Customers describe how they feel about companies and brands in profoundly personal ways. We hate our banks; we love our yoga pants. We can’t stand the cable company, but we consider our smartphone one of our very best friends.
How are we making these judgments? According to a new book titled, The Human Brand: How We Relate to People, Products, and Companies, by Chris Malone, an expert in customer loyalty, and Susan T. Fiske, a professor of psychology at Princeton University, our perceptions are the result of spontaneous judgments on warmth and competence – precisely the same elements that drive our impressions of other people. As a result, customers evaluate, judge and form relationships with companies in ways that are remarkably similar to how they evaluate and behave toward people.
Malone recently talked to Knowledge@Wharton about his book. To achieve success in the future, companies must build more genuine relationships with customers that display warmth, competence and worthy intentions, says Malone, who got his MBA at Wharton and has held senior marketing positions at companies such as Coca-Cola, ARAMARK and Choice Hotels.
An edited transcript of the conversation follows.
Knowledge@Wharton: Your book’s hypothesis is that we relate with companies in much the same way that we do with people. Explain.
Chris Malone: In their struggle for survival, primitive humans were forced to develop a genius for making two specific kinds of judgments quickly and accurately. One: What are the intentions of other people toward me? And two: How capable are they of carrying out those intentions? In the academic world, these dimensions of perception are called warmth and competence. Warmth involves whether we view others to be honest, trustworthy, kind or friendly, while competence relates to whether they seem capable, intelligent or skilled. These spontaneous perceptions drive most of our emotions and behavior toward other people.
Whether we realize it or not, the way we judge companies and brands happens in much the same way. Our research showed that more than 50% of all purchase intent and customer loyalty can be explained by these two basic human perceptions, before any features or benefits are considered. As a customer, we are acknowledging, “I get who you are and what you’re about.”
Knowledge@Wharton: So Mitt Romney was right? Corporations are people, too.
“As a customer, we are acknowledging, “I get who you are and what you’re about.”
Malone: He was sort of right, but not in the way he intended. We do perceive and judge corporations as if they are people, even if we never have any direct contact with the people in them. Psychologists classify relationships as either “exchange” or “communal.” Exchange relationships are very transactional. We get what we pay for – nothing more, nothing less. Communal relationships, however, are based on genuine concern for others, without an immediate expectation of reciprocal benefit. We tend to think that our relationships with companies and brands are strictly transactional. But to a much greater degree than we realize, we are more wired for, and desiring of, communal relationships.
Knowledge@Wharton: A “communal relationship” with a company? Really?
Malone: It’s really surprising and counter to conventional business wisdom, but our research on more than 45 major companies over the past three years has confirmed that warmth perceptions and communal relationships are the dominant drivers of customer loyalty. Here’s a personal example to illustrate. I never went looking for a communal relationship with my drycleaner, but ended up in one nonetheless. I’m not a chatty guy. I keep to myself on airplanes and elevators. But my drycleaner – a woman named Grace Kim, who emigrated from South Korea in the 1970s and now runs Jean’s Custom Cleaners – gradually won me over without me even realizing it. Her drycleaner is not the most modern, sophisticated or impressive I’ve ever seen, and her English remains heavily accented. But Grace greets most customers by name as soon as they walk in. She knows their kids’ names, what activities they are involved in and where they go on vacation. She really cares about the people she does business with and they have come to care about her in return. There are faster and more convenient drycleaners in my town, but at this point, I couldn’t imagine switching.
Knowledge@Wharton: What about the companies we don’t have good relationships with? What causes this deep sense of disgust on our part?
Malone: One thing that causes us to dislike big banks, cable providers and telecoms is the imbalance of power we have with them and how that is often used against us. They take actions in their own interest to generate revenue and profits – things like closing branches, cutting service and raising prices. Frequently, our ability to respond to these changes is limited by contracts or switching costs. In the business world, this kind of behavior is perfectly reasonable and rational. In fact, it’s what business schools taught us and financial markets expect from us. However, most people don’t live in the business world; they live in a civil society that relies on trust and communal relationships to function and grow. Prior to the industrial revolution, if a merchant did wrong by you, everyone in town knew about it by the weekend and the merchant would be under pressure to make it right or risk damaging his relationships with other customers. Today, social networks and digital communication are bringing back that same social accountability, and companies of all kinds will need to change the way they do business, or their customers will spend time actively plotting their escape and revenge.
Knowledge@Wharton: And what might that revenge be?
Malone: It could be as simple as never doing business with that company again, but more likely these days, it’s launching a social media campaign to let the world know how they have been wronged and what the true intentions of that company or brand are in their opinion. We have seen lots of examples of this in the past few years, from Bank of America’s attempt to introduce debit card fees or Verizon’s failed “convenience” fee for credit or debit card payments. Social networks have rebalanced the power in relationships between large companies and their customers.
“Today, social networks and digital communication are bringing back … social accountability, and companies of all kinds will need to change the way they do business.”
Knowledge@Wharton: What happens when a company disappoints us?
