the customer’s point of view, and taking steps to measure and manage customer value. In many cases, companies that had been product-oriented changed their philosophy, their culture, their metrics, and even their organizational structure to put customers at the forefront.

Why Do Companies Work at Being “Customer-Centric”?

Becoming customer-centric has not been easy, and not without controversy. Some believed that employees matter more than customers, since without great, engaged employees, an enterprise will have a hard time building strong customer relationships and building customer equity. Others continued to focus on cash flow and on making sure that strong product managers were held responsible for product promotion, distribution, and profitability. Ad agencies continued to tend “brand promise.” But while all of these are important to a successful business, a growing number of firms have recognized that three things are true about a company’s customers. Because of these truths, a company stands its best chance of success when it focuses on increasing customer value through outstanding customer experiences and relationships.

1. Customers are scarce. There are successful organizations that do not have “products,” but there is no such thing as a successful firm that doesn’t have “customers.” And despite the fact that the world has billions of people, only so many of them will ever want a particular company’s offering. That company’s ability to find them, win them, get as much business from them as possible, and keep them for a long time will be the determining factor in how much it can ever grow the size of its business. There are only so many hungry people, right now, within reach of a neighborhood pizzeria, and each of those people can cook for themselves, or go to a competitor, or start a diet today and not eat at all. Customers are scarcer than products, services, new ideas, or channels. For all but those companies in real financial trouble, customers are even scarcer than capital itself. There is no secondary market for customers. They can’t be borrowed at the bank and paid back with interest. Once a company’s leaders realize this fact, they may make decisions differently, as we will see in Part III.
2. Customers are the sole source of all a company’s revenue. Products don’t pay a company any money, ever. Neither do brands or services, or employees, or marketing programs, or stores, or factories. Only customers generate revenue for a business—the customers the business has today and the customers it will have in the future. All the other stuff is important to a business only to the extent that it contributes to generating more revenue from customers. Thus, the goal will not just be to create value from each product or channel or even the greatest return on the investment of money, but instead to make sure the company creates the greatest value from each of its customers.
3. Customers create value in two ways. Today, they are generating profit this quarter (or not), and—also today—the experience they are having with a particular company’s product, its brand, its contact center, or any of the rest of what it is selling is also causing them to become more (or less) likely to do more business with the company in the future, to become more (or less) likely to recommend it to friends, to think kindly of it (or not) when they need something else in its category. It’s interesting that nearly every company is very, very good at measuring and managing one way that customers create value: Companies know how much they spent making money from customers this quarter and what their revenue was from customers this quarter—since that’s the total of the cost and revenue on the quarterly books. But many companies are content not to know the second part of this equation: They don’t know, don’t measure, and don’t manage what is happening to underlying customer equity while the current numbers are falling into place. That means understanding a company’s Return on Customer (ROC) is as important as understanding the return on investment (ROI).¹ We talk a lot more about ROC in Chapter 11.²
   • ROI answers the question: How much value does your company create for the money it uses?
   • ROC answers the question: How much value does your company create for the customers it has?

If customers are scarce, if they create all the revenue for a company, and if the value they do create is measurable and manageable in the short term and the long term, as of today, then it’s natural for companies to want to understand and remember what customers need and to meet those needs better than a competitor that doesn’t know the same things about the customers. Customer information provides a very powerful competitive advantage. Companies want to use this information to provide a positive experience for customers and possibly to engage customers in a “relationship” that enables the company to provide better and better service.³

What Characterizes a Relationship?

Merriam-Webster defines relationship as “the state of being related or interrelated.”⁴ Because we are talking specifically about relationships between businesses and their customers, it is important that we agree on a few of the elements that make up a genuine relationship. And while dictionary definitions are not bad as starting points, the most important issue for us to consider is how well our own definition of relationship helps companies succeed in the “customer dimension” of competition. So, rather than settle for a few words from a dictionary, let’s list some of the distinct qualities that should characterize a relationship between an enterprise and a customer.

First, a relationship implies mutuality. In order for any “state of affairs” to be considered a relationship, both parties have to participate in and be aware of the existence of the relationship. This means that relationships must inherently be two- way in nature. This might seem like common sense. You can’t have a relationship with another person if she doesn’t have a relationship with you, right? But it’s a very important distinction for parsing out what does and doesn’t constitute relationship-building activities with customers. Can a person have a genuine relationship with a brand? Well, it doesn’t happen just because the customer herself likes the brand and buys it repeatedly. A customer can have a great deal of affection for a brand all by herself but, by our definition, a relationship between the customer and the brand can be said to exist only if the brand (i.e., the enterprise behind the brand) is also aware of the individual customer’s existence, creating a neodefinition with an interesting new twist for the term brand awareness.

