United States: Using a 3-D View of Customers To Generate Profitable Growth

By Ron Langford and Matt Hammerstein

To find profitable growth opportunities in an increasingly competitive marketplace, many companies are trying to deepen their understanding of existing and potential customers.

They have the right idea, but most go about it the wrong way. Either they rely too much on attitudinal information or – if they also look at customer behavior and economics – make little attempt to combine the three types of information. The result is an incomplete and often misleading view of how to manage growth investments.

This article introduces a more comprehensive approach to generating insights about customers that can improve any organization’s ability to drive profitable, customer-focused growth. The approach, known as "3-D customer insight," provides fact-based answers to the following critical questions:

• What customers and customer segments should we focus on (and not focus on)?

• What new products should we launch, and to which customers and customer segments should they be introduced?

• How can we best extend our offer into adjacent markets?

• How can we most profitably differentiate our offer from the competition?

• Where and how can we get the biggest bang from our growth investments (e.g., marketing spend)?

• What is the best pricing strategy?

Customers are notoriously hard to figure out. They say one thing, then do another; they are unclear about which product attributes they value; and often different customers respond differently to the same offer and the same marketing messages.

For example, in a recent survey for a global energy client, we polled around 3,000 customers in one regional market on what they valued most about their preferred gas station. Respondents indicated that cleanliness was a high priority. But when we analyzed actual switching behaviors (i.e., purchasing patterns characterized by a change from one brand or product to another), it was clear that customers were indifferent between stations that exceeded a minimum level of cleanliness (and all did). In this way, the survey showed how stated preferences can conflict with attributes that actually influence behavior.

Similarly, customers often find it hard to make trade-offs between multiple product attributes when presented with a list. They are notoriously capricious when asked to rate competing offers. In one academic study, only half of those who gave a particular answer to a question gave the same answer as near as 15 minutes later.¹ Other researchers have noted, "It seems that attitudes are seldom deeply held, customers give an attitudinal response only because they were asked to, not because they necessarily hold a strong opinion."²

Despite these human foibles, companies have not been deterred from spending a great deal of time and money listening to customers. They track changes in their satisfaction religiously, develop detailed segmentation schemes based on customers’ attitudes and perceptions, and design into their products the attributes customers say are important to them.

But knowing what customers think or say is not the same as knowing how they will react to changes in product attributes or marketing messages. Knowing the "minds" of customers is only useful if it deepens one’s understanding of their behavior and how to change it. And knowing the attitudes of existing customers reveals little about the attitudes of potential customers.

A further shortcoming of attitudinal data is the difficulty of deriving useful information about customers’ existing or potential economic value. This is a serious weakness: Unless a company knows how much economic profit (profit above the cost of capital) it is earning or is likely to earn from particular customers or segments, it cannot determine how much to invest to attract and retain them. Our own experience corroborates the conventional wisdom that for many businesses, 20% of customers account for over 100% of economic profits. But who are these high-value customers, why are they so profitable and how can knowing their minds and behaviors help a company lure and keep them?

The answer is an approach we call "3-D customer insight" (see Figure 1). It’s three dimensional in that it requires a careful integration of insights about customers’ attitudes, behaviors and economics. To get the most out of this technique and surface the best insights about where and how to grow profitably, companies need to:

• Develop a much deeper and greater appreciation for customer behavior

• Use this to gain a better understanding of customer economics

• Link customer attitudes to behaviors in order to better understand how they can entice the most attractive customers to change their behavior

Insights increase exponentially when information on customer attitudes, behaviors and economics is integrated in this way.

Consider the experience of a multinational consumer goods company. Senior management had previously dismissed the suggestion that it launch a new disposable product because earlier research suggested it would take sales away from the company’s highly profitable "system" product with replaceable parts.

