16 May 2011  Research & Ideas

What Loyalty? High-End Customers are First to Flee

Companies offering top-drawer customer service might have a nasty surprise awaiting them when a new competitor comes to town. Their best customers might be the first to defect. Research by Harvard Business School's Ryan W. Buell, Dennis Campbell, and Frances X. Frei. Key concepts include:

  • Companies that offer high levels of customer service can't expect too much loyalty if a new competitor offers even better service.
  • High-end businesses must avoid complacency and continue to proactively increase relative service levels when they're faced with even the potential threat of increased service competition.
  • Even though high-end customers can be fickle, a company that sustains a superior service position in its local market can attract and retain customers who are more valuable over time.
  • Firms rated lower in service quality are more or less immune from the high-end challenger.

 

Businesses that offer their customers the highest levels of service might like to believe that all their efforts to pamper and please will pay off with an extremely loyal following.

"Customers you might expect to be the most 'stuck' are the ones who are disproportionately vulnerable to service competition."

But as new research from Harvard Business School demonstrates, the customers you think are your best and most loyal are likely to be the first to cast you aside when a challenger to your service superiority barges into the market.

"Our results suggest that this is due to increasing expectations for service in these markets—the longer a firm has held a service advantage in a local market, the more sensitive are its customers to it service levels relative to those of competitors," says Harvard Business School's Dennis Campbell. In other words, you reap what you sow.

In How Do Incumbents Fare in the Face of Increased Service Competition?, Campbell, fellow HBS professor Frances X. Frei and doctoral student Ryan W. Buell explore this dance between service levels, customer loyalty, and competitive strategy. The study drew on extensive data gathered from a large US domestic bank operating in more than 20 states from 2002 to 2006.

In addition to proving what earlier models only hinted at—that new challengers offering high levels of service can siphon off the best customers of long-standing incumbents—the researchers learned something else: Firms rated lower in service quality are more or less immune from the high-end challenger.

These findings suggest that before mounting a counterattack on a competitor's incursion, it's important to understand your customer priorities and your business's place along the service cost continuum. In some cases it can be advisable or even necessary to invest in a response. In other cases, you may as well save your money, according to the researchers.

The study also concluded that even though high-end customers can be fickle, a company that sustains a superior service position in its local market can attract and retain customers who are more valuable over time.

"One prescription from all of this is that managers should avoid service complacency—or the tendency to rely on preexisting service advantages—and invest more in proactively increasing relative service levels when they're faced with even the potential threat of increased service competition," says Campbell.

Differences across markets

Customers and companies trade off between price and service. "Every customer has his or her own level of service sensitivity," says Buell. "There's a sorting process that takes place within the market so that customers end up with the combination of price and service that works best for them."

Companies, too, attempt to find the right balance between service level and price, but these calculations can vary widely. While some companies offer a consistent level of service across all locations, others alter service offerings according to the opportunities presented by the local markets. The bank studied by the researchers, which operated in 644 geographically isolated markets, offered different levels of service quality depending on location.

"It highlights that there are huge differences from market to market in what types of customers you attract and retain," Buell says.

In one market, the company may be at the top of the service scale and attract "high maintenance" customers who tend to be less satisfied and complain more than customers in a market where the firm occupies a lower-level service niche.

Consider Sheraton Hotels. In a market where Comfort Inn is a competitor, Sheraton might be the high-service option. But in another market Sheraton might be up against Ritz and Four Seasons, making it the more budget-conscious alternative.

"You can imagine," says Buell, "that the customers the Sheraton attracts in the first market compared to the second market are very different, and that the entrance of a high-service competitor in one market would affect the Sheraton very differently than it would in the other."

Is a standardized service-level strategy better than one that varies by market? There is something to be said for and against both approaches.

While there are certainly cost benefits to service standardization (Buell cites McDonald's as an example), the drawbacks can outweigh them if you're serving a customer group that doesn't want or need a particular service.

"If you occupy different service spaces in different markets, as was true with the bank we studied, you'll be using the same strategy to serve customer groups that are systematically different from market to market," says Buell.

The banking industry's rich array of data made it a prime subject for such a study. "Banks maintain customer data at a very fine grade level, and the government captures competitive data, so we have a very good picture of when competitors enter and exit markets and what the composition of a market is at any one time," says Buell. Third parties also track service quality (J.D. Power in this case). And because banking is a service that touches almost everyone, its customer group is diverse, making the study's results applicable to other service industries, such as hotels.

