CROUCHING CUSTOMER and HIDDEN INSIGHT

Dears,

CROUCHING CUSTOMER and HIDDEN INSIGHT

Data, Data everywhere, but never the time to think. That's the state of most companies' knowledge of their customers today, as transaction systems capture unimaginable volumes of data about customer activity, but create real challenges for managers hoping to glean insight into how to win more customers and better serve existing ones. Despite having a wealth of transaction data, few organizations have developed capabilities to aggregate, analyze, and use customer data to generate real business value. Though the business world is witnessing an explosion of interest and investment in CRM software and other analytic technologies, many fail to exploit those technologies effectively. As a result customer satisfaction ratings remain largely unchanged.


Why Care About Customer Knowledge?

"Know your customer" is one of the most widely used maxims in business. Yet many companies devote little thought to improving their own understanding of their customers. Often companies have been discouraged by previous efforts, such as failed data warehousing projects or unsuccessful attempts to persuade sales personnel to document customer interests. Many companies that do seek to improve their customer understanding take limited measures, such as conducting a study of customer profitability or implementing a new CRM software product to improve sales force effectiveness. Too often these efforts provide improved efficiencies, but yield little in the way of improved customer insight.

A recent research study suggests that the best companies in an industry derive as much as 6% of additional operating margin in certain industries, simply by having a better understanding of their customers. An organization whose people have better customer knowledge can develop a deeper insight into their customers. These insights, if properly nurtured and applied, enable employees to improve their customer relationships in every interaction with the customer. It is this increased "customer equity" that leads to improved margins.

The following are the most common ways organizations use their customer insight to create value:

o Segment and prioritize the customer base to maximize resource allocation – Famous Casion analyzes customer data to determine which customers are most likely to respond to offers to visit particular casinos. As its base of customer data has grown, more of its marketing bets are paying off.

o Create more effective marketing messages - Frito-Lay was involved in a study that compared a retailer's total return on investment for direct store-delivered brands (like Fritos) versus "warehoused" brands. Having this knowledge about its customer's performance allowed Frito-Lay's salespeople to make a stronger pitch for increased shelf space.

o Innovate and improve existing products/services - Hewlett-Packard's laser printer, Laser Jet V, was not designed to be portable (portability is not a factor in its purchase). Handles were added because observing customers showed that 30% are in the habit of moving their printers. Because many of those who transport printers are women, the handles were designed to be large enough to avoid breaking long fingernails.

o Engender customer loyalty - British Airways analyzed customer data to discover instances where an executive customer had flown one-way on British Airways, but used another carrier on the return. It sent these valued customers a special mailing, headed "now we see you - now we don't," and offered a special incentive to use their services both ways.

o Enhance the array of products/services - Travelocity, the Web-based travel agency, offers customers who buy airplane tickets to 10 large United States cities a "destination guide" with useful information about their destinations.

o Improve success in cross-selling - Amazon.com steers its repeat book-buyers to other types of products based on interests they have displayed in past purchases.

Customer Insight Leaders

In the research of 22 leading companies, they identified the multi-pronged approaches that allowed these companies to develop superior customer understanding. They noted that all were tackling the challenges simultaneously on many fronts, combining approaches to managing transaction-derived and human-based knowledge. While specific tactics differed in many respects, the leaders excelled in three areas - strategic focus, knowledge creation, and organization integration.

Strategic Focus

A company's market position and corporate strategy must be defined and understood before pursuing a knowledge creation initiative. Then, the company can choose its spots. While it would be nice to be thoroughly knowledgeable about every customer, the reality of resource constraints dictates that there be an emphasis on some highly valuable subset. Leading companies focus their resources on the most valuable customer segments. Microsoft, for example, shifted its emphasis a few years ago to understand the needs of CIOs, as it anticipated a future where vastly more revenues would come from corporate than from individual software purchases. A similar shift occurred at Procter & Gamble when it altered its focus in the 1980s to become more knowledgeable about Wal-Mart and other increasingly powerful trade customers. Until then, its efforts were largely focused on end-consumer research.

Knowledge Creation

Leading companies align their knowledge management initiatives with their business strategy. Prior to the information gathering process, these companies define and focus their customer knowledge objectives based on their business strategies and customer relationship objectives. For example, clearly defining its objectives first, FedEx successfully undertook an initiative to increase the company's share of the small shipper market. Since this depended on being able to serve these customers cost effectively, a related goal was to encourage small shippers to drop their packages off rather than have FedEx trucks pick them up. The clarity of these objectives made it much easier to understand what knowledge had to be gained and shared about small shippers.

These leading companies also use transaction-driven and human-based information to build a complete customer picture, fostering customer loyalty. Transaction-driven data can be obtained through systems and data warehouses/marts that include information from past purchases, ZIP codes or income data. This data can be used to improve direct marketing and products cross-selling, and in identifying unprofitable customers.

Detailed databases can be helpful, but the best companies recognized that much more sophisticated human-based knowledge - gathered through personal interactions with the customer - must be managed as well. This is especially true in situations where the past is not a particularly relevant guide to the future. Take the example of a company selling largely fashion goods - past transactions probably are not the best indicator of what will sell to whom this season.

Procter & Gamble, long considered one of the world's best marketers, exemplifies an organization that employs transaction-driven and human-based approaches to gaining consumer and retailer knowledge. Going a step further than the concept of focus groups, Procter & Gamble constructs highly detailed "mental maps" of consumers' thinking about products, such as detergents, which are based on extended, wide-ranging discussions with typical consumers. Procter & Gamble marketing people walk the floors of stores with shoppers, noting what they say and do not say, and observing what they do. With thorough mapping, a great deal of insight can be extrapolated from the thinking of a few consumers. At the same time, Procter & Gamble has been a heavy user of statistical data from point-of-sale transactions. Now Procter & Gamble has begun to focus on managing explicit knowledge about key retailer chains as customers, and encourages members of customer teams to capture and share key information about retailers with other members serving the same customer.