Under pressure to find profitable growth opportunities, one of the business unit heads decided to investigate the disposable idea more closely. He focused on understanding the buying behaviors of users of both products and their propensity to switch between them. He found that buyers of disposables rarely switched to systems, and vice versa, but that customers did switch frequently between brands and product lines within the disposables and systems product markets. This information led to two critical insights:

1. A new disposable product would take few sales away from the current system product – it was a pure organic growth opportunity
2. There were customers within the disposable market that he could entice away from their current brand and product – the opportunity was realistic

Later, the business unit’s management team investigated the economics of users of the disposable product to establish how much to spend on development and testing. Then it linked new attitudinal information to plan the communication for the launch, emphasizing the high performance that the disposable product offered relative to competitors. After tests confirmed the segment separation (virtually no sales of the system product were lost) and the economics (the project was forecast to be economically profitable within a matter of months), the company launched the disposable product. Profits for the business increased substantially, fueled by growth of both the new and existing products.

The key to unlocking profitable growth for the consumer goods company was a different approach to deciphering customer behavior – one focused on a detailed knowledge of how and why customers switch between rival brands and products. Without this, managers would not have been able to uncover customers’ latent preferences. And they would not have gained the confidence to introduce the new product, despite the wealth of existing information on customer usage.

Most management teams try to understand latent preferences and predict switching by studying attitudes and customer satisfaction. They assume that these are good predictors of future behavior. But surveys of customer satisfaction only reveal current attitudes – whether the product or service just purchased was poor, good or excellent. Many studies have shown that current attitudes appear to reflect rather than guide behavior – people tend to like what they buy³ – and customers often say they are perfectly satisfied with a product just before they switch.

In the previous gas station example, customers had rated as "important" most of the nearly 20 attributes listed in an earlier attitudinal study. By deriving the trade-offs customers made when visiting different sites – based on an understanding of how specific attributes varied across visits – we determined that differences in only four attributes genuinely influenced customer behaviors. Cleanliness, which ranked first in the attitudinal study, was not one of them. Friendliness, one of many important attributes in the attitudinal study, emerged as the second most powerful differentiator. This had significant implications for where and how the company allocated its investment (e.g., shifting money toward a staff training program).

In another example of the power of consumer switching data, a leading pharmaceuticals company introduced what it believed to be a differentiated but not a breakthrough new drug. Despite modest expectations, sales of the drug – call it "Blockbuster" – skyrocketed, and it quickly became a market leader. But no one was sure why, and no one was confident in what to exploit to continue increasing sales.

Initial research, which focused on what doctors said was most important in leading them to prescribe the drug, suggested that typical must-have traits like drug effectiveness were most important. Further inspection of actual switching behavior – to identify what attributes were similar and different when doctors made different drug choices – made clear why the treatment had been such a success (see Figure 2). While only slightly more effective, Blockbuster produced significantly fewer side effects than competing drugs, thereby reducing the amount of follow-up time for doctors. This insight had profound implications for the way in which the company marketed the drug.

With similar information, you can develop an in-depth understanding of which customers switch, which are most accessible (i.e., most likely to switch to your offer), which are not accessible and why. With this deeper knowledge of customers’ latent preferences, management can better predict how a category as a whole is likely to respond to new products or attributes, extensions and contractions of product lines, and new marketing campaigns – all fundamental variables in determining how and where to grow profitably.

A detailed understanding of customers’ latent preferences is clearly valuable in its own right, but it is much more valuable when used as a vehicle for integrating information on customer attitudes, behaviors and economics. Two bridges should be established linking behaviors to economics and attitudes to behaviors.

Knowing the preferences that lead customers to switch yields invaluable information about the demand and supply sides of customer economics – the value to the company of customers and segments, and the value that customers and segments attach to each product attribute (physical or otherwise).

Many companies measure customer and customer segment profitability, but few use switching-based metrics to make these calculations. Instead, they deduce customer economics from product economics and allocate costs primarily on product usage measures, even though they know that customers use their products in different ways for different reasons.

Consider two hypothetical customers in the ready-to-eat cereal market. On average, they both buy a box of your cereal every month. One buys only when the product is on promotion and switches liberally between a small set of brands; the other is entirely loyal to your product and buys whether it is on promotion or not. Every product’s market share represents a mix of both customers. The difficulty is determining how many of each there are within the mix.

