Customer Relationships: Healthy or Not?

It is an interesting question, and, on the surface, it seems easy to answer. Most companies feel their customers are satisfied and that they have good relationships but does that translate into sales or retention? Not really.

I just spent time reviewing a client’s database of customers—customers who self-report high levels of satisfaction. One thing I like to analyze is how many customers are ordering more or growing with you and how many are ordering less or fading away to oblivion. It was a fascinating exercise because in this case, regardless of industry (industry growth influence was not a variable) approximately half of the customers ordered more and about half ordered less. But don’t stop there. Was there a net gain or a net loss? In other words, those who ordered more overshadow the loss from declining customers. So many times, it is much harder to grow a business because before you can start counting revenue growth you have to backfill what you lost. It is an often-invisible challenge that makes growth significantly slower than it ought to be. And as important as that data is, most companies don’t know the health of their customer relationships or even calculate the size of the divot they have to replace.

For this business we agreed to several key steps: 1) Increase knowledge of top tier customers. By knowing their business as well as the customer does, you will better understand how to add more value and in doing so you will likely strengthen your relationship and growth prospects. 2) Develop new ways to add value to the top 50 accounts with more thorough account planning and developing more relationships with the company in various departments and at various levels. This will probably include proactively investing in these customers with more technical expertise and/or bundling services with products. 3) Setting retention goals and identifying retention markers so they can anticipate where there may be declines without intervention. Bear in mind not every customer is a good customer, so retention isn’t a goal in itself but rather it is important to monitor for high potential and core customers.

Just today, I came across an article in the latest Harvard Business Review called Toward Healthier B2B Relationships by Hochstein, Voorhees, Johnson, McCoy and Mehrotra. They are advocating that companies build a tool that tracks customer health scores. In today’s environment we rely on the salesperson to track customer health, but they may not have visibility to all aspects of the company’s interaction with that customer such as rate of payment or customer service calls. That approach is not formal or predictive with regard to retention. The authors recommend three primary dimensions that are part of an effective customer health scoring system: customer relationship qualityproduct usage, and value realization. Variables that are captured as part of the relationship quality score might include the Net Promoter Score or intention of future use, propensity to refer, their historical commitment behavior, and their availability or engagement. For product usage, some products have built in usage tracking, but most do not. Instead, or in addition, contacts made with customer support and the nature of those contacts can be tracked. Another metric may be product penetration or share of wallet of product use. Value realization can focus on cost savings, efficiency gains, system improvements, and other related impact variables. This section can also include payments and invoicing including timeliness and terms.

What components you include and how you weigh them will depend on your business. Most start with their best assumptions and tweak as they learn. If the system is effective at predicting churn it is doing its job. The authors propose 25% on customer relationship quality, 25% on product usage and 50% on value realization. Another firm featured in the article has 64% on relationship quality (and I believe they have customer contracts and can tell much about the relationship from the length and terms of them), 12% on product usage and 24% on value realization. What is important is that it is tailored to your business model and reflects the value proposition being delivered to customers. Do your customers feel like they get good value and are they willing to pay for it?

One thing a system like this doesn’t do is consider that new business models, enabled by technology in many cases, will only be reflected in a customer retention scorecard when it has done significant harm. It doesn’t absolve leadership of being ever vigilant about how the external marketplace is evolving, how customer needs are changing and whether their products and services are still meaningful and relevant. Those are great issues to address strategically at least every three years. But on an annual account planning cycle it makes sense to have a mechanism to monitor health so organizations can spend their limited resources proactively, where they can be best applied.

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