Teasing apart customer satisfaction

Buell's general research agenda considers how firm-level decisions affect customer actions and firm performance. He is continuing to collaborate with Campbell and Frei on a research project that explores different parts of a bank's operating system to determine the degree to which each transaction affects customer satisfaction.

"Past research has shown that the employee, the kind of transaction, the location, and the market can all affect customer perceptions," Buell says. "But no work has disentangled what percentage…is related to each of these factors. This will in turn indicate to what degree operating managers can control customer satisfaction. Essentially, we're looking at the entire operating system and drilling down to determine which factors are most important for driving perceptions of service quality."

About the author

Julia Hanna is associate editor of the HBS Alumni Bulletin.

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Comments

    • Steve Sheinkopf
    • CEO, Yale Appliance

    The real problem is complacency. Old Man Potter has been around forever yet is easy to beat by the brash Mr Bailey. Service is an evolving process. Once you think you are done. You are just that.

    Done

     
     
     
    • Collette Howell
    • Owner, COMPUTER EXPLORERS

    I am a small technology education business in a local market where I have elected to serve the most respected and financially healthy prospective clients. I am motivated by offering unmatched quality and service to my school partners. I find there are always opportunites to add unique and distinctive value to each client. My efforts in this regard are never ending. I heartily agree with the the CEO of Yale Appliance. If ever I perceive my efforts are complete.....my business will be finished.

     
     
     
    • Chuck Fienning
    • Advisor to the CEO, Sumter Packaging Corporation

    Innovative customer service trumps the market every time because customers like to do business with firms that recognize their individual needs. I was a founder of a community bank in 1996 that garnered a large share of the small business market in this community of 43,000. Branches of the big banks downsized and became more impersonal. We catered to demanding, 'finicky' customers who rewarded us with more and more business.

    In business, you're only as good as your last transaction.

     
     
     
    • David Rusin
    • CEO, www.fundyourartist.com

    It depends what you are selling to the high end of the market.

    If what you sell is mission critical ... and you deliver on-time, reliably perform and are honest if there are problems. The high end customer will pay a premium for piece of mind.

    Also, if you have been performing a mission critical product or service ... switching for a lower price is not a determining factor but a career choice -- especially if the decision maker switches and the new high end mission critical supplier fails to perform.

    The business I was in we had very high end customers for ten years -- never switched. Why? We performed. There could be no risk of failure given what we did for these customers so price was down the list. If we failed, our high-end customers were literally out-of-business until we fixed the situation. We never had an outage in ten years and very loyal high end customers ... even when Global brands would try to push us out ... the answer was "no."

    Big companies big problems in serving high end customers ... very inflexible and unresponsive. Mid-size e companies in my opinion serve mission critical services to high end clients better than global brands.

     
     
     
    • Frank Riganelli
    • Author

    I quickly read the valued replies from the CEOs of different companies, and wanted to offer an additional perspective to this important topic.

    As the article is not business-sector specific we should ask ourselves how these ideas of customer service apply to specific businesses. Not all can accommodate the approaches suggested without difficulty. And while customer is king, not recognizing a potential problem can be the makings of soon-to-be big problems.

    What is important to remember is that such approaches put a strain on other parts of the business and their approaches, many that require a certain amount of standardization in the business and (product or) service offered. If the customer's needs becomes a moving target, changing often and even only in modest ways, it can send a ripple effect through a business in responding to it. Now, not only is the business changing in the marketing and sales end of the business, trying to read the customer and change the offering to accommodate a new or changed need, but other groups in the business must also adapt so the business can effectively provide the service in a quality manner.

    A market-driven, or customer oriented, business can be like a whip -- once it's slung out to satisfy a customer, it sends a wave through the business. If this isn't considered, any damage to the business will never be known. I suggest that the business that not only satisfies their customers' changing needs, but also manages the rest of the business to effectively accommodate that will be the business standing when others have fallen.

     
     
     
    • Dr.K.Prabhakar
    • Professor, Velammal Engineering College

    My first question is " what is the role of context in this particular case of research". If the present research is conducted at the time of lowest ratings about bankers ( i suppose) and in such a context the high end customers will be ready to go. They suspect the claim of the bank. However, generalization based on banking services to other service industry may not be an acceptable argument. I have done research in India and found that even after advent of private airlines, Indian Airlines still had its own customers despite its falling. By your inference all the customers would have left Indian Airlines and it did not happen. I wish your clarification in this regard.

     
     
     
    • MPB

    It is quite a good, though counter-intuitive result. Especially, something of which long-established players in evolving markets need to take note. Incidentally, I wonder how it is possible for, say, Sheraton Hotels, to offer different service levels in different segments using the same brand name.

