Using an Outside in Strategy to Value

Business901 Podcast Transcription
Implementing Lean Marketing Systems

Outside in Strategy– Customer Value
Guest was Christine Moorman, co-author of
Strategy from the Outside In: Profiting from Customer Value

Related Podcast: Outside in Strategy– Customer Value

Copyright Business901


Christine Moorman is the T. Austin Finch, Sr. Professor and
founder of The CMO Survey at The Fuqua School of Business,
Duke University. Professor Moorman is the author of over 60
journal articles, reports, and conference
proceedings. She has co-edited the book
Assessing Marketing Strategy Performance
(with Don Lehmann) and has made over 100
presentations of her work at companies and
universities all over the world. Her primary
areas of activity are marketing strategy and
customer-focused innovation

Professor Moorman has served on the Board
of Directors and chair of the Marketing
Strategy Special Interest Group for the
American Marketing Association, as Director
of Public Policy for the Association for
Consumer Research, and as a Trustee for the Marketing Science
Institute. She won the 2008 Mahajan Award for Career
Contributions to Marketing Strategy from the American Marketing
Association and the 2008 Distinguished Marketing Educator from
the Academy of Marketing Science.

Professor Moorman’s research has won two best paper awards
and been published in Journal of Marketing Research, Journal of
Consumer Research, Marketing Science, Journal of Marketing,
Journal of Public Policy & Marketing, International Journal of
Research in Marketing, Academy of Management Review, and
Administrative Science Quarterly. Her research has been
supported by grants from the Marketing Science Institute, the
Institute for the Study of Business Markets, and the National
Science Foundation.


Joe Dager: Welcome everyone. This is Joe Dager, the host of
the Business 901 podcast. With me today is Christine Moorman.
She is the co-author of Strategy from the Outside In: Profiting
from Customer Value, a recent book published by McGraw Hill
that discusses profiting from customer value. Christine, could you
start out by giving me the elevator speech about yourself?
Christine Moorman: I'm a professor at Duke University and I
teach courses in marketing strategy at the Fuqua School of
Business. I've done both research and consulting work looking at
how organizations can really learn from the market, learn from
customers, and how they can grow and innovate in response to
what they've learned.
Joe: What prompted you to write the book?
Christine: That's a good question, Joe. I spent the last 20 years
in my career studying companies, teaching about companies,
working with companies, and one of the reoccurring themes is
that a lot of companies fall into what we call inside out thinking.
They just lose touch with what their customers want, what their
customers need, they lose sight of the fact that competitors start
doing a better job service those customer's wants and needs.
They begin to focus on what they're good at. They begin to focus
on the bottom line. And, they begin to focus on other things like
shareholder value, which is a perfectly reasonable outcome, but
when it takes precedence over first serving customers, and then
we have a problem on our hands.
It was observing that over and over and over again that made me
want to try to take it apart and understand why this was
happening and what companies could do instead and what I could
offer them in terms of advice about how to manage their
companies so instead they could manage from the outside in.


Joe: You talk about customer value. Is that really how a
customer perceives the value that your organization puts forth or
gives to them?
Christine: Exactly. We talk about the idea that what is it that
customers want? You know, how are their needs changing over
time? How can we then serve them more effectively than the
competition? It's not rocket science in that sense. I mean, it's
pretty basic business 101.
Joe: What is interesting that I find is customer value isn't rocket
science, but it's pretty difficult sometimes to get that information
and to really understand it. Does your book describe how to do
that?
Christine: I think you're right. It's the idea of customer isn't
very complex, but then getting a true sense of what it is that
your customers really want can be difficult. One of the difficulties
is that companies I think fall prey to two common mistakes.

First of all, they gather way too much data. So, they get stuck in
this sort of big data trap and they're trying to analyze their way
out of it.
The second trap that they fall into is that a lot of that data
doesn't reflect direct interaction with customers. I think the best
way to really understand what's going on with your customers is
to spend time with them.
We talk about living with your customers in the book. We don't
mean literally living with them; we mean spending time directly
with them either in their homes where they're using the product
or in the stores where they're buying the product, and on sales
calls where they're interacting with the sales force it manifests
itself having that direct contact.


