A 'Blueprint for Profit' in a Time of Growing Consumer PowerPublished: November 21, 2005 in Knowledge@Wharton
According to author Glen Urban, traditional "push/pull" marketing no longer works, and even highly-touted customer relationship initiatives are failing. In this environment, the smart companies are those that are pioneering a new route to higher margins and sustainable competitive advantage: customer advocacy. In his book entitled, Don't Just Relate - Advocate! A Blueprint for Profit in the Era of Customer Power (Wharton School Publishing), Urban explains why advocacy strategies work, and suggests ways to improve on what he describes as customer advocacy's eight elements, ranging from transparency to partnership. With the help of new case studies, Urban shows how to align culture, metric and incentives. Below is an excerpt from the first chapter of the book.
Chapter One: Now Is the Time to Advocate for Your Customers
What would you do if your customers knew everything about your company and your competitors' products and services -- even your disadvantages? The rise of the Internet enables your customers to find third-party information about your products, ratings of your products, people who were ever dissatisfied with your products or services, and the same full information on your competitors' offerings. On the Internet, your company, your biggest competitor, and the smallest unknown upstart competitor are the same distance from the customer. Each is only an online search away. The Internet has enabled an unprecedented increase in consumer power!
Customer power is growing, and you must decide what to do about it! I propose that you advocate for your customers and earn their trust. In this book, I will show you why you should do this, how you can do this, and what other leading edge companies are doing in this arena. In taking my own advice and advocating for my readers, I will also explain how you can tell if trust and advocacy are not right for your company.
Already some forward-looking companies are pursuing customer advocacy. They are providing customers with open, honest, and complete information -- and then finding the best products for them, even if those offerings are from competitors. In short, they are truly representing their customers' best interests, essentially becoming advocates for them. The strategy is this: If a company advocates for its customers, customers will reciprocate with their trust, loyalty, and purchases -- they will advocate for you now and in the future. Your firm can then command higher prices for its products and services because many customers will be willing to pay for the extra trusted value and the superior products you will offer. With trust, customers will increase the number and range of products they buy from you. Finally, when people trust your company, they will often tell others about it, helping to reduce your costs for acquiring new customers. The marketing paradigm is shifting, and you should too. Advocate for your customers to find business success in an era of customer power! Watch Out for Growing Customer Power!
New technologies such as the Internet provide easy access to tremendous amounts of information, and people have been taking advantage of that to become smarter shoppers. They are using digital technologies to gather information, to find competing products, and to talk to other customers. Increasingly, they are using the Internet to avoid pushy marketers and to help them make their own purchasing decisions. The Internet is a great enabler of customer power. What many hoped would happen with the Internet is actually occurring, and it will change how you do business.
The five proven sources of increased customer power are:
1. Increasing access to information: Customers now have access to information about a company and its products from a multitude of sources. From ConsumerReports.org for third-party information to Amazon.com for customer reviews and eBay for seller ratings, consumers now enjoy much greater access to independent information about a company's products and services. For example, more than 64% of car buyers now use the Internet to research car models, features, and prices. Sixty-eight percent of new car buyers rate third-party sites as very or extremely important sources of information, and they visit an average of seven different sites, such as Kelly Blue Book, Autobytel, and Edmunds. Many prospective buyers start their online research months before setting foot on a dealer's lot. And 6% go on to save an average of $450 per vehicle by using an Internet buying service. The implication: Old-style marketing is less effective when customers have independent means to research a company's claims and obtain cost information.
2. Access to more alternatives: Customers can find competing products more easily. Search engines, comparison sites, and online reviews all enable customers to find the best products at the lowest price. For example, travelers now enjoy a range of web sites (e.g., Expedia, Orbitz, and Travelocity) that help them find the lowest fares on flights. Over 63% of leisure travelers and 69% of business travelers utilize the Internet for research. Internet sales grew 37% in 2002 to $28 billion, even as total travel services fell 5% -- indeed, 35 million people bought tickets online in 2003. Leisure and business travelers increasingly refuse to pay high fares, causing much financial misery for airlines.
The Internet has also impacted the real estate market by making wider-spanning and richer information available to homebuyers. Online real estate buying services (such as eReality and ZipReality) rebate up to 1% of the purchase price, thereby lowering commissions and saving customers thousands of dollars on the purchase of a house.
