Relationship Marketing Economics

Just opened up a carton from a manufacturer we use in the Lab Store.  Every unit inside looks like this:

Bad nozzle

Here’s your challenge:

Would anybody in your business recognize this as a problem?  Or would they just shrug and transfer the item to the picking racks?

In other words, finding this, would you or an employee:

1.  Ship to the customer as is, let the customer figure it out

2.  Cut the nozzle off so customer doesn’t have to even think about it, doesn’t have to send you e-mail or call asking about it

Your answer to this question depends on:

1.  How customer-centric you / your org really is

2.  How much you understand about the financials of your business

Me, I can see and feel what the customer experience opening the package is going to be, especially if the customer is New.  First, they will see our Welcome Kit, Free Gift, and Samples.  Surprise and Delight, generates incremental net profit of $36.68 per New Customer.

Then they come across this mis-matched sprayer set, and lose Emotional Momentum.  In case you can’t picture what is going to happen, our average customer (probably not someone like you) is:

1.  Not going to initially realize this is a problem
2.  Try to assemble the product
3.  Find that it’s difficult to assemble
4.  Spill the product trying to force assembly
5.  Get very frustrated

Then – and this is the “Relationship” part – they will think, How could they ship a product to me like this?  What do I do with this?  Should I return it?  But I spilled it.  Can I fix this by trimming the tube?  Where are the scissors?  What if the sprayer doesn’t work after I cut it?  Why is ordering from these people a hassle?

This is Friction.  Friction gradually grinds the Relationship to a halt.

If a good experience can generate $36.68, does it follow a bad experience could wipe some or all of that profit out?  By decreasing the 2nd purchase conversion rate responsible for most of that profit?

I don’t want a single new customer to question their decision to buy from us; that’s planting the seed of dis-engagement, which leads to defection.  So I’m going to cut the nozzles off, because I can estimate the risk / reward.  But I have a lot of experience analyzing these kinds of issues, I can see the pro-forma in my mind’s eye.

What could you do?  For example, could you A / B test this hypothesis of mine before sticking your neck out and risking time or money to trim the nozzles?  Absolutely!  In fact, the classic split test is the fundamental tool in Relationship Marketing, and just about the only way to prove out the profitability of “Customer Experience” issues.

And we’ve done that kind of thing before when the issue is important strategically (example).  In this case, ship 1/2 the bottles with the long nozzle, 1/2 the bottles with the trimmed nozzle, keep track of the customer ID’s (who got which), look at customer value and service costs 90 days out, compare profit of two groups.  All of these customer-centric ideas can be tested, just like you test landing pages or e-mail copy.  Let’s take a look at what the outcome might be.

I figure it will take me an hour to trim the whole lot.  That means my salary (or net profit, in the case of an Operational Test of this concept) for that hour, if  the trimming preserves the 2nd purchase rate of all these new customers, would be:

240 bottles x 40% to New Customers = 96 x $36.68 = $3,521

That’s a gigantic “found money” number for a company of our size.  What is $36.68 x number of new customers at your company?

If just one New Customer is impacted negatively by the nozzle, I make $36.68 for the hour.  Not gettin’ rich, but better than working fast food.

That’s just the New Customer impact.  Doesn’t include negative impact on current customer value / subsequent re-order likelihood, or savings from prevented e-mail and phone calls ($6 each?)

Downside?  I completely waste an hour in front of the TV clipping nozzles.  No brainer, at least for me.  What if you were paying somebody $15 an hour in the warehouse to do the trimming job, would the answer be any different?  How about at $20 an hour?  $25?

Would you risk $25 to preserve a Potential Value of $3,521?

I would.

In the above case, we have a classic value exchange between the company and the customer.  The company (me) does work for the customer to improve the experience.  In exchange, the customer responds by becoming more likely to make a 2nd purchase.  There is real work done for the customer and the company is rewarded by increased profits.  And you can prove it with an A / B test.

