The Lack of Loyalty

I had my annual meeting with my friends at Walker Information the other day when they were in Boston talking about their latest report. I have written about Walker before, and it gives me pleasure to do so again — and to point out that I have no business relationship with them; I just like what they do.

If you are not familiar with Walker, they have made a science of loyalty. They collect volumes of data from the industry, analyze it, and discover relationships that are not immediately apparent. Walker’s concept of loyalty is a two-by-two matrix with attitude and behavior on opposing axes. It turns out that in their world, truly loyal customers both have loyal attitudes and exhibit behaviors that support those attitudes — that is, they buy more. Take away behavior, and Walker categorizes a customer as “accessible.” They might not be buying more right now, but they still think a vendor is doing well by them.

If, instead, attitude goes negative while behavior appears positive, the customer is said to be “trapped,” which means they might be buying more, but they don’t like it and are looking for a way out. Finally, customers that are neither acting loyal nor feeling loyal are called “high risk for attrition,” and most leave. This year, Walker turned its sights on the semiconductor industry — a very interesting sector from a loyalty perspective and one that has relevance to CRM. First, let’s jump into the way-back machine.

Moore’s Law

In 1965, Gordon Moore observed that the density of semiconductor chips would double about every 18 months, bringing with it significant improvements in computing, and, as we see today, advances in most parts of everyday life. This doubling will have to end at some point as miniaturization on the chip reaches the barrier of molecular size — you can’t make a transistor smaller than a molecule.

To understand the effect that this law has on chip makers and the pressures of new product development, you need to look at design wins, which is what Walker did. Very simply, a design win occurs when a product developer decides to work with semiconductor Company A instead of Company B, long before a product is finalized. Walker found that a lot of what goes into that decision-making process is what another Moore, Geoffrey, said a few years back — namely, that as markets mature, customers look for vendors that can provide whole products.

In the semiconductor world, “whole product” means development tools, product capabilities or features, and technical design support. What is truly interesting is that according to Walker’s report, cost is not much of a factor either. In sectors like consumer electronics, companies simply want the best chips and associated tools they can get so they can rush new products to market.

Up for Grabs

The downside of all this is that in semiconductors, loyalty is pretty low. The industries with the most-loyal customers — automotive and medical devices — each only scored 32 percent truly loyal compared with the bottom sectors, consumer electronics and wireless communications, with 28 percent. That’s it — just 4 points separate the best from the worst, a rather flat bell curve. More interesting is the fact that most of the sectors reporting actually have higher percentages of customers who are high risk than customers who are loyal.

So, if your business is semiconductors, you have to be looking at some very high potential attrition rates. What drives it? Well, you might be doing well with the current generation of whole products, but if you think you can stand pat, think again. Every time a semiconductor customer goes to the market, it’s a jump ball, and as we’ve said already, price is not the driving force. In other words, you can’t simply attract customers or expect to keep them with low prices. Building semiconductors is too important to be left to price.

All of this sure signifies a mature market to me. Switching costs is not a trivial matter, but apparently automotive, medical device and other companies view each product they design as a new opportunity to push the envelope. The semiconductor makers — the good ones at least — seem to be competing pretty much as equals. With so much switching and little price sensitivity, the chip makers are competing on services and tools, not raw ability to make the devices.

The Customer Is King

It’s getting to be much the same with many product categories. In many markets where innovation has slowed, vendors find themselves competing on tangential aspects of service. In his latest book, Dealing With Darwin, Geoffrey Moore spends a lot of time looking at ways companies in this kind of situation can differentiate themselves and make good returns.

As you can see, this is a world where the customer really is king. That’s why we hear so much about the customer experience and capturing the voice of the customer today. When we talk about the experience, we aren’t trying to replicate Disneyland — though those folks have done a great job of understanding the customer to the point that they’ve turned CRM on its ear, preferring to call it “CMR.” If you are not familiar with CMR, it stands for the “customer managed experience.”

In CRM, the practical effect of all this is a quiet shift that is taking place in the form of a growing reliance on marketing, as well as strategies that touch the customer in multiple ways. So far, e-mail marketing is the most obvious approach, but if you look at the newest application categories growing up, many fall somewhere between sales and traditional marketing. Lastly, I expect the call center will be called in to help out too.