The very best companies do this well. They not only have their
front line employees out there engaging with customers, but they
have top managers all the way from the very top, CEOs, you
know, who are out running the cash register to see what the
customer problems are, to see what the unmet needs are, you
know, all the way through middle managers who again, might be
attending to different activities that involve face-to-face contact
with the customer.
Joe: Can you name a couple companies that you think that are
good at this?
Christine: Yes, I can. In terms of the market insight part of it or
the overall managing per customer value?
Joe: I would say for managing for customer value because I
think you've got to get the big picture first.
Christine: Sure. So, well one company that we profile quite a bit
in the book is Tesco, which is a British retailer who really pulled
itself out of a death spiral in the mid-90s under the leadership of
Terry Lahee who was the chief marketing officer and later went
on to become the CEO.
They just do so many things well that help them achieve this
success at managing for customer value. As I was mentioning
before, they spend time directly with their customers. They have
a program that's called Tesco Week In Store where the top
managers are out there with the customers.
They also rely on employees to, you know, in various focus
groups and ways of gathering information from employees all
over the company, for insights about what customers want and
need.


They have an incredible way of capturing for their loyalty card,
The Club Card, capturing a lot of information about what
consumers are doing in their interactions with the company.
They systematically mine that information to be able to drive
their strategy towards what the customer wants and also to
defend against encroaching competitors in all the ways that we
talk about in the book.
We talk about a set of things that are called the customer value
imperatives. Tesco does all of these imperatives pretty well. But
fundamentally, these imperatives involve getting information
about consumers and the driving the strategy off of that
information.
I mean, we could talk specific about those imperatives. But at the
core, the idea is that these are principals that will allow Tesco and
other companies like Procter and Gamble, you can even talk
about other business to business companies, as well, that do this,
that really do drive strategy from the outside in as opposed to
just saying I've got this little bundle of resources and I'm going to
now play them out in ways that are efficient.
Firms have to do that. But, if they sort of put the cart before the
horse, if they put those efficiencies ahead of servicing customers,
those efficiencies will eventually dry up and competitors will
encroach.
The other company I would just mention briefly that we talk
about is almost a paragon of this outside in view is Amazon. A lot
of your listeners know about the different things that Amazon has
done.

One thing that Amazon reflects at the core is this outside in view
of strategy because Chuck Bezos, the CEO, has made it clear that
they will go where their customers need them to go. He makes
this quote which we really play up in the book that I think is

tremendous that we can all learn from. He says rather than ask
what we're good at and what else we can do with that skill, you
ask who are our customers, what do they need? You say you're
going to give it to them regardless of whether we have the skills
to do so.
At the core of that statement is the idea that, obviously he's not
going to go off and make aircraft engines. There are some
limitations to this mentality. But nevertheless, it still reflects an
openness to grow in the direction and to evolve the company in
the direction that where it reflects customer interest and
customer needs. They've done that from the online bookstore all
the way through the Kindle. If you look at the Kindle, they had no
expertise in electronic devices. But, what they did have was a
strong relationship with customers who trusted them for online
content.

Joe: I think that's interesting they developed the Kindle. They
also bought Audible for listening to the books too for an extension
of business. So, it's just not innovation of a new product too, it's
also some acquisition involved there too.
Christine: Absolutely, I think this strategy from the outside in
can involve organic growth, and it can involve growth through
acquisition. I'm all on paper with that. I think that makes sense
depending on the costs and benefits of growing this yourself or
buying someone who is already good at it.
Joe: I enjoy hearing it's not necessarily what you're good at. So
many of my listeners are continuous improvement of people and
to get them outside of their four walls and they wonder why
continuous improvements efforts don't last. And to me, the
reason they don't last is because they're not driven by customer
value. They're driven by internal structure, and if the customer is
pulling in from you, then that drives and keeps the continuous
improvement efforts going.


Christine: Absolutely, and it's a very virtuous cycle then. On the
other hand, if you just focus on continuous improvement, at
some point, you can't squeeze any more blood from a turnip, so
to speak. I mean, there is only so much you can take in terms of
costs out of the system before you actually start to affect quality
and value.
I think this whole dynamic of really understanding and
responding and creating customer value and then driving the
system in a way internally, developing the business model, for
example, that can do that extremely efficiently, is a powerful,
powerful combination of having the customer value on the one
hand and these terrific efficiencies. That's very hard to beat.
Competitors will turn away, as they consider entering markets
when they see that combination on the part of companies.
Joe: I think you're right there. If you're driven by your value
proposition and being able to spread that gap, even if you are a
leader in that certain field, if you are able to spread that gap by
your quality improvement, that's what continuous improvement is
about.
Christine: Exactly! Exactly!
Joe: When I read your book, I pulled an older book off my
bookshelf, and your book seemed to be a 2010 version of
Treacy's "Discipline of Market Leaders.” If nobody's ever read the
book, I wouldn't tell them to go and read "The Discipline of
Market Leaders" now. I would have them read your book. But, it
did really seem like a 2010 version of that book, and I mean that
as a compliment.
Christine: Well, thank you. I appreciate that. I see the parallel
is that Paul talks about the three sources of leadership. I forget
his exact terminology, but he has three sources of leadership that
actually parallel very closely what we offer in our first imperative,
which is this idea of really try to be a customer value leader,

which means, pick a position in the marketplace that you will
really like to excel at and don't try to be all things to all people.

