Chapter 10

The Customer Engagement Index

TYPES OF ORGANIZATIONS WHERE THIS METRIC IS APPROPRIATE

This measure is appropriate for any medium to large business that can’t just observe to get a good feeling on the level of customer engagement. It is harder to measure customer engagement when you have millions of customers and sell your product through stores or distributors. However, with the advent of big data, it is now possible to summarize millions of data points from millions of customers to get an assessment of customer engagement. This type of measurement is much easier and less costly if you have a dozen or so big business customers. If you have two or three customers you probably don’t need this metric, because you know where you stand on a daily basis with them since you talk with them every day. You also probably don’t need this measure if you see customers once or twice and hopefully never again. A surgeon who does hip replacements is not looking for a customer for life. If the surgeon does a great job, she sees the patient after surgery, maybe checks in a few months later, and then does not see them again. If your organization is built on selling a product or service that is good for life and you never need to sell them anything else, there is no reason to measure and manage the relationship you have with them. However, this is only true for a small minority of organizations. Even organizations with a captive audience of customers, like the Department of Motor Vehicles or the IRS, seem to care about managing the relationship they have with their customers or citizens.

HOW DOES THIS IMPACT PERFORMANCE?

The relationships you have with customers directly impact your revenue, profit, costs, and even your stock price. Losing a major account could cause your stock to decline in value. Losing a big customer could not only result in a loss of revenue from that customer, but also inhibit new business from future customers who might talk with that lost customer. Losing a customer is often devastating to an organization. Even if it is not, managing relationships is critical. Even if you are a consumer products company, or a service firm with literally millions of customers, one consumer can impact your entire business. In the past, big companies like banks, airlines, carmakers, and retailers did not bother themselves much with individual consumers and did not try to track and manage relationships with them. However, with the advent of new software and big data, this is now possible, and organizations that do it have a huge edge over their competitors.

Measuring and managing relationships with customers also has a big impact on your costs and your account management and sales processes. Detecting small problems and getting them corrected is the secret to managing a relationship with a customer. This means frequent measurement and follow-up actions to see if the problem has been resolved and the relationship is still positive. Marriott is a master at this. It knows the lifetime value of a customer and that 20 years of a highly engaged customer can turn sour with one bad hotel experience. Understanding the value of a customer relationship helps customer-facing personnel make the right decisions regarding spending a few bucks or doing something extra to make a customer happy.

Customer engagement also directly links to employee engagement. Happy, engaged employees tend to provide better service to their customers, but the reverse is also true. It’s pretty hard to be happy and engaged in your job if most customers are angry and seem to hate your company. Often the anger is caused by factors outside of the employees’ control, like stupid policies, poor-quality products, software and hardware that is too slow, inaccurate databases, and under-resourced call centers. In short, customer engagement can have a big impact on most measures of an organization’s success. The ironic thing is that the vast majority of organizations do not have good measures of this factor.

COST AND EFFORT TO MEASURE

The cost and effort to construct a good customer engagement index are both high. Of course, the value is also high. Taking a halfhearted approach to this metric does not make sense, and you are better off not tracking anything than taking shortcuts like relying on surveys as your only measure. The cost will be in both determining the factors to measure and collecting the data. If you sell to consumers, the cost could be much higher than if you have 20 to 30 business customers that account for 80 percent of your revenue.

In some cases, you might have to buy the data. Grocery stores keep track of the purchases of each customer through the use of their discount cards. Big stores like Safeway and Kroger deal with millions of customers who make millions of purchases. Getting at that data could be extremely useful for a consumer products company. However, it won’t be free. The retailers know the value of this information and will charge for it. However, it might be worth the money. Imagine if you sell Tide detergent and you buy a big jug of it every couple of weeks either at Kroger, Walmart, or Target, depending on where you are shopping that week. The value of that customer to Procter & Gamble is huge, because he may also buy Crest toothpaste and lots of other P&G products. So let’s say that consumer joins Sam’s Club or Costco for the first time and decides to try that store’s private-label laundry detergent, which is a lot cheaper than Tide. He takes it home, tries it out for a few weeks, and the laundry comes out really clean—just as good as or better than with Tide. So he keeps buying it and does not go back to Tide. On the next visit to Costco he decides to try Kirkland toothpaste and Kirkland vodka instead of the Crest and Absolut he usually buys. Once again, if the experience is positive, then it’s more sales lost for P&G and the maker of Absolut. Being able to track stuff like this could be hugely beneficial to P&G and other consumer products companies. A customer who has tried a competitor’s product once or twice is usually not sold right away. Imagine if you knew when a customer tried a competing product for the first time and you could send her a coupon for 25 percent off or some enticement to keep her buying your product? By the time she has finished the jug of laundry detergent or bottle of vodka, the consumer might realize that it is not quite as good as the name brand, and a coupon for a big discount could be just the ticket for luring her back.