Second, relationships are driven by interaction. When two parties interact, they exchange information, and this information exchange is a central engine for building on the relationship. Information exchange, of course, also implies mutuality. But interactions don’t have to take place by phone or in person or on the Web. An interaction takes place when a customer buys a product from the company that sells it. Every interaction adds to the total information content possible in the relationship.

This point leads to the third characteristic of a relationship: It is iterative in nature. That is, since both parties are interacting mutually, the interactions themselves build up a history over time—a context. This context gives a relationship’s future interactions greater and greater efficiency, because every successive interaction represents an iteration on all the previous ones that have gone before it. The more you communicate with any one person, the less you need to say the next time around to get your point across. One practical implication of the iterative nature of a customer relationship is that it generates a convenience benefit to the customer for continuing the relationship. Amazon.com remembers your book preferences, your address, and your credit card number, based on your previous interactions with it. To purchase your next book from Amazon.com, you need only find the book and click on it. If you’ve bought enough books already at Amazon.com, you might not even need to find the next one—the company can do a pretty good job of finding it for you. The richer the context of any customer relationship, the more difficult it will be for the customer to re-create it elsewhere, and so the more loyal the customer is likely to be. (We find that Amazon.com recommends to each of us all of the new books we write—not surprising, since they’re all very relevant!)

Another characteristic of a customer relationship is that it will be driven by an ongoing benefit to both parties. Convenience is one type of benefit for customers, but not the only one. Participating in a relationship will involve a cost in money, time, or effort, and no customer will engage for long in any relationship if there is not enough continuing benefit to offset this cost. However, precisely because of the context of the relationship and its continuing benefit to both parties, each party in a relationship has an incentive to recover from mistakes. This is because the future value that each party expects from the continued relationship can easily outweigh the current cost of remedying an error or problem.

Relationships also require a change in behavior on the part of both parties—the enterprise as well as the customer—in order to continue. After all, what drives the ongoing benefit of a relationship is not only its context—its history of interactions, developed over time—but also the fact that each party’s current and future actions appropriately reflect that historical context. This is an important characteristic to note separately, because companies sometimes mistakenly believe that interactions with customers need only involve routine, outbound communications, delivered the same way to every customer. But unless the enterprise’s actions toward a particular customer are somehow tailored to reflect that customer’s own input, there will be no ongoing benefit for the customer, and as a result the customer might not elect to continue the relationship.

Yet another characteristic of a relationship, so obvious it might not seem worth mentioning, is uniqueness. Every relationship is different. Relationships are constituted with individuals, not with populations. As a result, an enterprise that seeks to engage its customers in relationships must be prepared to participate in different interactions, remember different histories, and engage in different behaviors toward different customers.

Finally, the ultimate requirement and product of a successful, continuing relationship is trust. Trust is a quality worth a book all by itself,⁵ but fundamentally what we are talking about is the commonsense proposition that if customers develop a relationship with an enterprise, they tend more and more to trust the enterprise to act in their own interest. Trust and affection and satisfaction are all related feelings on the part of a customer toward a company with which he has a relationship. They constitute the more emotional elements of a relationship; but for an enterprise to acknowledge and use these elements profitably, it must be able to reconcile its own culture and behavior with the requirement of generating and sustaining the trust of a customer. (For more on this issue, see Chapters 3 and 9.)

Over 20 years ago, business professors Jag Sheth and Atul Parvatiyar predicted that companies are “likely to undertake efforts to institutionalize the relationship with consumers—that is, to create a corporate bonding instead of a bonding between a frontline salesperson and consumer alone.”⁶

Customer orientation is powerful in theory but, some say, troubled in practice. In some industries, customer satisfaction rates in the United States fall while complaints, boycotts, and other consumer discontent rise, fueled in size and velocity by social media. Some say there has been a decline in the fundamentals of relationship building among enterprise executives who are more concerned with increasing quarterly profits for their own sake than establishing closer ties to profitable customers. Every aspect of customer relationship management and managing customer relationships and experiences is affected by the firm’s understanding of relationships. Enterprises must examine and fully comprehend the basic foundations of relationships in general, and the basic principles of the Learning Relationship in particular, before embarking on a customer relationship or customer experience initiative.