He talks about these three different kinds of sources of value that
the firm can attempt to compete on. And we have three similar
sources. In fact, we cite him in our articulation of those.
But, I think we do slightly differently than in that particular point.
Where we take him a step further, is that we actually talk about
the fact that there are points of parity and points of distinction
that the firm is looking for that if you want to be, for example, a
performance leader, where we talk about having some
technological performance advantage, that might be in biotech,
or that might be in hardware, software. We also talk in that same
way about fashion leadership, or style leadership.
In either of these cases though, you will exceed, if you want to be
a leader on that dimension, you'll exceed the competitors. You
will go beyond the average, if you will.

But, that doesn't mean that you can be, that your service, for
example, that you provide customers, or that the price that you
charge can be so out of line that consumers see the whole value
proposition as unreasonable. So, we talk about being really good
at one of these and then being at parity on the other two. I think
that's one point.
The other point is the fact that we try to make clear, which is I
know something really important to executives is that the world
just keeps changing from underneath you that you have this
position of value. And as soon as the competitor comes in, they
teach the consumer something new and their perception of what's
valuable or not valuable starts the shift. Maybe also that
competitor takes the position that's more attractive on that
particular value than you've been able to achieve.


So, it's a case in managing this position of customer value
leadership that is really being very vigilant, staying in touch with
what's going on in the market, what are competitors doing. More
importantly, how customers see those competitors and what
they're doing. Do they see them as taking that position that's
greater than yours?
That's a very important aspect of this outside-in mentality, and
profiting from customer value that a lot of companies aren't
willing to do over time, to really take seriously that we are going
to have to monitor the market, monitor what customers are
thinking on a continuous basis, and find a way that makes sense
of that so that we know how to move at which direction, at what
time, in response to what's happening out there.
These are some of the ways in which a company that is focused
on customer value can be assured that they will not only do well
in the market place, but maximize profits.
The first of these is to be a customer value leader. And to really
have a position where, again, you have a position of leadership.
You have a business model that supports it, that will allow you to
create that value for customers over time and also to make a lot
of money in the process. In other words, capture value for the
company.
So, this whole dynamic of creating value for the customer,
capturing value for the company, is very important. I know that
this is something that they put a lot of stock in getting that
business model right. If the business model's snapped onto a
value proposition, it's really powerful. Then you have a great
combination of capabilities that can serve the company well.

If you get that first imperative right, so in the case of Tesco, you
know, they are a company that is, interestingly enough, although
they are a supermarket, they're a superior relative value
provider. They understand their customers. They give them

excellent service. They customize the stores to provide that
value.

In terms of moving to the second imperative, they had to
innovate new value over time for those customers. They could
not sit still, because Sainsbury were at their heels. Other
companies were putting pressure on them that were higher
quality stores. So, they started offering new store formats, like a
metro express, big box stores.
They entered financial services and started competing head to
head with the bank, which was really interesting. It's been
successful for them in the UK. They've also entered new
geographies around the world. Now, they're third in the world.
But they didn't stop there. They capitalized on both their
customer assets, and their brand assets, which are our third and
fourth imperatives. The idea here is that, you've done great
things for your customers; you hold a position of leadership.
You've innovated some new value for them.
And now, the viewpoint is that there is money on the table to be
made from these relationships that you have with customers, and
the perceptions that they hold, of your company. But you have to
explicitly manage those customers, and explicitly manage the
brand asset that you've built in their minds and hearts.
Tesco did both of those things, really well. Most important thing
that they've done is to really convince the employees that they
represent the brand and that every encounter that their customer
has with a Tesco employee in a Tesco store is a reflection of the
Tesco brand. And so, kind of this, uncompromising position, that
really protects the brand against loss of relevance, and also,
competitive encroachment.
Joe: I'm only good at three out of the four, two out of the four.
Do I have a chance?

