CHAPTER 1
Customer Focus, Customer Performance, and Profit Impact
The single most important thing to remember about
any enterprise is that there are no results inside its walls.
The result of a business is a satisfied customer.
— PeterF. Drucker (1909–2005)
On the Profession of Management
Harvard Business Press
Peter Drucker’s quote could be used to start a discussion on the importance of a customer focus
and measuring customer satisfaction. The managers of many product-focused companies work
mostly inside the walls of their company, with only a fraction of their time given to connecting
with customers and improving customer satisfaction. You could ask students for their thoughts
on why this is so.
Introduction: Customer Complaint and Social Media
Here’s a great exampleof“customer voice,” the power of social media, and how not to handle a
customer complaint. After a United Airlines flight, a passenger found that a $3,500 guitar he had
checked in as luggage had been badly damaged. The passenger jumped through all of the proper
hoops to obtain compensation from United, but to no avail. After realizing United was notgoing
to pay the replacement cost, the passenger made a YouTube video of himself singing about the
incident. The video generated 4 million views and propelled the man on his singing career.
United soon offered to make compensation,and the passenger requested that it be donated to a
music school. United says it is using his video in its training programs. (The incident is also a
Harvard Business School Case Study andis listedin the HBS case studies that follow.)You can
view the video at youtube.com/watch?v=5YGc4zOqozo.
Listed here are three kinds of business travelerscategorized by their levels of customer
satisfaction. Discuss how the sales and profits generated by each type of customer impacts the
overall sales and profits of an airline.
Customer 1.The business traveler is a very satisfied, loyal customerwho flies this airline whenever possible
(eight times a year).
Customer 2.The business traveler is a somewhat satisfied, non-loyal customerwho flies this airline
occasionally (three times a year).
Customer 3.The business traveler is a dissatisfied customer who flies this airline only when necessary
(once a year).
Teaching Objectives
Demonstrate the role that a strong customer focus plays in building marketing strategies that deliver
above-average levels of customer satisfaction and profitability.
Explain how a business can link its customer complaint behavior to its levels of customer satisfaction and
customer retention, and show why this link has a positive impact on profitability.
Extend this understanding of customer satisfaction and retention to customer loyalty and customer loyalty
management, andshow why combining customer loyalty and customer profitability allows a business to
better manage both.
Harvard Business School Case Materials
United BreaksGuitars (2010).HBS Case 10057-PDF-ENG. When social media propagate a complaint
about poor customer service, an international media event ensues. How do viral videos spread and what can
firms do about them? This case dissects an incident in which a disgruntled customer used YouTube and
Twitter to spread a music video detailing United Airlines’ mishandling of his $3,500 guitar and the company’s
subsequent refusal to compensate him. The song was called “United Breaks Guitars.” Within one week it
received 3 million views and mainstream news coverage followed, with CNN, The Wall Street Journal, the
BBC, CBS’s“The Morning Show,” and many other print and electronic outlets picking up the story. The
mechanics of viral propagation are uncovered and the limited opportunities for response by the firm are
revealed. The case supports the notion of the Internet as an insurgent medium, better at attack than at
defense.
Rosewood Hotels & Resorts: Branding to Increase Customer Profitability and Lifetime Value
(2007).HBS Case 2087-PDF-ENG.Rosewood Hotels & Resorts, a small luxury private hotel management
firm running a collection of 12 individually branded hotels and resorts in several countries, was wondering
how to foster customer retention and loyalty and capture the maximum value from its 115,000 guests.
Rosewood had always allowed each hotel to stand as its own individual brand, with the Rosewood name
presented as a muted sub-brand, if at all. Now Rosewood’s new leadership is contemplating whether the firm
should significantly increase the prominence of the corporate identity, making Rosewood a corporate brand.
The main challenge Rosewood’s executives face is to assess whether the potential economic benefits from
increased guest retention can outweigh the $1 million marketing investment needed to implement the
corporate branding strategy. The central focus is a quantitative assignment that asks students to calculate
how customer lifetime value would be affected by a shift from individual branding to corporate
branding.Learning Objectives:To understand the concept of customer lifetime value and the importance of
maximizing a customer’s lifetime value for the firm; to understand the components of customer lifetime value
and how each component is estimated; to learn how to calculate customer lifetime value based on a
combination of financial and non-financial data; and to explore the risks and opportunities associated with
corporate branding versus the branding of individual products.
Customer Profitability and Customer Relationship Management at RBC Financial Group (2007). HBS
Case 102072. The Royal Bank of Canada uses customer relationship management and customer
profitability tools to gain a competitive advantage in Canada’s increasingly crowded financial service market.
The case presents two pricing and customer management issues: one from the point of view of the vice
president of customer relationship marketing and the other from a line manager’s perspective. 20 pages.