Views on relationships and their role in business vary, but all provide a relevant perspective to building a framework for relationships. Jim Barnes says that relationships between enterprises and their customers can exist at four different levels⁷:

1. Intimate relationships are characterized as personal and friendly and generally involve the disclosure of personal information. Such relationships may involve physical touch, as in the relationship between doctors and patients or hairstylists and clients.
2. Face-to-face customer relationships may or may not require the customer to reveal personal information. Such relationships often occur in a retail store.
3. Distant relationships involve less frequent interactions and might occur over the telephone, online, or through videoconferencing.
4. No-contact relationships rarely or never require a customer to interact with an enterprise directly. Customers typically interact with a distributor or agent, as in the case of buying a favorite brand of soda at a supermarket.

We should also acknowledge that a company may build a “relationship” with a customer that the customer has no emotional interest in. By learning from a customer, or a small group of customers with similar needs and behaviors, the company may be able to offer the right product at the right time and provide convenience to a customer who may not be emotionally attached to the product or company but does more and more business with it because it’s easier to continue with the current provider than to switch. In many other cases, of course, the “relationship” is specifically enjoyed by the customer—at the extreme by the Harley-Davidson customer who tattoos the company’s brand on his bicep.

We have discussed the foundation of relationship theory and the benefits of getting, keeping, and growing customers, and, so far, the discussion has included concepts that foster an often-emotional involvement between the customer and the enterprise. The Learning Relationship is a highly personal experience for the customer that ensures that it is always in the customer’s self-interest to remain with the enterprise with which he first developed the relationship. We believe this may go beyond emotional attachment and beyond a customer’s favoritism for any enterprise. It may or may not be derived from some sense of obligation or duty. Instead, many scholars believe that by establishing a Learning Relationship, the customer-focused enterprise increases customer retention by making loyalty more beneficial for the customer than non-loyalty.

Here, we present a different view of customer relationships: Although many disagree, Jim Barnes believes relationships work only when the customer acknowledges that we are having one.

Customer Loyalty: Is It an Attitude? Or a Behavior?

Definitions of customer loyalty usually take one of two different directions: attitudinal or behavioral. Although each of these directions is valid, when used separately, they have different implications and lead to very different prescriptions for businesses. The most helpful way for businesses to approach the issue of improving customer loyalty is to rely on both these definitions simultaneously.

Attitudinal loyalty implies that the loyalty of a customer is in the customer’s state of mind. By this definition, a customer is “loyal” to a brand or a company if the customer has a positive, preferential attitude toward it. He likes the company, its products, its services, or its brands, and he therefore prefers to buy from it, rather than from the company’s competitors. In purely economic terms, the attitudinal definition of customer loyalty would mean that someone who is willing to pay a premium for Brand A over Brand B, even when the products they represent are virtually equivalent, should be considered “loyal” to Brand A. But the emphasis is on “willingness” rather than on actual behavior per se. In terms of attitudes, then, increasing a customer’s loyalty is virtually equivalent to increasing the customer’s preference for the brand. It is closely tied to customer satisfaction, and any company wanting to increase loyalty, in attitudinal terms, will concentrate on improving its product, its image, its service, or other elements of the customer experience, relative to its competitors.

Behavioral loyalty, however, relies on a customer’s actual conduct, regardless of the attitudes or preferences that underlie that conduct. By this definition, a customer should be considered “loyal” to a company simply because she buys from it and then continues to buy from it. Behavioral loyalty is concerned with repurchase activity, rather than attitudes or preferences. Thus, it is theoretically possible for a customer to be “loyal” to a brand even if they don’t really like it, provided there are other reasons for repeat purchase. A discount airline with poor service standards, for instance, might have customers who are behaviorally loyal but not attitudinally loyal, if its prices are significantly lower than those of other airlines. (Some Londoners lamented that they hated RyanAir every weekend they took it to Barcelona!) And a business-to-business firm selling complex services may rely on long-term contracts in order to ensure it is adequately compensated for high setup costs. (We once participated in a meeting with high-tech executives at their headquarters in which one of the executives joked that their primary customer loyalty tactic was probably the lawsuit.) In its most raw form, behavioral loyalty is similar to what can be described as functional loyalty, in that there is no emotional content or sense of attachment to the company on the customer’s part.