3. More simplified direct transactions: Customers can buy from anywhere, regardless of physical location. The Internet simplifies transactions for both consumers and industrial customers. Customers can connect directly with providers to buy goods and services. For example, online ordering and direct shipment make buying books and electronics possible at any time without leaving home. Electronic airline tickets eliminate the need to obtain paper tickets, thereby reducing people's dependency on local travel agents. Simplified transactions also enable switching -- the Internet gives customers the power to find and buy from a wider array of potential providers.
4. Increasing communication between customers: Prospective customers can find out if a company has mistreated former customers by consulting and collaborating with them through the Internet. In 2002, 110 million Americans looked on the Internet for healthcare information. An additional 48 million consumers in Japan went online for healthcare information, 31 million went online in Germany, and 14 million went online in France for health data. Active online communities exist for virtually every disease. Patients exchange information about the effectiveness of products and provide advice to each other about how to take control of their medical treatments. When a customer requests a specific prescription, 84% of the time that request is honored by the doctor. Sites such as epinions.com or planetfeedback.com make it easy for customers to submit their opinion of a company or product and for other potential customers to find these ratings.
Increasing communication between customers amplifies and accelerates word-of-mouth marketing. In the past, bad companies lost customers one at a time. At worst, the occasional exasperated ex-customer might convince a few friends to stop buying from the company. But now, the Internet provides global reach for the disgruntled. Web sites such as thecomplaintstation.com, rating services, and discussion forums accelerate the process of weeding out bad products, bad service, and bad companies. On eBay, customers give positive and negative comments on sellers, and even a few negative comments can immobilize the seller's auction by reducing the number of bidders. Very visible star ratings summarize the seller's reputation in terms of the quality and quantity of comments.
5. Increasing control over contacts: Customers can avoid a company's marketing efforts. Consumers have more control over the flow of marketing messages into their homes and lives. Consumers' distaste for junk mail, telemarketing calls, spam, and pop-up ads means that these pushy messages are more likely to earn ire than profits. Technology empowers consumers by letting them mute or zap TV commercials, screen telephone calls, block pop-up ads, stop telemarketing, or send spam straight to the trashcan. For example, 94% of people "distrust" pop-up ads, over 20 million have installed pop-up blockers, and over 50 million people signed up for "no call" protection.
Customers are taking advantage of these five trends to become more powerful consumers. They are tired of corporate hype and corporate scandal. More than two-thirds (69%) of Americans agree with the statement, "I don't know whom to trust anymore," according to a February 2002 Golin/Harris Poll. Companies tarnished their images through accounting scandals and product recalls. CEOs lost credibility with fat salaries, while workaday staffers lost 401k retirement savings in a market downturn.
According to a 2004 Gallup International and World Economic Forum study, there is a dramatic lack of trust in global and large national companies, and trust is even lower when it comes to NGOs, trade unions, and media organizations across the world. Global companies and large domestic companies are not trusted to operate in the best interest of society -- 48% of the 36,000 respondents across 47 nations had little or no trust in global companies, and 52% had little or no trust in large national companies. The highest level of distrust of any institution was 52%. In 2003, two-thirds of Americans believed that "if the opportunity arises, most businesses will take advantage of the public if they feel they are not likely to be found out." Furthermore, customers are resentful of current marketing tactics. Sixty-four percent of consumers are "furious" about pop-up ads on their screens (96% were "angry" or "furious") -- the same percentage as those who are furious over spam. Ninety percent of customers say "they think less of brands featured in pop-ups." These resentments make consumers fight back and exercise the increasing power granted to them by these five dimensions of customer power.
In an era of customer power, untrustworthy companies can be out of business. In a few short months, the venerable Arthur Andersen went out of business because a few employees broke the trust (shredded Enron evidence); over 100 years of tradition were gone, and 20,000 employees lost their jobs. In 2005, Merck is facing a major crisis because it is now evident that Vioxx increases the risk of heart attacks and stroke. Although legal damage suits will continue for years, the court of public opinion has already dealt a severe penalty to Merck stock value. The firm's health itself is in question because of its failure to be completely candid with customers.
Untrustworthy companies may not all go out of business, but at least they will suffer a competitive disadvantage. Customers' abilities to verify marketers' messages make traditional hype a very risky strategy. This new transparent reality will weed out those companies that do not honestly deliver information and real value to customers. In the face of this Darwinian trend, companies have no recourse but to change their relationship with customers and build trust.
The point is that the Internet and other computer-augmented technologies enable consumer power, and companies' pushy tactics and lack of trust encourage customers to use that power. Today's consumers are more educated and more informed than ever before. With more tools for verifying a company's claims, customers can seek out superior product and service options. There are no secrets any more! Companies must decide what to do in the face of this growing force.
