Friday, October 28, 2011

Customer Retention and Loyalty programs hamper innovation

I think one of the biggest challenges that many organizations face when they think about innovating is that innovation creates real cognitive dissonance.  Innovation is often so different, and in some cases so opposed to what seems "right" that it can be difficult for executives and managers to wrap their thinking around what they need to do to innovate.  Many times I've seen executives shake their heads when confronted with the fact that to innovate a firm must often stray from the proven path into actions or strategies that on the surface seem to reject all the conventional wisdom.  Most people aren't good at this - holding two diametrically opposed ideas in the head at the same time.  We've been trained to be effective and efficient, and trying to square the circle with ideas that seem to refute investments and training that have proven successful cause distraction and confusion.  Let's look at one example which on the surface seems absolutely correct but creates barriers for innovation - customer loyalty and retention.

While customer retention and customer loyalty are vital to your firm in the short term, a deep focus on these factors create significant barriers and obstacles for innovation.  While I'm not going to tell you to stop thinking about retention and loyalty, or that a focus on customer retention and loyalty is wrong, I am going to suggest that too much focus on these factors simply becomes a barrier to doing anything interesting from an innovation perspective.

We've all seen the data - loyal customers drive a fair amount of the revenue and often account for a substantial amount of profit in a business.  Businesses don't have to work as hard to attract and retain loyal customers and they are less likely to look elsewhere.  Loyal customers create a dependable revenue stream through repeat purchases.  But too much focus on loyal customers creates a thinking trap that is hard to escape from.

Loyal customers are, for the most part, happy with existing products and services and expect only small, incremental improvements.  To them, a radical or disruptive new product or service may introduce new methods, new technologies or new solutions that force them to learn something new, to adopt new solutions or that disrupt their comfortable understanding and lifestyle.  They aren't adverse to innovation, necessarily, they just don't want existing products and services changed radically. Think about how a focus on customer loyalty and retention impacts innovation.  As customer retention and loyalty become more important, firms narrow their focus to these "best" customers.  How can we best serve existing customers?  How do we keep them happy?  And much of the answer is:  same products and services, slightly improved customer service, all at a lower price.  Over time, focus on loyal customers means shutting out prospects and occasional but not loyal customers and their insights and needs.  Increasingly, this means blinkered feedback from a very small subset of your potential customer base, who are already fairly happy with your products and services and don't want significant change.

However, disruption rarely occurs from within your existing, happy customer base.  Disruption happens in customer segments or from prospects who are unhappy or felt that your products and services never met their needs, or didn't understand or relate to their needs and wants.  So while focusing on existing customer loyalty is right in the short run, it is devastating for the long run.  As your firm carefully monitors a small subset of the potential customer population and caters increasingly to its needs, you ignore or reject feedback from the vast population of potential customers whose needs and wants you don't fulfill. And it's in these segments and customer populations where new demands are created.  And, since you are paying attention or are actively rejecting the feedback and insights from these prospects, other innovators enter the market to fill these needs, which ultimately results in disruption of even your loyal customer base.

Happy customers rarely want to upset the status quo - they want to tinker around the edges.  Unhappy, pissed off customers or people who are simply outside the system or ignored want to bring down the status quo, and that's where real change and disruptive innovation happens.  Don't believe me?  Ask Tower Records, or any of the physical media firms, about Napster and eventually iTunes.  Ask Blockbuster about NetFlix.  People were beside themselves about late fees.  NetFlix basically delivered the same service to people who were angry enough with Blockbuster and its fee structure to make the switch.  Meanwhile Blockbuster continued to focus on its happy core customers, ignoring change in the marketplace. 

Perhaps you need some cognitive dissonance in your product management and innovation team - one focused squarely on existing, happy, loyal customers and one equally committed focus on unhappy, disaffected and disloyal customers.  The former will drive near term revenue and profit, the latter will drive insights to new innovation.  Too often we are far too happy to see an unhappy or disaffected customer go, not realizing that they carry with them the germ that will spark a significant change in our market or industry.  While interacting with customers who aren't loyal or who are unhappy or disaffected doesn't make for comfortable reading, it will open your eyes to disruptive opportunities and new innovation.
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posted by Jeffrey Phillips at 5:40 AM


Blogger Vandall said...

This is well thought out, nice work!

8:22 AM  
Blogger Gloria said...

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12:15 AM  

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