alteraxion > Digital Entertainment Convergence | Consulting, Venture Capital, Strategic Intelligence.: Customer Efficiency Ratio: The Next Competitive Advantage

I recently had the opportunity to read anew some of Bill Gates’ comments and my notes in his book “Business at the Speed of Thought”. One of my many higlighted paragraphs states:

“In the traditional business model, suppliers have often been merely tolerated for what they provided but were not treated as an integral part of the overall business process to serve customers”.

I enjoyed being reminded in this fashion that above all a business makes money as a result of building systems and processes that best serve customers. In addition, I also found a recent Business 2.0 article entitled “The CTO in the GTO” to have been a fascinating read. In it General Motors’ CTO Tony Scott describes the many issues confronting technology businesses today and in an opening quote he states:

“Listen to your customers or risk losing them”

Although Scott discusses B2B environments his comments should be given careful thought as the implications within a B2C context are identical and all players in the digital entertainment convergence space should pay particular heed to this. He goes on to say:

“We’ve been dilligent about making our pain known in that space [interoperability] – it’s very costly to make incompatible technologies work well together. [This incompatibiltity has] been the full employment act for contractors and consultants. It’s silly. These things should just work together.”

Naturally when GM - with its $3 billion IT budget - makes its ‘pain’ felt you can be pretty sure that someone will soon take notice and try to be accomodating. However when it comes to the typical B2C customer it would appear that companies often consider that it’s too ‘complicated’ to take their individual needs into account when designing and delivering a product or service – the fact that without satisfied customers there is no business does not appear to play a big part in this equation. Thus while the ‘Voice of the Customer’ is paid some lip service, customers’ pain can go completely unchecked even though their budget is orders of magnitude larger than GM’s. Furthermore, although customer technology ‘consultants’ such as Best Buy’s ‘Geek Squad’ is a much welcome exception most companies will more often than not be content to let customers ‘figure it out by themselves’.

In this vein, Shoshana Zuboff, a professor at Harvard Business School and regular columnist at Fast Company, discusses in ‘Small Insults, Heavy Toll’ some of her own – increasingly regular – customer pains. She describes some of the most common product and service practices among businesses today which she places in four distinct categories below (my comments in brackets):

Transaction Starvation:

Work is off-loaded to customers (delusionally thinking that this will save costs instead of understanding that it reduces overall revenues).

Transaction Inflation:

Instead of the price going up, the original product shrinks (the standard becomes ‘premium’, customers are not fooled, revenues shrink, death spiral begins).

Product Tyranny:

Take it or leave it (transaction based processes with no regard for the long-term value of the customer relationship. Companies who do not understand the compound value of each customer’s spend over many years will suffer the financial consequences).

Relationship Mimicry:

The transaction is dressed up to look like a relationship (we’ll treat you nice as long as no effort is required. Can you tell when someone is being honest? Your customers can – very quickly.).

So why should B2C companies care about identifying and addressing customers’ pain and serving them better? Well, stated bluntly, because there’s a bundle of money to be made for those who can successfully remedy customers’ pain.

In following with Zuboff’s themes, I would like to use her idea of ‘Transaction Starvation’ to help describe just how much more money is to be reaped by those companies who are able to deliver effective customer solutions – what I term the ‘Customer Efficiency Ratio’ (CER).

As you may recall, in my previous post ‘Confronting Change’ I discussed how my company had developed a financial model to help illustrate how two competing businesses could achieve financial results orders of magnitude different from each other with only very minor variables at play.

The chart below is a highly simplified representation of this financial model and does not take into account many other important variables such as client acquisition rate, client acquisition cost, client retention rate, pricing and other operating costs for example. For our purposes here we have considered all other competitive elements to be identical across both players. Also, this chart does not take into account the compound growth effect that the more customer efficient business would benefit from.

In this case, our point of departure is one single process that customers need to use to get a desired result – such as to buy a product, subscribe to a service, look up information, etc. The customer centric organisation (Biz1) has facilitated this process by allowing customers to complete this task within 1.5 minutes while the same task completion time at the product centric organisation (Biz2) is 2.0 minutes. Therefore Biz1’s customer efficiency ratio is 75% that of Biz2. The rule that we then apply is that Biz2’s CER – in effect the business’ competitive disadvantage – is directly proportional to Biz1’s CER - his competitor’s competitive advantage. In this case 75% x 75% = 56%.

Thanks to its higher customer efficiency ratio Biz1 is able to attract more customers (and faster), to generate a higher level of business patronage with more visits per year per customer, to deliver a better customer experience which translates into more customer spend and finally to do so consistently year after year achieving a much higher average customer retention rate. The results speak for themselves, the customer centric organisation is able to generate revenues 1,000% above those of the product centric organisation.

Within this context perhaps our earlier rule about performance in the age of digital convergence below will gain a renewed resonance:

“The overall use of a system is directly proportional to the ease-of-use of that system”

Hopefully our financial model and the illustration of its very tangible rewards will be used to help stimulate the required changes within organisations to deliver better, faster and cheaper customer processes. In the end it is worthwhile to remember that everything flows from the customer and that when we are able to make him or her happy(er) the rewards will follow naturally.

Related:

If your organisation is a Digital Entertainment Convergence player and you would like to learn more about alteraxion’s model and its ongoing Digital Foresight program and to discuss how we can apply these to your organisation please fell free to contact me - Andrew Carton.

Furthermore, I will be happy (limited to the first 10 companies) to extend a free one hour telephone consultation to those organisations wishing to explore the ideas discussed here further. Please send me your contact details along with a short description of your business (in strictest confidentiality) and your area(s) of interest and I will aim to respond to you within 24 hours.