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Why Customer Experience Is The Only Thing That Matters

BY HARLEY MANNING

 | 

AUGUST 13, 2012

The only source of competitive advantage is the one that can survive technology-fueled disruption: an obsession with customer experience.

I was at a conference talking to some attendees when one of them, a guy who works for the Abu Dhabi ministry of finance, asked what I do for a living. When I replied that I conduct research into customer experience he replied, "Companies already know all about customer experience! Isn't it just common sense?"

That's a fair question because it should be common sense. It's not, though, as I explained by offering the example of the difference between the customer experience on Southwest Airlines or JetBlue, and the customer experience on United Airlines or American Airlines.

I didn't get far in my explanation before he cut me off--I could almost literally see the light bulb turn on behind his eyes. "You're right! I always fly Emirates. Even if they're more expensive and I have to pay the difference in the ticket price myself, it's worth it to not have to fly British Airways or Air France!" Then he proceeded to extoll the virtues of the Emirates experience for the next 10 minutes, warming to his topic as he went.

Why am I telling you this story? Because it's a perfect illustration of the state of customer experience as a business discipline in 2012.

A firm called Watermark Consulting used our data to calculate the performance of a portfolio of publicly traded companies that are customer experience leaders. Over the last five years, a period when the S&P 500 was essentially flat, that portfolio produced a cumulative total return of just over 22%. During the same period a portfolio of customer experience laggards returned -46%. That shows that not only do customers reward a superior experience, so do the markets.

There I was talking to a sophisticated businessperson (with an MBA from a prestigious U.S. school, I later found out). And yet he hadn't given much thought to A) what the term "customer experience" actually means, B) how much it varies among direct competitors, or C) how much of an impact it has on customer loyalty.

The good news is that he caught on immediately once I started explaining these things: Customer experience may not be as easy as "common sense" but it's not as difficult as quantum mechanics, either. Which prompts the question: Why is so much of the business world out of touch with the concept of customer experience?

Ironically, the answer is that for decades, customer experience didn't matter as much to business success as it does today. Consider that from 1900 to 1960 we were in the age of manufacturing. In that era, if you owned the factory, you owned the market. Factories were expensive to build but, once created, generated products at prices that others couldn't compete with--like the Ford Model T, which took two people to start (hardly a great experience) but was a huge commercial success because it was affordable.

Then from 1960 to 1990 we were in the age of distribution.  Businesses globalized, and deregulation and freer trade meant they could manufacture cheaply in Asia. In that world, the key barrier to competition was a distribution network that brought goods from where they were cheapest to local stores. Companies like Toyota, Procter & Gamble, and Walmart took advantage of that change.

Although their customer experiences weren't bad, customer experience wasn't the key reason they won in the marketplace--it was their mastery of distribution.
What's more, these companies controlled the flow of information about their products and services. Comparing products and prices took a lot of work: driving around, calling around, or leafing through print ads. 

But that situation changed radically starting in 1990 when we entered the age of information. Companies with information-centric products and services thrived, including Amazon and Google, which initiated a power shift from sellers to buyers.

Now we've entered a fourth age, which we call the age of the customer. In this age, past sources of competitive advantage have been commoditized: Now every company can tap into global factories and global supply chains. Brand, manufacturing, distribution, and IT are all table stakes. And with online reviews, social networks, and mobile web access, it's easy for your customers to know as much about your products, services, competitors, and pricing as you do.

In this age, the only source of competitive advantage is the one that can survive technology-fueled disruption: an obsession with customer experience.

You don't have to take my word for this. Over the last five years we've been running a study in which we ask consumers to rate the customer experience at companies they do business with. What we can now prove is that customer experience correlates to loyalty. Specifically, it correlates highly to willingness to consider for another purchase, willingness to recommend, and reluctance to switch to a different provider. In other words, if you want that next sale, if you want good word of mouth, and if you want to keep your customers, it's unlikely that anything else you do matters more than delivering a superior experience.

Will your business be one of those that profits in the age of the customer by mastering the business discipline of customer experience? Ultimately that's up to you.

Harley Manning is the co-author of Outside In: The Power of Putting Your Customers at the Center of Your Business. Manning launched the customer experience practice at Forrester Research and has led it for 14 years.