How Should Your Company Respond?
In the face of increasing customer power, your company can choose among three possible strategies. These strategies range from amplifying the traditional push/pull model of marketing, to strengthening relationships with customers, to embracing true customer advocacy. I'll introduce these strategies in this section and then discuss their relative merits in depth in Chapter 6, "Where Are You Positioned on the Trust Dimensions?"
Push/Pull Harder: You may be tempted to respond to your customers' new power with good old-fashioned marketing push and pull. Increased pull by media advertising, aggressive push by price promotions (perhaps with higher initial prices or hidden fees to maintain profits), and potentially misleading one-sided communications might get the job done. After all, those time-tested tactics have been the core of marketing for the last 50 years. But modern-day consumers are wiser and more elusive than their more gullible predecessors. Even as consumers have embraced a greater influx of information, the media channels by which a company might push information to consumers have become less effective. Media fragmentation, consumer skepticism, and the time pressures of a modern lifestyle mean that pushing information and products on unsuspecting customers is an uphill battle.
In the halcyon days of mass media, everyone read his or her local newspaper and watched one of the three national broadcast TV channels. In the past, a company could reach a large mass of consumers through any of these mass-media outlets. But now, daily newspaper readers are in the minority, national broadcasts have lost market share to a dizzying array of cable channels, and the Internet has diverted peoples' attention to a fragmented web of online sites. The national broadcast networks have seen their market share of prime-time audiences decline 50% since 1970. When today's figures are compared to the 1960s, the decline is even worse. The hundreds of channels available on cable or via satellite fragment the TV's power, making it harder for marketers to push their messages to the millions of viewers that they need. Surprisingly, advertising costs have not fallen -- in fact, they are way up! Network prime time TV cost per thousand exposures rose 18% from 2000 to 2003.
Even if a prospective customer is exposed to your TV ad, only one-third actually watch the ad -- the vast majority mute it, switch channels, or leave the room. In a 2004 study, Yankelovich found that 79% of viewers flip channels during commercials compared to 51% in 1986, and 53% turn down the volume versus 25% in 1986. Ads lose out in the competition with the refrigerator, the bathroom, family members, other TV channels, electronic games, and the Internet. Average use of the Internet is almost the same as TV viewing time, at 15 hours per week, and 36% of people say they are watching less TV. Some people under 21 never watch TV and prefer to use the Internet and mobile devices. Even on the Internet, with its deftly targeted pop-up and banner ads, click-through rates have fallen dramatically since the early Internet days of 1998 to 2005. Internet service providers and software vendors now tout their capability to block pop-ups and spam. Junk mail gets tossed, and telephone calls are screened by Caller-ID, answering machines, and no-call registries. The effectiveness per dollar of push/pull marketing has dropped dramatically!
Admittedly, a company may continue to thrive using a push strategy in this brave new world of fragmented media and attention-deficient addled customers. Clever, funny, or engaging ads can draw customers in. Shrewd selection of highly specific media with refined targeting can help a company reach its intended niche audience. But aggressive push can be a false victory -- winning the sale but losing the customer if excessive hype or questionable (but not illegal) pricing tactics leave the buyer embittered and resentful if they find out the facts. And in today's world, they will find out the facts!
Strengthen Relationships: In trying to appeal to a more powerful customer base, your company might pursue a strategy of relationship marketing. In recent years, many leading companies have refocused on their customers by emphasizing customer satisfaction metrics, creating consistency in customer interfaces, building better products through Total Quality Management, and emphasizing more personalized service. Customer Relationship Management (CRM) software often backs these efforts by giving a company the data and functionality it needs for one-to-one marketing and creating a consistent one-face-to-the-customer interface. CRM helps a company to understand each customer and then deliver a consistent message or service to that customer. By putting the "custom" back in customers, these companies can target their customers better and can deliver persuasive information and promotions more efficiently.
Customers may enjoy this new emphasis on one-to-one connections, but only if your company is very careful about how it uses the data. The dream of CRM is for a close positive relationship with customers, but the reality is often more invasive marketing. Too many CRM programs are based on building a huge data warehouse, mining the data, and then hitting the identified segments with aggressive email, phone, or Internet promotions, with or without customer permission. For some companies, CRM is merely a more efficient means of push/pull marketing, targeting customers in the sense of drawing accurate cross-hairs on their chests. Impertinence and aggressive cross-selling can make your customers treat your company as if it were a cheeky acquaintance -- making the customer cross the street to avoid contact with you. No wonder 55% of CRMs have not succeeded. If your CRM is a push system, it is not going to work well in this world of customer power. You need to fulfill the dream of CRM by building a long-run trust, but even this may not be enough. Advocacy is an effective new strategy and you should consider it.