Christine: Absolutely. In the book, we talk about the fact that,
these are pieces that you can build, over time. I think the one
that you definitely do need, to start with, is you have to take
seriously, this issue of customer value leadership, and you have
to seek that. Once you own a position like that, then you can
start to think about new value, capitalizing on the customer
assets. If you haven't started this process yet, that is definitely
the place to start.
Once you've done that, then you can think about exercising
resources in different areas across these three other imperatives.
They don't have to be done, necessarily, in any sequence, other
than the first one.
Joe: Is this a how to book? Do you discuss certain things to do
to carry these things out, and to measure them?
Christine: We talk in the book about, first of all, we try to
explain why we think these imperatives are really the way to
manage, an outside in company to maximize profits. We offer a
series of, if you will, pointers, tips for doing this.
I hope you found the examples in the book illuminating because
we worked very hard to find companies who were actually doing
these things, and to point those examples out. In my classrooms,
at least, people are much more likely to believe the case that I'm
trying to build if I can show them, "Oh, here's an example of
General Electric doing this. Here's an example of this Internet
startup doing it. Here's an example of another company."
We offer a lot of examples. Depending on your business, you may
be able to learn differently from the variety of examples.

But in each of the chapters, we also hold up some metrics that
firms could use in thinking about how they would measure their
progress on each of these customer value imperatives.


Joe: When you look at, let's say, capitalizing on the customer as
an asset. Can you take that, I mean, the customer is our asset, in
a business. There's nothing else that we really have as a business
as a stronger asset, is there?
Christine: There is nothing that you, which a company would
claim as an asset that is more important than its customer. But,
the irony is that, at least for now, and this is going to change, but
at least for now, that of course isn't on the balance sheet.
You know, so, it's, you know, you don't put down the value of
your customer relationships in the United States, and you don't
say that, "Well, we have this many customers, and, you know,
they're worth this much." There are some conditions when firms
are forced by the SEC currently, to make disclosures, if their
customers are of a certain size, and percentage of their business.
But on average, most companies aren't making those disclosures.
So what happens is that companies start thinking about, "Well,
it's these other resources, that we have, these other assets, that
we own, that really should be driving our business." But, that's a
huge mistake as we've made, as a point that I've made
throughout this conversation. So, yes, it is the most important
asset, the customer is.
Joe: I think it's kind of funny, because I just wrote a blog article
yesterday about Michael Porter's value chain. That's been around
for ages, but when you look at all the continuous improvement
efforts that TQM, Lean, Six Sigma, and all these different efforts
people made, they've left sales and marketing, off of the
continuous improvement cycle, they haven't really attacked the
demand side of the business.

That part of the value chain, is the most important, but still the
one that I'd think is, people have a tendency to stay away from
it. They want to control, they want to have the control within the


company, and your title, "Strategy from the Outside In," hit me
as so relevant, that I pre-ordered the book.

Christine: Well, we talk about these four imperatives as the new
value chain. Maybe better put, instead of the extension of Porters
value chain, which of course if very powerful and important.
But I think you're right, there are a lot of reasons why companies
sort of get stuck there, and we talk in the book about what some
of those reasons are, but one of them is that there's a lot of
positive reinforcement, at least, for a while, in terms of increasing
efficiency. You know, it looks good. It shows up on the bottom
line, immediately, when you start. I think that's one of the
reasons that people tend to stay in those earlier stages of the
value chain.
Also, if you think about it, it's easier, in a sense, to manage,
because you have more control. Think about the things that
you're controlling in those earlier stages, your operations. Which
is a whole lot easier to manage than customers, who, of course,
have their own businesses, and their own households to run, and
they don't often do exactly what we want them to do. They're
hard to understand, take time.
Then competitors get in there and start rumbling around, and
messing up our strategies. You notice, those conditions make it
very hard to learn from customers, but also, hard to get a good
read on how well we're doing with them. I think companies tend,
a lot of managers would tend to go to the easy read, and the
easy manage. Get that positive reinforcement.
Joe: One of the things I think is really unique is that you talked
a about other people within the company participating with
customers and how important that may be. You talk about some
of the Tesco strategies, and the reason that your employees can
be effective with customers is because they understand that
value proposition? Is that fair to say?