Scott Cook and Intuit. HBS Case 9-396-282. Presents how CEO Scott Cook built a company culture
around customer research and customer service and used this market orientation to drive new product
development and the success of Intuit, the producer of Quicken and other software.
Hilton Honors Worldwide: Loyalty Wars. HBS Case 9-501-010. Presents Hilton Hotels’ frequent-guest
program and the company’s efforts to build customer loyalty and retention in an increasingly competitive
environment. 18 pages, with teaching notes.
FedEx: The Money-Back Guarantee (A). HBS Case 9-690-004. Discusses how FedEx created a major
headache for a customer who then made a formal complaint to the company’s CEO. The problem exposed
deficiencies in the company’s service and in the guarantee it advertised heavily. Teaching Note: 5-690-034.
Four supplements: B, C, D, and E.
Regency Facsimile,Inc.HBS Case 9-591-037. The vice president of customer service must justify the
customer service department’s dual mission of maximizing customer satisfaction and profits. Some in the
organization believe that the customer service department should only be focused on customer satisfaction.
Teaching Note: 5-592-058.
Market-Based Strategic Thinking
1. How would a business like Enterprise Car Rental manage its customer focus using the
customer-focus behaviors and practices presented in Chapter 1?
The three major drivers of a strong customer focus, as presented in Figure 1-3, are summarized here with
respect to Enterprise Rental Car.
to the public, but in the company’s philosophy of customer focus.
customer mentions that the vehicle was dirty or expresses any other dissatisfaction, thecomment goes
to the manager of the office where the customer rented it.
2. Why would a strong customer focus and high levels of customer satisfaction allow Southwest
Airlines to be more profitable than other airlines?
With a strong focus on improving the customer experience Southwest Airlines is able to achieve higher
levels of customer satisfaction. This allows the airline to more easily attract new customers and keep
3. Why would a very satisfied Apple Mac customer be more profitable than a somewhat satisfied
Apple Mac customer?
Very satisfied Mac customersare more likely to buy other Apple products,includingupgrades. Somewhat
satisfied customersaregenerally less motivated to buy upgrades and products such as the iPod, iPhone, or
4. Why would companies with high levels of customer satisfaction produce larger gains in their stock
prices than the average S&P 500 company?
Companies such as Apple, Southwest Airlines, and Clorox have above-average levels of customer
5. Lexus has been known for high levels of customer satisfaction. How would this impact customer
retention over time?
Very satisfied customers are more likely to return as customers than less satisfied customers. As the CEO
6. If Lexus hasan average customer retention of 80 percent, how many purchases would the average
customer make over their life as a Lexus customer?
If we assume Lexus customers replace their cars every 5 years on average, they would rebuy every 5
7. If a new coffee company had above-average profits its first couple of years but estimates of
intentions to repurchase (see Figure 1-9) were declining, with customer retention expected to fall
from 67 to 50 percent, what would be the likely impact on future profits?
There are two ways to look at the profit impact. In Figure 1-8 we can see how profitability increases when
customer retention improves from 70 to 80 percent. For a coffee company going from a customer retention
8. Why would extending the life of an online fashion retail customer from 4 to 5 years impact profits?
The are two important considerations here. First, the longer a customer is retained, the more cash flow
there is for offsetting the cost of acquiring the customer (often 5 to 10 times the cost of retaining a
9. What makes an Apple customer loyal, and why are loyal customers more profitable than other
customers?
Apple delivers unique productswith levels of customer satisfaction. For Apple customers, there are no real
10. How could a frequent-flyer airline customer become a captive customer? How do captive airline
customers contribute to current and future company profits?
A captive customer is usually a customer who cannot switch. An airline travelerwho lives in a small
cityserved by only one airline is a captive customer, having no choice but to fly an airlinethat the person
11. How would you manage a repeat McDonald’s customer who had a below-average (low) purchase
amount?
This is a tough situation. McDonald’s certainly cannot impose a minimum purchase amount. But it can offer
better prices with combined sales, such as coffee at half price with a breakfast order between 6 and 8 a.m.
12. What could cause a business to attract unprofitable customers?
No business intentionally wants to attract unprofitable customers, butit happens for two reasons. One, the
business does not know the target market for its product and attracts customers who do not buy at a level
13. How could a repeat customer with a low lifetime value be more valuable than a repeat customer
with a high lifetime value?
To add some context, let’s consider a coffee shop business. Customer A has a low lifetime value and
Customer B has a high lifetime value. Customer B buys a lot and is a repeat customer, but this
14. How should a first-time machine tool customer be managed differently from a returning customer?
New machine tool customers need extra customer service and training to ensure that their initial
experiencesare positive. In many instances, it is just a matter of answering questions typical of new
15. Foran industrial supply company, how could a returning new customer have a higher customer
lifetime value than a first-time customer?
Returning customersusually pick up about where they left off with respect to the purchase and usage of the
industrial supplies that the company offers. Brand new customers—those with no prior experience with the