     
     
     
    • Bill Garber
    • Founder, Interlink, Inc.

    High quality service is a form of respect. Companies of substance believe they warrant respect, and thus service has little currency and adds almost no value.

    Companies striving for what they yet expect to become or perhaps just aspire to be taken for more than they know themselves to be by comparison to other clients of a vendor, are more likely to see service as a sign of respect. For such companies, quality service may well anchor the vendor relationship.

     
     
     
    • John Heng
    • Director, Living by Design Limited

    I agree with the logic but we are all getting caught up with the meaning of the word service. The loyal customer is fickle but what they look for is the customer experience which goes beyond the bounds of service. This experience in fact may have a different meaning to different customers. To measure the experience you offer is to have other suppliers treat you the way they think will capture the business and compare the key effects that will retain loyalty.

    John Heng Director Living by Design Limited

     
     
     
    • Seena Sharp
    • Principal and Author, Sharp Market Intelligence

    Too many successful companies don't recognize and respond to change, leaving themselves vulnerable to the bar that is constantly raised.

    It's not the customers that are disloyal; it's the companies that are disloyal to their customers.

    They don't keep up with their customers and competitors and the changing marketplace, but expect their customers to stay with them. This is often due to a mismatch in what each group deems important. And companies believe they know better than the customer.

    Customers prefer not to change, but when the company is tone deaf to, or dismissive of, the evolving business environment, then the company is "pushing" the customer to go elsewhere.

     
     
     
    • Peter Anscombe
    • Head of commercial business uk, Marsh

    Interesting research and some insightful comments. This research may not be quite so counter intuitive as it first seems. My own research in B2B services highlighted that service whilst important may not be enough to maintain client commitment. Value appears to be the key antecedent to commitment; if you constantly deliver greater value than your competitors then clients may be less concerned about service provided it is maintained at an "OK" level. Striving for "customer delight" may be an expensive luxury. Constant striving for new ways of delivering client value may be a more strategic imperative.

     
     
     
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.

    In any industry, there tend to be both "active" and "lazy" customers. For active customers, the industry is very important to them and they actively get involved to ensure they are getting the best. For lazy customers, the industry is not a major factor in their lives. They do not actively reevaluate the industry on a regular basis. Habit and convenience rule the day, because that requires the least amount of thinking.

    As it turns out, active customers tend to be the most interested in both service levels and in comparison shopping. As a result, they are the most likely to switch (least loyal).

    Lazy customers tend to stick around forever, because it is not an important transaction to them and it takes extra effort to leave the comfortable and switch (most loyal?).

    Years ago, I did research on Kmart customers. Even though everyone rated Kmart as inferior to Wal-Mart and Target, Kmart had a lot of lazy customers who really did not care and stuck with the inferior brand.

    So I think the moral of the story here is that if you have a segmentation strategy aimed at active customers, you need to be extra vigilant to stay on top. And if you are targeting lazy customers, focus on convenience and ease.

     
     
     
    • Gary Cushman
    • Business Development, Nicor National

    I don't believe there is a disloyal customer. The customer has but one loyalty and that is to him or herself. It is the company that sees lost customers as disloyal. The customer usually leaves because their consumption needs are no longer being met. The company has failed to stay in touch with the customer and the customers needs have changed out from under the company's product offerings.

     
     
     
    • Robert Mng'anya
    • Manager Cards, NBC Ltd

    Customers expects more and more everyday and there is no room for compalcncey

    d

     
     
     
    • Mark L
    • Project Manager

    Is it possible to generalise this interesting point about service to any other important factors that customers care about? Put another way, isn't an incumbent company particularly sensitive to a new entrants who offer products that challenge the incumbent's means of differentiating itself to its customers? For instance, if your business is built on offering low cost products then presumably its likely more sensitive to a start-up that offers lower cost offerings than one that offers quality at a mid price point.

     
     
     
    • Prof.P.A.Habeeb Rahiman
    • HOD, Marthoma College of Management & Technology

    Customer loyalty Vs.Product Quality: As long you are the best in the industry all high end customers will be highly loyal, as there is no substitute. If you mistake the loyalty as personal liking to your organisation, rather than product liking, sooner than later you will realise that all the higher end customers have switched to your competitor. In a dispassionate thinking, it makes sense to decide what are the factors contributing to customer loyalty, especially for the higher end customers. One should have the sense and logic to believe that it is the product quality that embeds the customer to you. It is quiet natural that the moment you compromise on quality or someone else comes with a better quality product, higher end customers will flee you denoting that in a dynamic market place, compacency is your biggest enemy and higher end customers, whom you feel are loyal will be the first to go to your competitor.