Christine: Absolutely. I think that's fair to say. Do an interview,
we include a couple of deep case studies about companies that
have a very successful marketing leader, who are part of these
outside in efforts, and one of the companies that we profile in the
book is Wal-Mart. Steven Quinn, who is the current chief
marketing officer, he makes a very bold statement to the
employees at one point in the transformation of Wal-Mart, from
being a retail company, to a customer focused company. He tells
them all, "You are the brand."
That's not something that Wal-Mart really focused on. They did
try to make it a pleasant place for people to shop but at some
point in the evolution of the company, they kind of lost sight of
the fact that, everything's happening in the store environment
that weren't necessarily pleasing to customers, like, overstuffed
aisles or dimly lit store. Not supporting employees in the way
that, a lot of the customers felt that the employees should be
supported. Customers didn't want to give their business to a
company that wasn't taking care of their employees.
Quinn was trying to not only get the employees to realize they
were representing the brand, but to get that whole constellation
of store level, corporate level activities all pointing in the same
direction, so that the customer understood, this is what Wal-Mart
stands for. And I want to give them my money.
Joe: Is that what you mean by capitalizing on the brand?
Christine: Absolutely. I think, in Wal-Mart's case, they needed
to really further build their brand before they could completely
capitalize on it. They had the great beginning, under Sam Walton,
but the culture had not really stayed true to his vision.

I think with Quinn, and a lot of other leaders who came through
during this time, you know, Eduardo Castro, right, the president
of Wal-Mart's US unit, who is Quinn's boss, they did a lot of
wonderful things. Under Quinn, they shifted the brand message

from, "Always low price." to "Save money, live better." If you
think about that, that's a very important shift, and it wasn't just
the words, it was also kind of a shift in the way that Wal-Mart
was thinking about itself.
A focus just on low price, that's not as meaningful to customers
as saying, save money, live better. Use that money for more
important things in your life, and use our store as a means for
doing that.
It turns out that, Sam Walton had actually said something like
that, earlier on in his career, and so it was easy for Quinn to
evoke that, and bring that to the company. But if you think about
it that was something that had to be pulled through every aspect
of the company's activities, not just their advertising, physical
assets, like signs, or truck logos, all of those things had to be
changed.
It was important to be able to show the customers that Wal-Mart
stood for more than just cheap. Which is, I think, if you had
asked consumers 10 years ago, I think most consumers would
agree, that's what Wal-Mart stands for. "Save money, live better,
" means something completely different.
Joe: I think he has, 'when I think of Wal-Mart now, I don't
necessarily, cheap isn't the word that I use. It's more, save
money, and I'm pretty oblivious to a lot of that type of
information that's coming across?
Christine: Absolutely, yeah. I'm with you on that. I'm with you.
Do you want me to give you the quote that Sam Walton, do you
want me to give you that quote?

Joe: Yes, what was that?


Christine: Sam Walton said, 'If we work together, we'll lower
the cost of living for everyone. We'll give the world the
opportunity to see what it's like to save and have a better life.'"
Joe: Quinn just broke that down to our sound bites that we live
by now, right?
Christine: Right, which is "Save money, live better". Exactly. .
But brilliant, because one of the things that I'm sure your
listeners can appreciate is that, it's hard to bring cultural change
to an organization. There's no doubt that moving from the inside
out to the outside in, is a big culture shift.
If you can rely on especially venerated leaders, like Walton, you
know? They just, the employees love him. They called him "Mr.
Sam, " you know, even the public relations person, when I was
working with Steven on the interview, talked about how "Mr. Sam
said this, Mr. Sam said that." It just, really struck me, how
important it was for Quinn to be able to understand what this
prior leader had said, and tried to do, and to be able to evoke
that, to whatever extent he could, and if he tried to bring the
company back to a customer focus.
Joe: I read your book and I buy into it. I think I need to
compete in the customer value arena, which, I'm a firm believer
of. But how do I change? How do I organize and do that?
Christine: There are a lot of things that I think companies can
do, that we talk about in the book. I'll mention a few here.
One is that, if you look at most companies, they're still organized
by product or service divisions. So, there'll be a product group
that takes care of this product, and another group that takes care
of another product.
Even at Procter and Gamble and Company that we talk
extensively about in the book they still have a group that takes

care of, you know, this deodorant, and that group that takes care
of this diaper product, and the two don't talk to each other, even
though they might actually have the same customer. That's the
problem.
Instead, companies can think about, how do we organize
ourselves by the customers that we serve? Actually having
customer groups, instead of product groups, that's a huge way.
Then you can nest the products within or across those two
groups, depending on exactly what the products are. But if you
start with a structure, that, first off, is focused on customers, and
not on products, this will go a long way to moving the company
from, you know, an inside out view, which is really product
focused, to an outside in view, which is more customer focused.
That's probably the most important thing that companies can do.
Joe: Instead of having the old product manager per se in an
organization, we're talking more about having a product market
manager, with "market" being the key word, and maybe that
managing of that will have several products under it, because we
really need to organize by markets.
Christine: Exactly. You would have customer groups, products
within them; you might even have a Chief Customer Office there.
Instead of even a Chief Marketing Officer, I mean, there's going
to be a lot of similarities in their jobs, but if you think about it,
what are marketing people doing? They're helping lead the
organization to stay focused on the customer. So, why not, even
just re-label the activities that they're engaged in as being, you
know, Chief Customer Officer, Assistant Customer Manager,
instead of Assistant Marketing Manager, or Vice President of
Marketing, Vice President of Customers.
We're starting to see these transformations, within companies,
and I think it's a very positive thing.