Malone: Netflix is a great example of how a betrayal of trust can be especially damaging. It was once a Wall Street darling and customer favorite. In 2011, the company shocked customers with a major price hike and customers were outraged. The reason was that Netflix seemed to be one of the good guys that enabled people to get around the unreasonable fees charged by cable companies and video rental chains. There was this feeling of: “I can’t believe I trusted you and then you turned on me.” The company [consequently] lost 800,000 subscribers and its stock price dropped dramatically. More recently, Netflix has been regaining customer trust and momentum, but has had to climb out of a deep, self-made hole that could have been avoided if it had handled its pricing changes in a warmer and more competent way.
Knowledge@Wharton: Do we forgive companies that make mistakes?
Malone: It depends on how they handle the mistake. If Netflix had come out right away and said: “We messed up – we are going to rethink this, and we are going to make this right,” it would have unfolded differently. But Netflix waited over two months to offer a half-hearted apology that did not include a rollback of the price hike. Netflix customers were not impressed and expressed even more outrage. In contrast, the Tylenol brand has been remarkably resilient in weathering an embarrassing spate of production problems and product recalls. Despite having their primary production facility shut down by the FDA, resulting in product shortages that have lasted for over two years, our research found that Tylenol purchase intent and brand loyalty remained slightly higher than that of Advil. In fact, 87% of consumers told us that they are likely to remain more loyal to a company that handles a product recall honorably and responsibly, even though it clearly made a mistake. It turns out that short-term lapses of competence are highly forgivable and can make companies seem more “human” and approachable, while intentional acts of ill will toward customers are often really poisonous.
Knowledge@Wharton: What kinds of things can companies do to make them appear warmer and more competent?
Malone: In our book, we profile Chris Zane, a bike shop owner in Connecticut, who back in the early 1990s was struggling to compete with the Walmarts of the world. One simple way he has built a fanatically loyal customer base is by giving away the tiny little parts that cost him nearly nothing, like nuts, bolts and ball bearings. He realized that the need for these parts typically comes during painful times for customers. A parent who enters his shop with a crying child and broken chain has enough problems without being nickel-and-dimed for a master link, so Zane started giving away these parts for free. It’s a little thing that doesn’t cost him a lot, but leaves his customers surprised and impressed by his loyalty to them.
Overall, the simplest and most reliable way to convey warmth and competence is what we call The Principle of Worthy Intentions. Sometimes in business, we make things much more complicated than they need to be. When companies simply think and act in the best interests of their customers – especially in the short term – the warmth and competence perceptions usually take care of themselves. Of course, good intentions alone will not be enough. The product or service needs to be decent as well, but our research shows that most companies are perceived to be lacking warmth more so than competence.
“There are some who believe that Big Data will be a kind of panacea for driving business growth in the future, but I am not among them.”
Knowledge@Wharton: What effect does Big Data have on our perceptions of a company’s warmth and competence?
Malone: There are some who believe that Big Data will be a kind of panacea for driving business growth in the future, but I am not among them. In my view, it really depends on how it is used. To the extent that it’s used to enable more one-to-one dialogue between companies and their customers, and demonstrate that they know and care who their customers are — like Grace the drycleaner — then I think it can have a very positive impact on those relationships. However, if it’s used primarily to track browser cookies and purchase habits as a means to serve up dynamic banner ads and targeted product pitches, then I think it will be a big disappointment. If companies want to develop stronger and more profitable relationships with their customers, they need to actually talk to them and pay attention to their interests, not just rummage through their digital trash.
Knowledge@Wharton: Is there a danger that companies will overstep?
Malone: Yes, absolutely. Last year The New York Times ran a story about Target using its data mining capabilities to figure out how to predict its customers’ pregnancies. The company had identified 25 items that could be analyzed along with individual customer data to produce a pregnancy prediction score with surprising accuracy. Then the company would send out motherhood-related coupons. The problem is that by trying to engage with customers on something that is deeply personal without getting to know them first just comes off as creepy. Target was chastened for overreaching. Companies need to use the data to get to know their customers by name and have interactions with them that are not just automated, machine-driven campaigns. Otherwise, it seems invasive and voyeuristic.
Knowledge@Wharton: What are the most important lessons for companies?
Malone: We have identified three imperatives that companies and brands should strongly consider if they seek sustained growth and profitability. First, they need to become more self-aware of how their actions are perceived by customers from a warmth and competence standpoint. Many longstanding business practices are far more off-putting now than they were just a decade ago. There’s a much higher standard of goodwill and transparency expected now.
Second, companies need to embrace significant change in the way they do business with customers, better aligning their policies, practices and processes to reflect warmth and competence.
And finally, companies need to rebalance their priorities to better serve the interests of multiple stakeholders. The stagnant, transactional nature of many businesses today can be traced to an excessive focus on short-term shareholder returns, often at the expense of customers, employees and other stakeholders. Until this root cause is addressed, the customer churn epidemic will continue, sapping growth and increasing the costs of doing business.