This is essential information. The current and future profitability of each customer will be substantially different due to large variations in acquisition and retention costs associated with the cost of the promotion. From a product usage perspective, they look identical. The difference is only apparent when you understand the switching activity across customers. With switching information in hand, you can more easily identify the segments and the differences in their profitability, allowing much more specific investment allocation decisions.

Switching information can also play a key role in understanding the "value" different attributes contribute to the company – particularly the difference between the added customer value that improving an attribute provides and the cost of providing it. By revealing the roles different attributes play in purchase decisions, switching information can help companies prioritize where and how to invest to change customer and company economics.

Attitudinal research, if conducted in conjunction with the right behavioral research, helps managers interpret customer behavior by enabling them to better link what customers say with what they do. This helps managers develop more precise communication programs (for example).

It is not enough simply to combine conventional attitudinal and behavioral information, however. Information on switching behavior is the linchpin of a 3-D customer insight approach, and attitudinal information must be aligned. Once managers determine which customers are the most attractive based on their behaviors and economics, they need to know what motivates these customers so they can effectively and efficiently reach them – and provoke the right customers to act in the right way.

Consider the case of a U.S. quick-service restaurant chain. Historical research had repeatedly shown that food quality was by far the most important product attribute to customers. Disappointed by the impact of the company’s latest investment in upgrading its offerings, the head of marketing wanted to investigate further. She commissioned a study of consumers’ switching behaviors and attitudes, and found that the most profitable customers were heavy users of the drive-through. In attitudinal research, these customers highlighted food quality as the most important attribute and said that the company’s product was the best on the market. Yet they would readily switch to a competitor if the drive-through was not open or was inconvenient to reach.

By linking switching behavior and attitudinal information, the marketing chief was able to both identify this as the most profitable segment and better understand the segment’s specific motivations. Armed with this insight, she convinced the company to upgrade its drive-through by increasing opening hours and ease of access. She also made significant changes to the communication program associated with the recent food quality initiative. Profits increased in the double digits as a result.

In some situations, like the restaurant chain’s, creating a tighter link between switching behavior and attitudinal information will require new approaches to customer research. Combined surveys covering attitudes and behavior are best because individual customers can be asked to recount their behavior and state their attitudes in one place, allowing the company to seamlessly link the two.

As evidenced by the cases of the multinational consumer goods company and quick-service restaurant chain, a 3-D view of customers can generate many new ideas for growing long-term company value – either by increasing the number of valuable customers, increasing profits per customer or both. This view leads to a fundamentally different way of segmenting customers.

Most segmentation schemes are based on attitudinal information – and sometimes behavioral and economic information is attached. Our approach requires companies to segment based on an integrated view of their customers. This reveals true cause and effect – how changes in a company’s offer or communications will cause changes in customer behavior, and what effect these will have on company profitability.

Managers can also use this integrated perspective to help evaluate strategic options by addressing the economic trade-offs between customers’ likely responses to a change and the cost of the change. The choice seems simple, but is seldom easy. It becomes doubly difficult when executives are unable to link customer attitudes to customer economics, or when they do not know which levers to pull to change customer behavior. Integrating attitudinal, behavioral and economic information highlights the trade-offs much more clearly.

Companies that continue to grow profitably over long periods of time know it is not enough to listen to what customers say. They are keen students of customer behavior, particularly what it is about their and their competitors’ products and services that cause customers to switch from one to the other. They use these insights to develop clearer pictures of the economic drivers of customers and customer segments, and dedicate their attitudinal research to interpreting and improving their understanding of how to influence customer behavior.

They gather the information required to build confidence in their strategies and in formats that can be easily integrated, so that each element (e.g., attitudes) can enrich the others (e.g., behaviors and economics), and the company can more effectively prioritize where, how and in what to invest. They outpace their rivals because they know which customers to target and spot opportunities for profitable growth that are invisible to companies employing one-dimensional or less comprehensive approaches to developing customer insight.

The tools and techniques to gather, integrate and analyze the information needed to achieve 3-D customer insight are available today – your competitors may already have them. Our experience with several companies suggests that the benefits of this new approach far outweigh the costs.