Joe: What type of companies would I recognize that are doing
that?

Christine: One company that you could study as a case study is
Fidelity. They went through a transformation where they
organized their front end employees by customer segment.
Instead of being focused on, certain kinds of investments, which
would be, again, product centric, they organized their employees
by segment.
So these employees were dedicated to different groups of
customers that were more or less valuable to the company. And
so, the most skilled employees, the highest knowledge
employees, would be dedicated to the most valuable customers,
and they would be trained and set up with procedures to give
those customers the highest level of service.
This makes a lot of sense. These are your most valuable
customers, let's go ahead and give them the best employees and
the highest level of services that we can give to them, because
we know that they're going to be able to give us the profits.
They're going to be able to give us a return on our investments.
For customers that don't want as much from the company, or
don't have the means to spend on certain kinds of investments,
maybe they would get a moderate level of service. There are also
customers who don't want to interact face to face with
employees. They would rather do everything online, knowing
about their needs, you would set up a system whereby they could
do their own trading, for example. They would be more satisfied,
than having to talk with somebody about their investments, and
get advice.

The idea is that knowing all this about your customers' knowledge
levels, their need levels, their investment levels, their profitability
levels, you can then organize your front end, organize your
employees so that they're serving these different groups in

different ways. That makes a huge difference in terms of how
profitable your activities are, in part, because you're giving your
most valuable customers, most of your resources. The other thing
is, those customers are getting what they want, so they're going
to give you a greater share of their wallet, in other words, of their
investment business, they're going to give you a higher
percentage.

When Fidelity did this, their share of wallet went from 30% up to
54%, of these customers. Their retention rate, which is whether
customers continue to come back, went from 89% on a yearly
basis up to 94%. These numbers are huge increases. If you think
about it, that all comes from, again, segmenting the market, and
then structuring your organization around these different
customer groups, so that you can serve them better.
Joe: I think it's interesting that you quote that differential, that
improvement, because I think that's really is how companies
should measure themselves, is by market share. Or, as you said,
a bigger share of the wallet or, that, them are definitely good
signs on whether you're improving or your improvement efforts
are working.
Christine: Absolutely. I think the idea here is that, if we can use
customer focused metrics, there are a lot of metrics that don't
necessarily reflect what's going on with consumers. So, we want
things that look at metrics like, the lifetime value of a customer.
The value of our customers, how does that compare, you know,
to our competitors'? Are our customers more valuable than our
competitors'? That might be a hard question for a lot of
companies to answer, but there are questions that and metrics
that companies can use that are customer focused.

Retention rate is a really good one. I'll give you an example of
how powerful this is. USAA, which is a financial services firm,
they sell insurance and financial services to military personnel

and their families, a tremendous company. I don't know if your
listeners have experience with them, but they're a tremendous
company. They have a retention rate, which again, is, the
percentage of your customers that come back in any time period,
we'll just say on a yearly basis. Their retention rate is 96%,
against an average in the automobile industry of 80%.
If you just do some really simple math on that, you'll see how
powerful it is. Because if I, let me do this with you, because I
think, I do it with my students and I always find it to be really
valuable, which is that, if we look after three years, for the
average automobile insurance company, how many, what
percentage of the various customers that are with them today will
be gone?
We take 80%, raise it to the power of 3, and we realize that only
51% of their current customers will be here in three years.
Versus USAA, with a retention rate of 96%, raised to the power of
3. 88% of their customers will be here in three years.

That differential is huge, when you think about a stream of cash,
that's coming from those customers that you can be assured of
over time. That retention rate is a powerful indicator of your
future cash flows coming in to the company.
Joe: Why don't we measure companies this way? Why aren't we
looking at companies, especially when you go to acquire a
company? Aren't these key metrics that should be looked at in,
let's say, a merger and acquisition?
Christine: Yes. They definitely are. I think, part of this is,
frankly, that we're just now really starting to understand how
important it is to focus on these customer level measures, things
like retention rate, lifetime value, the value of brands. I mean,
the value of brands is something that you see many, many
companies touting in M&A activities.