HOW DO I MEASURE IT?

Before talking about how to measure customer engagement, I need to spend a little time talking about how not to measure it. Three measures to avoid except as minor submetrics are:

Net Promoter Score: The One-Question Survey

The most typical way of measuring customer satisfaction is via a survey. To combat the fact that surveys have a very poor response rate, a new technique is to ask just one question: “On a scale of 1 to 10, would you recommend our company’s products or services?” The idea is that customers will be much more likely to answer one question and provide feedback to your organization. These one-question surveys do tend to get a better response rate than longer ones, but the majority of customers still ignore them. The results are turned into a Net Promoter Score, another practice that many have adopted. The approach proposes that customers who give you 8, 9, or 10 ratings are your “promoters” and talk about you in a positive way to others. Those in the 4–7 range are on the fence and could easily be lured away by a competitor, and the customers who give you 1–3 ratings are already very unhappy and may tell others about how bad your product or service is. The appeal of this approach is its simplicity. Executives now can focus on a single measure of customer satisfaction: Net Promoter Score.

The biggest problem with one-question surveys, or a Net Promoter Score, is that the data is not actionable. If you find out that 20 percent of your customers give you a 1–3 rating, you have no idea why or what to do about it. Relying on a single-question survey as your only or main measure of customer satisfaction or engagement is also a huge mistake. An article by the Gallup company called “A Popular Idea That’s Dead Wrong” talks about the folly of relying on a Net Promoter Score as your primary measure of customer satisfaction.1 Of course, Gallup wants to sell you a longer and more expensive survey.

Don’t Confuse Loyalty with Satisfaction

The fact that your customers stick around does not necessarily mean they are happy with your products or services. Loyalty is often driven by laziness, risk aversion, habit, and a lack of better choices. Most of us hate paying our cable or satellite bill for television and have looked around at alternatives, but they are all around the same price and have the same channels, and we may be stuck in a contract, so it is easier just to stay where we are. Predicting future customer buying behavior and loyalty is a tricky business. A customer who consistently rates you a 10 on your Net Promoter Score survey may be gone tomorrow because someone came along with an attractive offer, or she just got bored and wanted to try something new. Leading companies like FedEx and others have found that a daily metric that tracks the occurrence of errors that frustrate customers can be a simple and easy way of measuring and predicting when a customer might leave and never come back.

Most Unhappy Customers Don’t Complain

Measuring customer engagement by tracking complaints can provide misleading data. I read that only one-tenth to one-hundredth of unhappy customers bother to complain. Some people have learned that if they complain they get free stuff. My mom is always writing some kind of complaint letter to someone, and this behavior is often rewarded with free stuff. Most of us don’t bother complaining, but we display our dissatisfaction by never going back. Losing a customer is actually a pretty accurate measure of their dissatisfaction, but it comes a little too late.

WHAT FACTORS SHOULD BE INCLUDED IN A CUSTOMER ENGAGEMENT INDEX?

There are a number of different dimensions that tell you about the degree to which a customer is engaged with your firm and its products and services:

• Product and service quality problems and their severity (see Chapter 13 on the customer rage index)
• Share of wallet and level of engagement
• Personal relationships and politics
• Price of divorce (cost of finding a new supplier)
• Quality and value of alternatives
• Current satisfaction levels

Product and Service Quality

A big factor that impacts the relationship you have with customers is the quality and value of your products and services. People may love the account executive they deal with, but if the product quality starts to slip, so too does the relationship. It is a good idea to include internal quality control metrics in the customer relationship index, like on-time delivery, order and billing accuracy, defects, and other related measures. One simple way of tracking these factors is to take the customer rage index described in Chapter 13 and insert it as a submetric in this analytic. I often see this done where organizations will have an index that they look at separately as well as it being part of a larger measure. Having consistently good-quality products and services does not necessarily deepen the relationship, but not having them can certainly degrade it quickly.