Organization Integration



The companies that are best at managing customer knowledge also recognize that customer knowledge initiatives do not exist in a vacuum. Rather, their success is dependent on the broader context of roles and responsibilities, the culture of the workplace and organization structure.

It is imperative that the organizational structure enforces the strategic objective of customer understanding and therefore, must be conducive to generating and managing customer knowledge. Many companies, such as Hewlett-Packard, have undertaken reorganizations to become more customer focused. The company's laser printer business, for example, prides itself on technological excellence. Over time, Hewlett-Packard managers realized that commoditization would cause it to lose market share if it relied exclusively on technical leadership. Like many great product companies, Hewlett-Packard was organized by product segments, such as "mid-size laser printers." Management began a major cultural shift to focus instead on the full customer experience - which included customer support, buying, upgrading, selling, service, toner purchase and maintenance. Getting Hewlett-Packard's development engineers to think more broadly about their products is one benefit of this approach. For example, surveys suggested that customer satisfaction could be increased if the "low toner" message was changed to indicate how many pages were left before the toner runs out. To do this would require adding sensors to predict how many more pages could be produced. Before the new focus on customers and customer knowledge, development engineers would not have understood how adding this feature contributed to market leadership. Reorganizing around customers seems a double-edged sword. If a company is organized around types of customers, each type will receive significant attention, and approaches will be developed for managing knowledge about that type of customer. However, this segmented organization may mean that generalized solutions for customer knowledge will not be developed and that useful approaches may not be shared easily across different customer types.



The Harley-Davidsons, Hewlett-Packards, and Procter & Gamble’s of the world - are making significant investments to develop transaction-data-driven analytic to develop transaction-data-driven analytic capabilities. But more importantly, they are investing in a wide variety of approaches to gain customer knowledge. In fact, the detailed interviews with the leaders in customer knowledge reveal that they give most of the credit for their success to their efforts in increasing the collection, distribution and use of human-based, as opposed to transaction-derived, knowledge. We would argue that information from both customer transactions and human customer relationships are necessary for real customer insights, but they must be turned into knowledge to be useful.



Transaction-Derived Knowledge



There is no doubt that an organization's ability to analyze and interpret transaction data can be a source of competitive advantage. Examples of some of the leading companies use of transaction-driven knowledge include the following.



Use of past-purchase or other personalized data to target and deliver promotional offers - American Express designed four different covers for its merchandise catalog, each household got the one that best reflected its past purchases (high-tech gadgets versus jewelry).

Increase customer loyalty - Marriott invested heavily in customer relationship management systems. Desk clerks now get a heads-up display of any special interests or needs a guest might have expressed when making the reservation or during past stays at other Marriott properties. Having such information available during those first few critical minutes following the customer's arrival can make all the difference to their lasting impression of the hotel's service.

Achieve a sense of relationship through personalization - Clinique.com asks users for information, such as natural hair color and tendency to sunburn, so it can recommend products likely to be right for them, and also periodically sends email offering deals on these products. To date, some half million users have registered.

Improve cross-selling - First Union, one of the largest United States based banks, implemented a massive enterprise-wide customer-centric data warehouse. First Union uses its customer data to improve the effectiveness of direct marketing efforts. The bank also analyzes customer characteristics to identify unprofitable customers, with the hope of transforming them into desirable customers. Finally, by analyzing both transaction and demographic customer data, First Union relationship managers are able to react in real time to consumer "events" (for example, a major savings withdrawal or deposit, or purchase of a house). It expects these combined capabilities will contribute $400 million in revenues annually.



Human-Based Knowledge



As useful as transaction data can be, the truth about customer knowledge is that successfully managing it requires more than data crunching. Sophisticated knowledge, particularly human insight, must be managed, together with voluminous data. The following are examples of some leading companies' uses of this type of knowledge.



Promoting a higher level of interaction between employees and customers - Fidelity Investments requires salespeople to record customer knowledge gained in sales calls, a particularly useful resource when a customer account is reassigned for whatever reason.



Tightly linking corporate identity to their customers' identity - The Jeep division of Daimler Chrysler understands they must know their customers extremely well in order to continue to introduce product improvements that are true to the brand. It hires marketing professors (with strong backgrounds in the social sciences) to observe and interpret customer behavior at rallies and discuss it with executives and marketing management - an attempt to capture subtle observations and impressions and convert them to explicit knowledge.



Improving product design - At General Electric, comments from customer calls on the division's inbound toll-free number are systematically recorded by service reps and later analyzed by product developers. To get a feel for the customer's voice and mood when giving the comments, engineers and researchers are required to listen in on customer calls at regular intervals.



The best approach to customer knowledge is a mix of transaction-driven and human-based knowledge, though even the best companies struggle with achieving the right balance and integrating different types of knowledge. Those that are most successful take a conscious, deliberate approach to transforming data into knowledge and results.



Looking for Insight in All the Wrong Places



Clearly, companies investing in customer knowledge management must focus on particular customer types and objectives, employ both transaction-derived and human-based knowledge, and manage the broader customer knowledge context. Most large companies have a good record of the business transactions they complete with customers. Many of these companies are focused heavily on analyzing transaction data and have forgotten that there is a world of customer knowledge coming directly from human interactions with customers. Companies must not be tempted by the easy availability of transaction data to mistake transactions for customers, or to gravitate into territory where the projects are least ambiguous and where knowledge-finding looks easiest.



Customers, first and foremost, are people - and building a relationship with them entails more than just tabulating their transactions.

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