I've not been privy to a lot of the details associated with
customer level information, showing up in M&A activities, but, if
your listeners are involved in those kinds of activities, they should
be asking about, what is the retention rate of this company?
What's their retention rate of this company's closest competitors?
What's the acquisition rate? You know, for every customer out
there, when we go after them, how likely are we to get them, to
sign up for our service, or to buy our product?
How's the company performing with different groups of
customers? By that, I mean, does the company have a certain
reputation or relationships with very profitable customers?
Because that's where the profits will come from over the long
run, if the company forms relationships, strong relationships, with
profitable customers, and works to make those relationships last
over time, those will be the profitable acquisitions, and the
effective mergers.
Joe: We use customers in a pretty broad term. From your book's
perspective, are you looking at market value, maybe the
customer within the market value, and also looking at, let's say,
competitors. One of the points that I always try to look at, is that
when someone says, "I got a customer satisfaction score of
60%." Well, if all my competitors have a customer satisfaction
score of 60%, I'm just average. I mean, 60%, 70% might sound
good, but if the entire industry is at 70%, it's average, right?
Christine: Exactly. So, what you can do is, you can actually
make an index. I like to recommend that you can put your score,
whatever the customer metric is, if it's satisfaction, if it's
customer retention, you could put that over the industry average,
that's one way. But most firms don't want to just compare
themselves to the average. You can also put it over the top firm.

You would put your score over the top firm, and then, whatever
that number is, you can multiply, I multiply times 100, and then,


if you end up with a score of 100, that means that you're on par
with either the average or the best company, whichever you put
in the denominator.
An easy metric like that is helpful. Because then, if you're, for
example, if you're at 110, that means you're 10% above the
average. If you're at 90, that means you're 10% below. It's an
easily interpretable metric. Those kinds of indexes can be very
important, and I think, as you're saying, to be honest, and to get
a, not just a number, but to put that number in context, to give it
meaning, by virtue of well, how are firms doing in this industry?
The other thing is, the industry itself may be in trouble. So, I
think it's really important for firms to not only learn from what's
going on in their own industries, but to learn from what's going
on in other industries, too, to get that big picture view, in terms
of, what are the best companies doing, in terms of innovation?
Across industries, how are the best companies leveraging their
brands, across industries?

We talk in the book about Procter & Gamble, and how they took
this idea seriously of learning from other industries. They were
trying to figure out, we've got all these huge brands that we've
built, your listeners know a lot of these names, of Tide, and
Crest, and Jif was one of them at the time, Pringles. We've built
these big brands, now how do we leverage them, without killing
them? Because that's always the concern as you start to extend a
brand, you might dilute it.
Where do they look to figure out how to do that? They didn't look
at other consumer package goods only. They took this broad view
to say, "Let's look at other companies who have done this
successfully, and who have failed it, doing it. Let's see if we can
learn from their lessons."
I'm aware of the fact that they drew a huge sample of these case
studies, and one in particular, that they found to be helpful, was

the example of Titleist, which is the golf equipment company, and
they'd observed there that Titleist didn't have any trouble
extending their brand into all kinds of balls. For example, there
are very high end balls, that, the most, you know, elite golfers
were interested in, that had certain features associated with
them, and then there were other balls that didn't have those
kinds of qualities, so, for example, the serious golfer might be
interested in the Titleist Pro V, which is going to sell for $58. But
the lower level golfer might be interested in the Titleist DT Solo,
which sells for $40.
Now, a strict view of brand management might say, "Wow,
doesn't that Titleist DT Solo kind of dilute the value of that higher
end product?" The answer is no. That, there's a way to be able to
manage both of these brands and have them on the marketplace,
and make it clear that one of the balls is for a certain type of
golfer, a recreational golfer, and the other ball is for the serious
golfer. There's no confusion that Titleist is targeting these two
different golfers.
Well, Procter learned from that. They learned from other
companies about how they could actually take their brands and
offer them to different groups of consumers, if the products were
different enough from each other, but under the same brand
name.
That's an example of an important principle, which is if you really
are going to have the customers' point of view; you should look
beyond your own industry, and think about how you could use
what other excellent companies are doing to help serve those
customers more effectively. There are a great number of
excellent examples of how companies kind of learn by studying
other industries. They just have to open their eyes and spend the
time reading and thinking about those other industries.


Joe: What's something that I may have left out that you'd like to
tell me?