Share of Wallet and Engagement Level

This second dimension is a big deal because it is a measure of the degree to which your products and services are part of the organization or individual’s life or operation. My friend Roy is a consultant and contractor with a number of clients, but his main client is the research and development arm of the Army Corps of Engineers. Roy works with the director and other members of the management team to help develop strategic plans and performance measures and to improve processes. Roy is viewed as a valued member of the senior management team even though he is a contractor. He has worked with the Army Corps of Engineers for many years, helped it solve many problems and challenges, and is an integral part of the organization. This client is highly engaged with Roy.

My wife and I are highly engaged with Purina. Purina is one of the best companies I have worked with in 30 years. I buy many Purina products for our two Persian cats, including prescription food and probiotics, and we have pet insurance through PurinaCare. We watch the company’s television commercials, and my wife is often on its web sites, which provide really helpful advice to pet owners. To us, Purina is not just a company that makes cat food, it is a trusted partner and client.

We have a high level of engagement with Trader Joe’s as well. When we were thinking of moving to Austin, Texas, one of the negatives was no Trader Joe’s. I know, it is just a grocery store, but we love Trader Joe’s and spend a lot of money there every week. Trader Joe’s has about 80 percent of our grocery dollars each month, so it has a big share of wallet. Imagine how useful it would be to have a measure of the degree to which your products or services are an integral part of your customers’ lives. This is the real measure of engagement or relationship, and it cannot be measured with a survey. The measure looks at the number of ways in which your company is connected with a customer. Banks can easily track what they call “share of wallet” by looking at the different products you have and the percentage of your net worth that is with them. For example, with a big company like Citibank I can have:

• Credit cards
• Mortgage
• Checking account
• Savings account
• Retirement account
• Brokerage account
• Safe deposit box
• Line of credit

Having all my financial services handled by Citibank makes me a highly engaged customer and much more valuable to Citibank than if I just had one of their “products.” Collecting data on share of wallet is much easier for a bank than it would be for a retail store or consumer products company. Trader Joe’s probably does not know if I go to Vons to buy some things. However, if Trader Joe’s saw that the average amount of my spending at its stores was cut in half, it would be pretty easy to figure out that I have started shopping elsewhere.

How people spend their money is probably the strongest measure of engagement. If you start out as a third-tier backup supplier and work your way up to primary supplier with the largest share of the business, that is a great measure of the level of engagement of your customer. Growth and declines in business and diversity of your products or services purchased is a really important hard measure of engagement.

Personal Relationships and Politics

Relationships between firms are really relationships with people. If you sell to millions of consumers you can’t measure personal relationships and you don’t really have them with consumers. However, many big consumer products firms have relationships with their retail partners, like dealers do with car manufacturers. A factor in customer engagement is the connections you have with customers and who you are connected with. I recall a client who repairs aircraft having a close friendship with then CEO of Continental Airlines Gordon Bethune. Did this impact the relationship between the two firms? You would be naïve to not think so. These two guys were friends outside of work and had a business relationship that lasted over 25 years. Employees of Continental also had some friends and former coworkers at the supplier firm, so relationships went deeper than just the two CEOs. Walmart seems to understand this, so they rotate buyers every two years so they cannot become close to vendors and suppliers. This makes trust hard for the vendor, since as soon as they develop a trusting relationship with the Walmart buyer, a new one gets appointed. Personal relationships can be quantified by the level of the person you have a relationships with (i.e., CEO = 10, worker = 1) and the length and depth of the relationship (1 = business only, 10 = close personal friends for 20-plus years).

Price of Divorce and Cost of Switching Suppliers

Part of what makes two firms or a consumer and a firm stay together as partners is the price and effort required to switch suppliers. Most firms have trusted suppliers they have been working with for years and tend to stay with them even if their performance is not perfect because it would be too hard to switch. There is also something to be said about the devil you know versus the one you don’t know. Many people stay with their bank, insurance company, and mechanic because it is too hard to find a new one. Finding a new bank and switching all your accounts is a pain, and who’s to say the new bank is really any better than the one you have? Often businesses stay with suppliers because of lethargy, but a supplier that really knows your business and needs is very valuable. The higher the cost of switching suppliers, the more likely an organization is to stay with the ones they have. This is true for individual consumers as well as for big companies.

