19 Jul 2004  Research & Ideas

Your Customers: Use Them or Lose Them

Companies can differentiate on service profitably, says HBS professor Frances X. Frei. Here's how a new-thinking bank, insurance provider, and software company are using customer power to win.

 

It's easy to deliver lousy service. Examples are too numerous to mention and let's not ruin the day, shall we? But imagine this: How about living in a world where companies treat you, as a customer, nicely and it benefits them as well as you? Such companies exist, says HBS professor Frances X. Frei. Their customers are better off and the organizations earn a disproportionate share of the profits over their competitors.

Frei, who spoke with HBS alumni on June 4 in a session titled "Capitalizing on the Power of the Customer," said three successful strategies are used to differentiate on service and do it in a sustainable manner. These organizations do one or more of the following, she said: Defy conventional wisdom, reduce costs, and minimize demand.

"I believe customers are very smart and customers are desperate to be helpful to the company," said Frei. "How do you get customers to act in the best interests of the firm? Of my mantras, number one is: Your customer is probably your most powerful asset."

To explain how certain companies jump to the head of the pack through good service, she shared highlights of her research as well as insights gained from her course for Harvard MBA students, Managing Service Operations, which explores interactions between firms and customers.

Defy conventional wisdom

Commerce Bank entered a mature industry where the overall level of customer satisfaction was "pretty low," Frei observed. The conventional wisdom for banks was that in order to grow they should offer the best rates of deposit or buy another company. Instead, she said, Commerce Bank offered the worst deposit rate in every single local market. It has never made an acquisition. Yet it is the fastest-growing bank in the country, she said. Reason: Commerce Bank decided to differentiate on service.

For starters, it offers seven-day branch banking, giving customers extra convenience. In addition, every branch includes so-called penny arcades, coin changing machines that are free for customers and non-customers.

"There are genuinely friendly employees," Frei continued. "The employees are friendlier in part because Commerce Bank only has four checking accounts; others may have forty checking accounts. So the bank can train employees on service, not on compliance."

Newspapers, coffee, coin machines, friendly staff—all of this costs money, Frei said. Commerce Bank pays for it by paying lower rates on deposits compared to the giant banks.

"Think about it," she told the group. "Would you trade half a percentage point on your account to have what is truly exceptional service?"

Would you trade half a percentage point on your account to have what is truly exceptional service?

When the bank put branches in Manhattan two years ago, Commerce Bank grew faster there than anywhere else, she said. Other banks can't afford to stay open until 11 p.m. while managing forty accounts. Other banks can't respond because they're not set up to differentiate on service.

"Commerce Bank basically figured out how to get customers to pay for the service in a rather clever way: It turns out that a lot of people don't care if they get half a percentage point less on interest." It was a "palatable" way to have customers pay for their own service, Frei said.

Reduce costs

Not every industry, however, is set up so it can persuade customers to sacrifice more money for better service. Customers of most auto insurance plans, for example, are extremely price-sensitive. People will go with the best price, "full stop," said Frei.

Another confounding factor for the insurance business is that companies lose money on auto insurance, she added. "Every company with the exception of maybe five loses money on auto insurance. They make up for that loss and make a little bit of profit by investing the pre-paid premiums. So they lose money on insurance but make up for it by investing premiums."

By contrast, she said, Progressive Casualty Insurance Company makes money on insurance and spends more on service in the provision of insurance than any other company, she said. They do it in two ways.

One, if a Progressive customer gets into a minor accident, he or she can phone the company from the scene and will be met by a member of its Immediate Response fleet. "It's not unusual for them to show up at the scene of an accident before the police do," said Frei. Fleet management is expensive; so is wireless technology. But in the end Immediate Response is a cost saver for Progressive. The staffer may write the customer a check on the spot and such quick assessments end up reducing lawyer fees. It also substantially reduces the potential for fraud, she said. "The Immediate Response fleet is their fraud buster."

A second Progressive service is called Comparison Quote, said Frei. If a potential customer logs on to the Web site, Progressive will give a quote for Progressive auto insurance as well as similar insurance from all their nearest competitors, she said. The quotes are accurate, Progressive's are lowest less than half the time, and if they are not the lowest then the customer usually goes elsewhere.

"So how does that make sense? What they're capitalizing on is that Progressive is better at data analysis than all of their competition. Comparison Quote is their clever service design that takes advantage of their data analysis superiority. They can get at the true 'riskiness' of a customer in a more refined way than anyone else can, so they know the true risk better than the competition," she said. If a potential customer is such an apparent risk that the quoted Progressive rate is higher than the competition's, Progressive is happy if that customer goes elsewhere to buy cheaper insurance. "They are happy to have the competition get those customers," said Frei.

Minimize demand

Software giant Intuit offers free cradle-to-grave service on a financial software product that costs, at most, $50, said Frei. If Intuit fielded the same number of customer service calls as its competition, it would be out of business, she said.

"The entire organization is geared toward minimizing the need for customer service. So their strategy is to minimize demand. Many [other] organizations have the strategy of hiding the phone number so deeply on the Web site that you can't call them: That's their way of minimizing demand," she observed.

At Intuit, customer service is excellent and the need for it is rare, she said. People answering the phone are part of the product development team and they are expected to talk with the engineers about the calls they receive. These employees are paid more than their counterparts in other companies.

"Intuit wants engineers who will design products that their mothers could use. Engineers who do whiz-bang things are not welcome at Intuit. Intuit's philosophy is to increase the customer willingness to pay via e-commerce; the other is take operational savings and wrap it up in a stealth kind of way in service features," she said. Intuit found a way to make customer service excellent by removing most of the need for it.

What's next

"These are celebrated companies and they are not the norm," Frei acknowledged. Many other industries are ripe for customer-friendly interlopers, she said.

"A great example of all of these things not working in a spectacular way is the cell phone industry. It sees the customer as an adversary, [asking the customer to sign] contracts for the next fifty years so they don't have to take care of you. It's like they don't trust themselves to deliver good service. For their long-term service contracts, customers have to guess their usage. The companies make money when you guess wrong, when you pay for capacity you don't use. The company has set up the customer in an adversarial role; the company benefits when customer does not."

A great example of all of these things not working in a spectacular way is the cell phone industry.

For their part, cell phone companies complain their customers are price-sensitive and won't pay for service. But the cell phone industry is like the banking and insurance industries: it's waiting, she said.

"Will the cell phone industry become like Commerce Bank or Progressive in five years?" she asked. "Will there be other new entrants?"

"If you think about companies you know, there are more on the customer-as-adversary than customer-as-advocate side," said Frei. She added, "If you win when your customers lose, then you're leaving the door open for someone else to come in and champion the customer."