     
     
     
    • pradeep verma
    • Partner, CFB Consulting GmbH

    Humans are the most complicated - individually & collectively different and allways desire to have simple solutions to life! Raising the level of "Excellence" is a day to day affair & demand pattern has ONLY one factor to be considered by any company -- keep raising your levels....be it marketing, product innovation/service, technology & resultant comfort that it can deliver. Finiky....is what we as a company...keep making our Customers!!!! and then if we become complacence.....we are booted out...by a guy smarter and next door.

     
     
     
    • Andrew Zgutowicz
    • Partner, Kurt Salmon

    Customer experience IS the next focal point in retail. Retailers are taking a strategic look at their current multi channel offering (product, services, and technology) to not only maintain a competitive advantage, but relevancy as well. Our work suggests that consumers are being conditioned by other verticals outside of retail, e.g., travel, financial services, etc., to expect value, solutions, control, simplicity and recognition as part of the experience. These are elements that most retailers can't consitently provide today online, in-store, and via mobile; even though they might excel in one particular channel.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    Humans always expect more and more. And when someone is kind to them they take the kindness for granted and do not settle for anything lesser later. The level of kindness is always desired to soar upwards. This basic psyche applies to customer loyalty also. By creating "loyal" customers there is bound to be an assumption that the loyalty will continue come what may. This is something which does not hold. When you provide something good, better and then the best is expected by and by. And this best too becomes just good or even below that for in-so-far as human imagination goes, sky is the limit and to reach the sky is not possible! All "loyal" (so to say) customers need close focus to ensure their genuine expectations are met and they do not get diverted to competitors who may deploy tactics to attract our loyals- if we are not vigilent, this can and does happen. To conclude, nothing is permanent in this world and more so the assumed loyalty.

     
     
     
    • Kiriti Mukherjee
    • Consultant, Independent

    Companies might as well ask - why should the customer be loyal? Every good experience with a company counts for one, just one more interaction. Fail to delight the customer once, and the hundred previous good experiences count for naught.

    Faced with a competitor, incumbents should carefully evaluate their position - the positive response to offer a better product or service than the competitor is always better than the negative response of competition bashing. Even without a competitor, the only recipe for continued customer loyalty is an attempt to offer better service than the last time.

    Bottomline - do not take loyalty for granted. It has to be earned, every single time.

     
     
     
    • Aisha Mohsin
    • Lecturer

    Consumer decision-making is 70% emotional and 30% rational. So marketers have to have a smart blend of emotions and logic, applied strategically that doesn't just "meet" but "exceed" customer expectations. Having said that, I reckon there is no proven recipe that would keep the customers coming back to you forever. Unpredictability is the name of the game. However, on an optimistic note, marketers can figure out the "root" incentives and drives and it very much goes back to their ability to comprehend the situation, plan and execute the right choice of action!

     
     
     
    • Teresa Allen
    • Owner/Consultant/Speaker, Common Sense Solutions

    Service is becoming increasingly complex with the number of channels needed to satisfy an array of customers. Different industries and different customer types demand different strategies. A one size fits all strategy is a death sentence. Strategies and training must be customized for maximum impact of every close encounter with the customer. Teresa Allen Author, Common Sense Service www.AllenSpeaks.com

     
     
     
    • Chirag Swamy
    • Manager Pre-Sales, Animika Studios

    Thank you for putting this together. Absolutely insightful. While reading this article, I couldn't help but try and relate this to the Grocery-shopping scenario in India.

    According to the Nielsen report of 2011 for India, 62% of consumers from across 11 cities in the country still prefer the 'Kirana' stores (Traditional Traders) to the Supermarkets. This loyalty has nothing do with quality of service or even, in some cases, the pricing of the service. It is purely "Trust" and "Familiarity" that drives the relationship. The incumbent long-standing Kirana store owner does very less for customer retention and lesser for quality of service but still manages the largest market-share even while competing with some of the biggest brands of Indian grocery retail stores.

    While I understand that your research is based more on a larger enterprise spread across different geographies, I wanted to bring in this angle of a small incumbent store taking on large enterprises and battling (and winning) anti-incumbency.

    Best Wishes,

     
     
     
    • Bruce Kasanoff
    • President, NowPossible.com

    Many marketers are stuck in traditional thought patterns that create endless loops of churn. Companies steal each other's customers, because their service offerings are neither personalized nor significantly differentiated. To combat this, we abandoned white papers and business-speak in favor of very short, highly plausible "science fiction" stories about the near future of business. They work much better to inspire managers, at least so far.