Quality and Value of Alternatives

A related factor is whether more attractive alternatives are available. You can switch your wireless provider from AT&T to Verizon, or try one of the smaller companies, but chances are you will have to sign a contract and you will pay about the same. You can switch from Colgate toothpaste to Crest, but not save any money there either, and you’ll probably find that either product gets your teeth clean. Many organizations stay with an existing supplier because they perceive that the alternatives will be the same price and quality or close. When an alternative comes along that is cheaper, of better quality, or a better value, organizations and individuals may not be loyal. A few years ago every company and business person had a BlackBerry and most people really liked the product. BlackBerry pretty much had the business market locked up until the iPhone came along. At first many people had a BlackBerry for business and an iPhone for their personal device. That seemed like kind of a waste, and most found they preferred the iPhone. Some even convinced their companies to adopt the iPhone instead of the BlackBerry. Even though BlackBerry/Research in Motion had excellent relationships with their corporate clients, the pressure to switch to the iPhone was strong and many did so.

Current Satisfaction Levels

A big factor in assessing the strength of your engagement with customers is their current satisfaction level with your product, service, and firm. As you know from reading other chapters, I am not a big fan of surveys, for reasons already expressed. However, you do need a way of gauging customers’ opinions and perceptions. As explained earlier, Net Promoter Score is a one-question survey that might be one of the submetrics here in the customer engagement index. Another alternative is a face-to-face meeting and report card. Younger Brothers Construction in Phoenix uses this technique. Jim Younger visits each of his 15 to 20 homebuilder customers a couple of times a year and asks the president of the customer company to give his company a report card on four or five factors like quality, value, flexibility, and service. The cool thing about this as a data collection method is that Jim takes the time to visit customers himself, and when someone gives less than an A grade, that person can talk about reasons for the grade and what can be done to get a better rating next time. It becomes a dialogue and his customers love that he takes the time to have these meetings. If he just sent out a survey, it would be ignored. If you are doing any kind of survey you can use that data as one of your submetrics here. Other methods such as focus groups using automated rating devices like those on TV game shows, follow-up visits, and recommendations can also be ways of measuring satisfaction levels.

VARIATIONS

One common variation is to measure customer engagement by tracking action items completed in the CRM (customer relationship management) plan. This sounds good in theory. If your account exes do everything they are supposed to do to build a stronger relationship with customers, the engagement score should go up. This is not always the case, however. I recall a client who loved to take customers out for golf, expensive lunches, and spectator sporting events. Some of the clients loved these outings and took advantage of every one they could. Other clients were offended by the offers, seeing it as an unethical way to bribe them, and they would rather be at work or home with their families than out at a Red Wings game with a bunch of drunk customers. Customer relationship management is important, but the strategy has to be tailored to each customer, making it tougher to use events or activities as valid measures.

Another measure I often see is loyalty, or length of the relationship. I mentioned earlier that loyalty can just mean laziness or a lack of better choices, but having a customer for a long time is sure to be worth something.

One client calls this entire analytic the Matrimonial Index, and rates customers on a 1–10 scale, with 10 signaling “married and will use our product even if there is a less expensive alternative” and 1 signaling “we are a backup supplier only and customer is married to another supplier.” What makes the metric even more strategic is they don’t set a goal of being married to all their customers. For some customers they are looking to pull away and eventually divorce them, whereas they are working on building a marriage with other more attractive customers. Everyone understands this index, and they reassess the attractiveness of each of their customers once a quarter because things change.

FORMULA AND FREQUENCY

The specific design of your customer engagement index will vary a lot depending on whether you sell to business (B2B) or to consumers (B2C). Personal relationships and even share of business may be impossible and impractical to measure. A straw man formula for a B2B company is shown below. Note that a B2C company would leave a few of these dimensions out of the formula.

BENEFITS OF DATA

The benefits of having this data at your disposal are enormous. First of all, you will be able to adopt a much more scientific and refined approach to sales and customer relationship management. Another big benefit is that you might decide to pull away and even drop some of your customers. You will also have a way to track the return on investment from your CRM activities. Most companies do all sorts of things for customers with nothing other than anecdotal data on how it impacted their engagement. Using this metric in combination with attractiveness metrics such as customer lifetime value allows an organization to directly link customer engagement to profits. The organization I mentioned that created the Matrimonial Index made dramatic improvements in revenue, profit, and market share using this metric to drive the activities of their marketing and sales departments.

NOTE

1. John H. Heming, “A Popular Idea That’s Dead Wrong,” Gallup Business Journal, December 14, 2006, http://businessjournal.gallup.com/content/25822/popular-idea-thats-dead-wrong.aspx.