In the behavioral definition, customer loyalty is not the cause of brand preference but simply one result of it, and brand preference is not the only thing that might lead to behavioral loyalty. A company wanting to increase behavioral customer loyalty will focus on whatever tactics will in fact increase the amount of repurchase. These tactics can easily include improving brand preference, product quality, or customer satisfaction, but they may also include long-term legal contracts or prices so low that service is almost nonexistent.

Behavioral customer loyalty is easier to measure because it can be objectively observed, while assessing attitudinal loyalty requires more expensive and subjective polling and surveying techniques. But positive attitudes do tend to drive positive behaviors. Even if a firm observes loyal behavior, if the customer has no genuine attitude of loyalty, then the relationship will be highly vulnerable to competition. If a competitor enters the market at a comparable price, for instance, the customer once loyal to your discount product can easily disappear.⁸ The truth is, if an enterprise wants a clear and unambiguous guide to action, it needs to pay attention to both definitions of customer loyalty. Attitudinal loyalty without behavioral loyalty has no financial benefit for a firm, but behavioral loyalty without attitudinal loyalty is unsustainable. Defining loyalty purely as an attitude is not very useful, because that attitude can exist completely apart from any continuing relationship on the part of a customer, and this simply flies in the face of the common English definition of the word loyalty. Customer A and Customer B might have an equally loyal attitude toward a particular product, but what if Customer A has never even consumed that product before, while Customer B has consumed it regularly in the past? Moreover, attitudinal loyalty and brand preference seem to be redundant, so why introduce a separate term at all? However, defining loyalty in purely behavioral terms is equally unsatisfactory; monopolies have behaviorally loyal customers.

A better insight into what customer loyalty really means can be gained by examining the policies companies introduce to improve it. A credit card company or mobile phone carrier, for instance, often concerns itself with reducing its “customer churn” rates. Churn is a colloquial term meaning “defection.” These companies often can count the customers who voluntarily elect to leave their franchises every month, and it is a legitimate and time-honored business practice to try to reduce this churn rate. A company usually tackles the churn problem with both reactive and proactive tactics. Reactive tactics can include predictive modeling to identify those customers who are most likely to try to leave the franchise in the near future and then trying to intercede in advance; or actively trying to persuade churning customers not to leave at the point they announce they want to defect; or perhaps attempting to win defectors back immediately with offers of special pricing or improved services. Proactive tactics, however, can include identifying as many of the service and pricing problems that cause customers to want to leave in the first place, and trying to fix them; or perhaps designing new, customized products and services that do a better job of locking customers in for convenience reasons; or improving service friendliness and competence to increase customer affection for the brand.

A company trying to reduce its customer churn—and thereby increase its customer loyalty—shouldn’t think of customer churn as a disease but as the symptom of a disease, somewhat like a fever. If a fever is severe enough, the doctor will want to treat it immediately and directly, but she also knows that the only long-term solution to reducing a fever is to cure the underlying disease causing it. If we pursue this analogy, we could visualize a lack of behavioral loyalty in our customer base as a fever that is affecting our company while the actual disease causing this fever is a lack of attitudinal loyalty.⁹

When dealing with the issue of customer loyalty, a firm should try to forge as direct a connection as possible to loyalty’s actual financial results. That is, we ought to be able to “connect the dots” between whatever strategies and tactics we employ to increase our customers’ loyalty and the actual economic outcomes of those actions. The customer-strategy enterprise will want to quantify the benefit of a customer’s increasing loyalty, and the most direct and unambiguous metric to deploy for this task is the customer’s lifetime value, as described in Chapter 5.

The important thing to remember about loyalty programs is that most are just a “me, too” way of reducing profit margin. Once all the major players in a space offer one, it’s just a bribe for doing business with a particular restaurant, store, airline, or product consumable. In contrast, the best-practice loyalty programs are the ones that offer a reward in exchange for ongoing customer information (shopping basket data, or preferred services and routes, for example) and then use that information to serve a customer better than a company that does not have the information.

Summary

Our goal for this chapter has been to give the reader a grounded perspective of how Learning Relationships enable enterprises to develop more personalized and collaborative interactions with individual customers. Our next step is to begin to understand “the business sense” of building a customer-strategy enterprise. Learning Relationships, after all, result in many pragmatic and financial benefits, not only for the customer but also for the enterprise that engages in them. The objective of increasing the overall value of the customer base by getting, keeping, and growing one customer, and then another and another, is achieved through these highly interactive relationships.