Customer Advocacy: Your company might choose to embrace advocacy by becoming a faithful representative of your customers' interests. Under this approach, you provide customers and prospects with open, honest, and complete information. You give them advice so that they can find the best products, even if those products are not your company's products. Far from being foolish, the honesty of advocacy reflects the reality that customers will learn the truth anyway. If your company is distorting the truth, your customers will detect those falsehoods and will act accordingly.
Of course, if you embrace honesty, you will need to have very good, if not the best, products. With transparency, this is the only way you can earn the customer's purchase. You will invest more in product design and quality and less in pushy promotion and advertising.
Advocacy is not a way for your company to speak at customers. Rather, it is a mutual dialogue that assumes that if you advocate for your customers, those customers will reciprocate with their trust, purchases, and an enduring loyalty. It is a partnership between you and your customers for everyone's mutual benefit. You advocate for their interest, and they advocate for you by buying your products and helping you design better products. Most importantly, they tell other customers about your firm and products. Advocacy has duality -- the partnership created by advocacy is mutual and reciprocal. If customers tell others about the positive partnership, then customer acquisition costs will decline, and customer preference for your product will grow. Companies that advocate for customers will enjoy more opportunities to sell a wider range of products to more people. This can lead to growth in sales as customers and their friends choose your company's products. It also leads to greater profit margins as customers come to realize that you offer an extra value that is reflected in an honest, reasonable price. General Motors, Intel, Leading Credit Unions, and John Deere are a few of the companies that are testing and implementing advocacy programs, and we will discuss these cases in depth later in this book.
eBay Becomes the Killer Application Through Trust
Who would have thought that a site started by a French-Iranian immigrant (Pierre Omidayar) to help a girlfriend to trade her Pez candy dispenser collection would become the killer application of the Internet? Who would have thought that millions of people who have never met would buy and sell billions of dollars of goods over the Internet, including thousands of used cars? Yet this is exactly what eBay did -- in 2003, over 20 billion dollars of goods exchanged hands at the online auction site. eBay is a microcosm for the economy as a whole -- it illustrates both customer power and the profits created by trust.
The keys to eBay's success are the mechanisms that help buyers and sellers trust each other. This trust has enabled eBay to create a new marketplace for buying and selling. One trust mechanism tracks the reputations of participants through the feedback between buyers and sellers. Buyers may enter feedback (positive, neutral, or negative rating and description) about a seller, and vice versa. The percent of positive comments is displayed for each seller. Sellers garner star ratings based on the number of net positive votes (yellow at 10 to 49, and on to green at 5,000 to 9,999, and shooting stars for higher numbers), and the stars appear next to their items. Every auction contains simple, clear information on the reputation of the seller. Because of this rating system, buyers and sellers trust each other enough to exchange large amounts of money without even seeing an item in person. Sellers are upgraded to "Power Sellers" if they embrace the core values of the eBay community and maintain 98% positive feedback. This results in a "Power Seller" label next to the item they offer for sale.
The behavior of bidders on eBay illustrates the profitability of creating trust through reputation. Trustworthy eBay sellers -- those who build a good reputation with buyers through multiple transactions -- enjoy higher prices for their goods at auction. A controlled experiment found that buyers bid 7.6% more for otherwise identical goods that are listed by repeat sellers with high reputations. Ebay's feedback systems create the transparency needed for buyers to assign higher monetary values to good reputations.
eBay also has an aggressive fraud protection program, ensuring that less than .01% of transactions are affected by fraud. PayPal is available for making payments on eBay, and along with credit card companies, it protects against fraud losses. Participants who have changed IDs in the last 30 days are flagged with a pair of sunglasses to indicate that there may be a reason why the person changed his or her ID. You are encouraged to "get to know your seller" by asking email questions, and you can easily report suspicious activity. For more valuable items, eBay offers an escrow service, Escrow.com, that ensures that both the money and the goods reach their respective parties. Another partner company, Squaretrade.com, provides a range of reputation-enhancing services, including ID verification, dispute resolution, and a seal that eBay sellers can display to protect buyers from fraud; in addition, purchases can be protected up to $250 after a $25 deductible.