Tests for Customer Focused Companies

Most companies claim to be customer-focused, yet few are. In a world where customers (both end consumers and intermediate customers) are becoming increasingly powerful, all companies declare that they are “customer-focused”. At one level this is a truism – all companies must have some degree of customer focus just to survive in increasingly competitive markets.

But, let's move beyond this generic level and apply some real tests of customer focus. We'll find that the practice rarely matches the rhetoric. I apply three questions to determine whether companies are truly customer focused. These three questions zero in on the most fundamental elements of a firm – decision-making power, performance metrics and brand promise. It is surprising how few companies meet these tests.

Power

Who in the organization holds real decision-making power? Is it the organization that manages relationships with the customer or is it some other group?

In every firm, even in complex matrix ones, one set of executives typically holds the real decision-making power. More often than not, they are the executives managing major product groups rather than executives assigned with the responsibility of managing customer relationships.

Now, of course, executives with product accountability have to be focused to some degree on serving the needs of customers, otherwise their products would not sell.  But, at the end of the day, their primary loyalty is to the product, not to the customer. If products sales are flagging, they will aggressively seek to market and sell their products, even if they are not the most appropriate products for specific customers. In this case, who champions the customers needs?

In fact, many firms do not even have a senior executive accountable for building relationships with customers.  At best, these firms may have a marketing executive, sales executive and perhaps even a customer support executive, but these are functional silos leaving no single executive responsible for building and managing end to end relationships with customers. How can a company claim to be customer focused if they do not have an executive accountable for building relationships with customers? Even where such an executive exists, this executive rarely wields the greatest decision-making power within the firm.

Performance

What are the primary measures of performance for the firm?

Ask most executives about the performance of their firm and they will discuss in great detail their profitability by product or, perhaps if they are a retailer or asset intensive manufacturing company, their profitability by facility.  Ask them about their profitability by customer and you will more likely get a blank stare. 

Few companies systematically track profitability by customer.  They are usually not able to answer which 20% of their customers account for 80% of their profitability.  Even fewer could tell you about the life time value of their customers. And even fewer could tell you what share of an individual customer’s “wallet” they represent.

If a company is truly customer focused, it would seem natural that they would be closely tracking their customer economics.  If we accept that people generally focus on what gets measured, we would have to say that people in most companies are unlikely to put their highest priority on customer performance.

This lack of focus on customer profitability is not accidental.  Two factors explain the persistence and prominence of other metrics. Throughout most of the previous century, production economics or facility economics (e.g., retail stores or branch outlets) dominated the financial performance of most firms.  While the economics of the firm are shifting to the growing challenge of finding and retaining customers, our financial accounting systems continue to focus on what drove performance in the past.  A second factor involves the difficulty of tracking and measuring customer profitability for many companies.  Advances in information technology are making this task easier, but again our accounting systems are slow to catch up.

Now, I know that most companies closely track their overall market share and some even track it by customer segment. But, at best, this would mean they are market focused.  They have very little investment in tracking their customer performance.

And, yes, I know that many companies track customer satisfaction metrics.  These may play a role in the performance evaluation of individual contributors and perhaps even become a factor in some compensation decisions.  But in most companies these customer satisfaction metrics play a very modest role relative to product or facility profitability metrics.

Customer satisfaction metrics are certainly a key driver of customer profitability, but they are not the only driver.  In the absence of a broader focus on customer profitability, many of the actions required to serve customers effectively are likely to get little, if any, attention.

At the end of the day, money matters more than any other dimension in performance evaluations and compensation decisions.  Most companies keep track of their financial performance along dimensions other than customer profitability.  How can they claim to be customer focused if they do not systematically track financial performance along this dimension?

Promise

What is the primary focus of the brand promise of the company?

Most companies have a vendor-centric or product-centric brand promise – buy from me because I have great products or because I have a great company.  Very few companies have developed a customer-centric brand promise – buy from me because I know you as an individual customer better than anyone else and you can trust me to use that knowledge to configure the best products, services and experiences that meet your individual needs.

Bottom line

Choices need to be made.

Few companies are customer-centric in terms of these three basic dimensions of the firm. And perhaps they don’t need to be.  I have suggested in earlier writing that most companies today are an unnatural bundle of three very different kinds of businesses – infrastructure management, product innovation and commercialization and customer relationship management. 

Most companies are ultimately going to have to choose which of these three businesses they really want to be in, shed the other two businesses and aggressively grow the business they have chosen, aided by the enhanced agility and focus that they have achieved. If they do not make these difficult choices, they are likely to under-perform as they make the inevitable compromises required to accommodate the competing demands of three very different kinds of businesses.

When I pose this choice, most executives gravitate towards the third business type – the customer relationship business. In part, they do this because they genuinely believe they have a customer centric company. 

When confronted with the three customer focus questions, though, they begin to realize the enormous distance they would need to travel to become a true customer relationship business.  The companies that really succeed in the customer relationship business will have no trouble meeting this test.  All the rest had better decide which of the other two businesses they really want to focus on.

Comments

[Daniel Berch]

I've seen numerous product-focused companies attempt to become customer-focused.

Your suggestion of a customer-focused organiational structure is very difficult to implement - in part because it's so rare that it might be viewed as radical.

An easier first step is to begin thinking in terms of lifetime value (LTV). Doing so gives performance metrics, a frame of reference, and ultimately can lead to a shift towards customer-centric thinking.