The enterprise determined to increase the value of the customer base will start with a commitment to increase customer value and then move to implement the strategic levels of the Learning Relationship. The tasks needed to make this happen are: identifying their customers individually, ranking them by their value to the company, differentiating them by their needs, interacting with each of them, and customizing some aspect of the business for each. From the enterprise’s perspective, these tasks are by no means chronological or finite. We will examine each of them more carefully in the next chapters.

Food for Thought

1. Based on what we now know about the essence of relationships, is it possible for a customer to have a relationship with a commercial (or other) firm? Is it possible for a customer to have a relationship with a brand? Is it possible for a firm to have a relationship with a customer—especially a customer who is one of millions of customers? If you said no to any of these questions, what conditions would have to be met before a relationship would be possible?
2. James Barnes says an important ingredient to a good relationship is an emotional connection, but customer relationships have elsewhere been referred to as a bond of value or a bond of convenience. What do you think? Do customers have to love a product or company in order to have a “relationship” with that enterprise? Or is a perceived benefit—especially one that grows from a vested interest—enough? How would you approach a debate on this controversy?
3. Pick a brand that you will always buy. What happened specifically to create this loyalty from you? Is there anything that could dissolve your loyalty or make it even stronger?¹⁰

Glossary

Age of Transparency

The era of human history characterized by increasing levels of transparency in all human affairs, as a result of the pervasive interconnectedness of people, using social media and other ubiquitously available communications technology.

Attitudinal loyalty or emotional loyalty (see also Behavioral loyalty)

Attitudinal customer loyalty, also called emotional loyalty, is manifest by a customer’s good wishes or affection toward a product or brand. When a customer “likes” a brand, as measured in surveys of customer opinions or attitudes, the customer can be said to be attitudinally loyal.

Behavioral loyalty or functional loyalty (see also Attitudinal loyalty)

Behavioral customer loyalty, also called functional loyalty, is evidenced by a customer’s repeated patronage, as measured by the customer’s actual buying behavior.

Customer churn

The rate at which customers leave and enter the franchise. High churn indicates a simultaneously high number of defecting customers and high number of new customers. Usually a symptom of low customer loyalty. Also called churn rate.

Customer context

The environment in which the customer operates.

Customer equity (CE)

The value to the firm of building a relationship with a customer, or the sum of the value of all current and future relationships with current and potential customers. This term can be applied to individual customers or groups of customers, or the entire customer base of a company. See also the definition of customer equity in chapter 11, especially as it relates to customer lifetime value.

Customer experience

The totality of a customer’s individual interactions with a brand over time.

Customer orientation

An attitude or mind-set that attempts to take the customer’s perspective when making business decisions or implementing policies.

Customer strategy

An organization’s plan for managing its customer experiences and relationships effectively in order to remain competitive. Customer strategy is building the value of the company by building the value of the customer base.

Customer-strategy enterprise

An organization that builds its business model around increasing the value of the customer base. This term applies to companies that may be product oriented, operations focused, or customer intimate.

Emotional loyalty

See Attitudinal loyalty.

Functional loyalty

See Behavioral loyalty.

Information Age

“A period in human history characterized by the shift from traditional industry that the Industrial Revolution brought through industrialization, to an economy based on information computerization.” [Wikipedia]

Iterative

Building on itself. Conversations are iterative when they pick up where they left off. A customer relationship can be “iterative” if both the enterprise and the customer remember their previous interactions with each other, so that with future interactions they do not need to start all over again from the beginning. In effect, an iterative relationship is one that gets smarter and smarter over time, as an enterprise conforms its behavior (for this particular customer) with the customer’s previously expressed needs and preferences.

Mutuality

Refers to the two-way nature of a relationship.

Procedural fairness

Based on the perception that procedures and processes are fair and are focused on behaviors, regardless of outcome.

Relational (collaborative) versus discrete (transactional) customer strategies

Relational customer strategies take into account the lifetime costs and payoffs of the total of all projectable interactions and transactions with a customer, while discrete or transactional strategies are based primarily on the directly measurable financial value of the current transaction. This distinction is important because the cost of maintaining a customer relationship is often incurred in the current period, while the value achieved by the relationship might not be realized until later, in future (non-current) transactions. For example, a company following a relational customer strategy will likely be willing to resolve a customer’s complaint about a single transaction by taking a loss on the current transaction, while a company following a transactional strategy will not.

Value of the customer base

See Customer equity.