The Best Way to Cut Costs Is to Make Customers Happy

Over time, happy customers cut down costs, making them an asset for any company looking to spend less.

By Fred Reichheld

min read


This article originally appeared on LinkedIn. Sometimes I get a reminder that I’ve been doing this work for more than a little while. Recently a Google alert popped up on my screen for an article I wrote in October 2001. Entitled “Prescription for Cutting Costs,” it published in the midst of the US recession that followed the dot-com bust. Today’s economic environment seems very different, with low unemployment and strong overall growth. But financial discipline remains in style because everyone understands that another downturn is sure to come. Typical arguments for good customer care focus on the upside: Your happiest customers spend the most money with you, and they expand your revenue and customer base by recommending you to others. Promoters are an invaluable source of efficient and sustainable growth. That they also help keep costs down is a case less often made, but just as true. Return customers buy more from a company over time, and as they do so, the operating costs to serve them decline. Referrals cut down on marketing expenses. And your happiest customers will often pay a premium to keep doing business with you, even if they could save by switching to a competitor. In the 2001 piece, I highlighted a couple of customer-centric companies that were proving my point. One was Vanguard, the mutual fund industry cost leader. Starting with founder John Bogle, Vanguard management had long focused on customer retention, going so far as to reject business from institutional customers who seemed likely to invest only for the short term. This emphasis on building long-term customer relationships had contributed to Vanguard’s low fees. In 1999, the expense ratio of its flagship S&P 500 Index Fund was just 0.18%; today, it has dropped to 0.14% for investor shares, and even lower for ETF and institutional investors. Over the same period, Vanguard has grown from a successful company into a powerhouse. Its assets under management have surged from $581 billion in 2001 to more than $5 trillion today. Loyal customers reduce costs over the long term. It’s still wise for companies to keep customers in mind when engaging in short-term cost-cutting, such as during a merger integration. In 2007, after Enterprise Rent-A-Car bought rivals National and Alamo, the newly acquired firms adopted Enterprise’s customer feedback system before making any changes. Enterprise knew that the only way to grow is to treat customers in a way that makes them come back for more and bring their friends. Though cost reduction wasn’t the focus of the deal, it always makes sense to minimize redundant costs and simplify processes. Such savings only last, however, if they don’t diminish customer loyalty. The companies that best understand cost savings through loyalty take very deliberate steps. A few you might (still) consider: Modify customer-acquisition incentives. Reward your sales teams and marketing channels for acquiring customers that stick. Consider commission or bonus reductions if customers defect before 18 months. Reallocate marketing investments. Systematically rank all of your customer-acquisition campaigns based on their yield of loyal customers (promoters who will recommend you to others). Shift resources toward programs that attract the best mix of loyal customers (lots of promoters and very few detractors). Identify ways to help underperformers. Develop annual relationship report cards for managers and employees with as much care as you give to annual reports for investors. Test a 360-degree feedback system, starting with senior managers and then rolling it out to all employees. By focusing on the loyal relationships that, by their very nature, keep costs to a minimum, companies are far more likely to remain strong—in good markets and especially in bad markets. That’s every bit as true today as it was back in 2001.

This article originally appeared on LinkedIn.

Sometimes I get a reminder that I’ve been doing this work for more than a little while. Recently a Google alert popped up on my screen for an article I wrote in October 2001. Entitled “Prescription for Cutting Costs,” it published in the midst of the US recession that followed the dot-com bust.

Today’s economic environment seems very different, with low unemployment and strong overall growth. But financial discipline remains in style because everyone understands that another downturn is sure to come.

Typical arguments for good customer care focus on the upside: Your happiest customers spend the most money with you, and they expand your revenue and customer base by recommending you to others. Promoters are an invaluable source of efficient and sustainable growth.

That they also help keep costs down is a case less often made, but just as true. Return customers buy more from a company over time, and as they do so, the operating costs to serve them decline. Referrals cut down on marketing expenses. And your happiest customers will often pay a premium to keep doing business with you, even if they could save by switching to a competitor.

In the 2001 piece, I highlighted a couple of customer-centric companies that were proving my point. One was Vanguard, the mutual fund industry cost leader. Starting with founder John Bogle, Vanguard management had long focused on customer retention, going so far as to reject business from institutional customers who seemed likely to invest only for the short term.

This emphasis on building long-term customer relationships had contributed to Vanguard’s low fees. In 1999, the expense ratio of its flagship S&P 500 Index Fund was just 0.18%; today, it has dropped to 0.14% for investor shares, and even lower for ETF and institutional investors. Over the same period, Vanguard has grown from a successful company into a powerhouse. Its assets under management have surged from $581 billion in 2001 to more than $5 trillion today.

Loyal customers reduce costs over the long term. It’s still wise for companies to keep customers in mind when engaging in short-term cost-cutting, such as during a merger integration. In 2007, after Enterprise Rent-A-Car bought rivals National and Alamo, the newly acquired firms adopted Enterprise’s customer feedback system before making any changes. Enterprise knew that the only way to grow is to treat customers in a way that makes them come back for more and bring their friends. Though cost reduction wasn’t the focus of the deal, it always makes sense to minimize redundant costs and simplify processes. Such savings only last, however, if they don’t diminish customer loyalty.

The companies that best understand cost savings through loyalty take very deliberate steps. A few you might (still) consider:

Modify customer-acquisition incentives. Reward your sales teams and marketing channels for acquiring customers that stick. Consider commission or bonus reductions if customers defect before 18 months.

Reallocate marketing investments. Systematically rank all of your customer-acquisition campaigns based on their yield of loyal customers (promoters who will recommend you to others). Shift resources toward programs that attract the best mix of loyal customers (lots of promoters and very few detractors).

Identify ways to help underperformers. Develop annual relationship report cards for managers and employees with as much care as you give to annual reports for investors. Test a 360-degree feedback system, starting with senior managers and then rolling it out to all employees.

By focusing on the loyal relationships that, by their very nature, keep costs to a minimum, companies are far more likely to remain strong—in good markets and especially in bad markets. That’s every bit as true today as it was back in 2001.

outubro 29, 2018

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