Relationship Marketing.  Dollar for dollar invested, often makes your company more money than Advertising because of the leverage you get from Optimizing customer-facing Business Processes.

If you want to gain credibility for Customer Experience ideas, if you want to actually do something about this area, you need to (as we used to say at HSN) “go down into the belly of the beast”.

Perhaps you could start by testing a New Customer Kit or On-Boarding program?  Form your hypothesis and test it.  Prove customer experience matters to people with the power to take action – Finance.

I’m pretty sure if you walk into Finance with proof that you can generate $48 in profit for every dollar they give you in 90 days on this New Customer program, you’ll get their attention.  I don’t know about you, but I have unlimited budget available for this kind of program!

Once Finance understands what you are doing and how profitable it is, you have a platform for any Customer Experience ideas you’d like to talk about, whether you call them Social or Service or Experience.

People listen to the sound of profits.

 

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10 thoughts on “Relationship Marketing Economics

  1. This looks like the sort of sprayer that has a flexible hose to *reach into the corner of the bottle*. A shorter nozzle would leave wasted product in the bottom of the bottle.

    Looks like the product design is OK to me. Or am I missing something?

  2. Nice try, Novo. I know that that’s just an optical illusion. If you moved the bottle further away from the sprayer, then they’d both be the same size.

  3. You know, when I was taking the pic, I thought to myself, “With this crowd, perhaps I ought to take a picture of the correct nozzle as well, but Nah, nobody would be that anal”.

    Don’t you think I know how long the nozzle should be? I’ve shipped, dunno, maybe 2000 of them. It’s too long. Honest!

  4. Really? Based on the first comment, I was thinking I had failed the mission to explain a complex marketing issue with a simple example. But since that’s your talent, perhaps I did OK.

    Thanks for the (simple) comment, Seth.

  5. Loved the line “friction gradually grinds the relationship to a halt.” It speaks to the absolute necessity of having marketing and the customer at the fore of an organization’s management planning. In this case, a smart, customer focused marketer (C-Suite or elsewhere) would have made the connection and used the delivery of the product as an opportunity to enhance the experience. The problem in the case you illustrate is that you have an efficient operations focus at the core of the organization. Many executives see internal operations as the area where they have the most control and therefore give that area the most attention. The challenge for executives is recognizing that the user experience, something outside of their immediate control, is the primary point of interaction for the brand. Eliminating customer, not operational friction is the key to energizing a brand and executives must shift their focus from Six Sigma to an authentic interaction between product and customer. The value in a transparent marketplace is embedded in the trust between customer and producer.

  6. Thanks for the comment, John.

    I’m in full agreement with the operational efficiency / Six Sigma notion. Not that it’s a bad idea per se, but now what we need to do is Six Sigma for customers – focus on the processes or policies that create “defective customers”.

    The more I think about this issue, the more I’m convinced that Root Cause is management lacking awareness of the risk / reward equation mentioned above. All they see is the cost savings, because proof is not offered on the profit reduction. This is primarily Marketing’s fault, in my opinion.

    What we need to do is foster a culture of measuring the impact on customer value of operational decisions.

  7. First post – just signed on to the program.
    But..this is a well written example of something missed daily by companies everywhere – profit opportunities derived from customer satisfaction.
    The real challenge is indeed getting and keeping the attention of the other players in the organization. I’ve seen this behavior in numerous F500 companies – usually junior employees, those without agendas, point out a ‘problem’. And we certainly do like to shoot the messanger.
    Keep up the good work. Hopefully both ends of the spectrum will read it and be inspired to ‘do the right thing’.

  8. I’m diggin’ this post. It’s nicely laid out and different from the run of the mill. Today business is about relationships…PERIOD. Currently the customer is running things and the economy is tight. The key is to meet the customer on a level, that makes them feel like you (as a business) care. A great example of reaching customers on their level can be found in a post by Walter Pinson called Hyundai schools us on Relationship Marketing

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