Christine: The thing I would want to emphasize is that this is
something that takes time. That, it requires, it can't be just
plugged into in an existing organization, that you do need to
think about how to structure the organization, and introduce
metrics that will get people motivated to focus on these kinds of
customer things, that you need to think about how to really
manage this within the organization.

You don't have to do all the imperatives at once, but just to get
this outside in view, kind of focused, within the organization, and
in the minds and hearts of what the managers and employees are
worrying about every day. That will take persistence, and it will
take leadership, and the CEO, of course, needs to be the front
runner in leading by example on this issue. They will need to be
out in front, waving the flag.
They're going to need everyone in the organization, all of the top
leaders, but all of the employees as well, following them. We
recommend in the book that it's also important to have one
person whose job it is to really worry about managing the
customer value, and to be the sort of ringleader, if you will, and
that, we recommend is the Chief Marketing Officer. That person's
job will be to be the customer advocate.
I think in the organizations where this works well, everybody
starts to get it so well that, you know. We talk about Philips
Electronics in the book quite a bit, and the CMO there made the
point that, at some point, in the transformation of Philips from
being a company that had what they call a "factory mindset", to a
company that was very focused on the customer, that realized, in
the end, that profits don't get made in the factory, they get made
in the market.


That at some point in that transformation, the members of the C
suite were coming to him, and asking him for information about
these different customer metrics, that they were using within the
organization. They realized that they were important indicators of
the company's long term profit success.
That type of transformation is what you'd like to see happen over
time, because one person can't make this happen. A strong CMO,
as smart and hardworking as he or she may be, isn't going to
make this happen. But, if everyone joins together, over time,
that's definitely the most effective way to pull it off.
Joe: I think it's interesting you point out, the CMO. One of my
questions I have for you, you put him as the champion from
outside in. Why wouldn't you put the VP of sales?
Christine: That's a good question, Joe. I think, at a lot of
companies they often are the same person. In fact, we see a dual
title, I don't have an exact percentage for you, but I have some
research going on, where we actually ask for that information,
and look at the longevity of the CMOs within companies. Those
with, both the sales and the marketing, expertise tend to have
higher retention rates.
In many companies, sales can often have the strongest
connection to the customer, right? Because, they are the ones
engaging directly with the customer and in those companies, it
may make sense for a Chief Sales Officer to take the position of
leadership on this. That, I think, is a matter of looking at the
companies and what they're doing. The problem with sales is that
there can be short term thinking about managing the customers.
The bigger problem there is that incentives have been set up to
reward that kind of short term management of the customer,
meeting quota and not the long term relationship, which is what
marketing would probably tend to advocate more. But if those
incentives can be fixed, and the salesperson, the head of sales

can adopt this kind of customer focus, then I don't see any
reason why that would be a problem. I think, as long as you have
somebody who accepts that point of view, and is willing to
manage, help manage the rest of the organization to get there, I
think that's fine.
I'll just add one other thing that, on this particular point, is that
in a lot of companies, especially like packaged goods companies,
say, like Proctor, Nike, etc., the sales organization will not have a
very strategic role within the organization. I think giving the Chief
Sales Officer, or the VP of Sales that position, probably wouldn't
work.
So there's always this question, when you look at any
organization, you know, where is the power, where is the
knowledge, and how can we get this done most effectively? I
think those are important things to consider as you think about
where to locate the right leader for this job.
Joe: I'd really like to thank you, very much for this conversation,
Christine it's been a wonderful time spent. This podcast will be
available on the Business901 blog site and also available on our
iTunes store, and again, I'd like to thank you again, Christine.
Christine: Thank you, Joe, it's been my pleasure.



Joseph T. Dager
Lean Six Sigma Black Belt
Ph: 260-438-0411 Fax: 260-818-2022
Email: jtdager@business901.com
Web/Blog: http://www.business901.com
Twitter: @business901
What others say: In the past 20 years, Joe and I
have collaborated on many difficult issues. Joe's
ability to combine his expertise with "out of the
box" thinking is unsurpassed. He has always
delivered quickly, cost effectively and with
ingenuity. A brilliant mind that is always a pleasure to work with." James R.

Joe Dager is President of Business901, a progressive company providing
direction in areas such as Lean Marketing, Product Marketing, Product
Launches and Re-Launches. As a Lean Six Sigma Black Belt,
Business901 provides and implements marketing, project and performance
planning methodologies in small businesses. The simplicity of a single
flexible model will create clarity for your staff and as a result better
execution. My goal is to allow you spend your time on the need versus the
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An example of how we may work: Business901 could start with a
consulting style utilizing an individual from your organization or a virtual
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