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Your Customers: Use Them or Lose Them

HBS Working Knowledge: Marketing: Your Customers: Use Them or Lose Them

Commerce Bank entered a mature industry where the overall level of customer satisfaction was "pretty low," Frei observed. The conventional wisdom for banks was that in order to grow they should offer the best rates of deposit or buy another company. Instead, she said, Commerce Bank offered the worst deposit rate in every single local market. It has never made an acquisition. Yet it is the fastest-growing bank in the country, she said. Reason: Commerce Bank decided to differentiate on service.

For starters, it offers seven-day branch banking, giving customers extra convenience. In addition, every branch includes so-called penny arcades, coin changing machines that are free for customers and non-customers.

"There are genuinely friendly employees," Frei continued. "The employees are friendlier in part because Commerce Bank only has four checking accounts; others may have forty checking accounts. So the bank can train employees on service, not on compliance."

Newspapers, coffee, coin machines, friendly staff—all of this costs money, Frei said. Commerce Bank pays for it by paying lower rates on deposits compared to the giant banks.

"Think about it," she told the group. "Would you trade half a percentage point on your account to have what is truly exceptional service?"

"Every company with the exception of maybe five loses money on auto insurance. They make up for that loss and make a little bit of profit by investing the pre-paid premiums. So they lose money on insurance but make up for it by investing premiums."

By contrast, she said, Progressive Casualty Insurance Company makes money on insurance and spends more on service in the provision of insurance than any other company, she said. They do it in two ways.

One, if a Progressive customer gets into a minor accident, he or she can phone the company from the scene and will be met by a member of its Immediate Response fleet. "It's not unusual for them to show up at the scene of an accident before the police do," said Frei. Fleet management is expensive; so is wireless technology. But in the end Immediate Response is a cost saver for Progressive. The staffer may write the customer a check on the spot and such quick assessments end up reducing lawyer fees. It also substantially reduces the potential for fraud, she said. "The Immediate Response fleet is their fraud buster."

A second Progressive service is called Comparison Quote, said Frei. If a potential customer logs on to the Web site, Progressive will give a quote for Progressive auto insurance as well as similar insurance from all their nearest competitors, she said. The quotes are accurate, Progressive's are lowest less than half the time, and if they are not the lowest then the customer usually goes elsewhere.

"So how does that make sense? What they're capitalizing on is that Progressive is better at data analysis than all of their competition. Comparison Quote is their clever service design that takes advantage of their data analysis superiority. They can get at the true 'riskiness' of a customer in a more refined way than anyone else can, so they know the true risk better than the competition," she said. If a potential customer is such an apparent risk that the quoted Progressive rate is higher than the competition's, Progressive is happy if that customer goes elsewhere to buy cheaper insurance. "They are happy to have the competition get those customers," said Frei.

At Intuit, customer service is excellent and the need for it is rare, she said. People answering the phone are part of the product development team and they are expected to talk with the engineers about the calls they receive. These employees are paid more than their counterparts in other companies.

"Intuit wants engineers who will design products that their mothers could use. Engineers who do whiz-bang things are not welcome at Intuit. Intuit's philosophy is to increase the customer willingness to pay via e-commerce; the other is take operational savings and wrap it up in a stealth kind of way in service features," she said. Intuit found a way to make customer service excellent by removing most of the need for it.

"If you think about companies you know, there are more on the customer-as-adversary than customer-as-advocate side," said Frei. She added, "If you win when your customers lose, then you're leaving the door open for someone else to come in and champion the customer."

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