Exit, Voice and Customer Loyalty
by Arthur Middleton Hughes

 

In 1970, economist Albert Hirschman wrote Exit, Voice and Loyalty that holds some relevant messages for modern database marketers. I have not seen Hirschman’s ideas referred to in current marketing literature. They should be. Here is what he said:

When customers, who want to continue to purchase in our category, become dissatisfied with our offerings (because of price, relative quality, or the way they are treated) they really have two choices. They can Exit – begin to buy from one of our competitors, or they can exercise their Voice – keep buying, but complain. Where there is a good competing product, most customers simply exit. It is much easier. There is little cost for them in switching. The suppliers often have no clue as to why their customers are leaving.

Voice is more complicated. Customers have to make telephone calls, write letters, organize committees, hire lawyers, call their congressmen. Few are willing to go through all of that bother if they can simply walk across the street and begin buying from another supplier.

In what circumstances do customers choose Voice over Exit? Obviously in the case of a local monopoly: the local water, electric, telephone, gas, or bus company, voice may be the only option. This is also true of local public schools, hospitals, public libraries, police, fire, and park departments. Whenever any one of these local services falls short of public expectations, they can anticipate hearing from the public at meetings, in the press, on the phone or in their mailbox. If you are running one of these services, you know how annoying Voice can be. You have to have a well-staffed public relations department to deal with these irate citizens. In some cases, you may even become so rattled by the noise that you actually alter your behavior and make some improvements in your products and services.

You often hear it said that competition is the best remedy for poor service from monopolies. Hirschman argued that that is not always the case. He pointed to the terrible service offered by the national railway service in Nigeria. Public complaints were having an impact on the railway until the government improved the roads in the country. For the first time, the public had an opportunity to exit. Well-financed business shippers quickly purchased fleets of trucks to do their own hauling. They gave up trying to reform the railroad. Service on the publicly funded railroad thereafter got worse and worse, after competition, rather than better and better, because the most vocal customers went elsewhere.

The same thing has happened to the public school system in the United States. The well educated and wealthy, who would otherwise be the most vocal critics of the drugs, sex, violence and poor educational levels of many public schools, simply walk away. They send their children to private schools. Those who remain in the public schools are the less well-off who are so busy earning a living that they don’t have the time, energy or resources to exercise their voice to improve the schools. They also lack the means to exit. Public schools, as a result get worse and worse because there is competition. The most effective and vocal change agents have exited. President Clinton, for example, sent his daughter to private schools, while vigorously opposing attempts to introduce vouchers for the poor, which would have provided them the means to exit.

How do the principles of voice and exit apply to commercial businesses that are not monopolies? Here is what happens. When your customers leave, you may not understand what is happening. If you don’t have a database, you may not even aware that they have left. If you had 100,000 customers last year, and you have 100,000 this year, are they the same people? Or have half of them left and been replaced by 50,000 new customers? Before database marketing, suppliers might have said, "Who cares? Sales are steady and good. That’s all that matters."

If, however, you have a database so that you can keep track of your customers, you can discover that your retention rate is only 50%. With this knowledge, you might be able to improve your situation. If you could find out why so many customers are choosing exit, you might come up with ways to increase your retention rate. If, at the same time, you keep your acquisition rate steady, your sales might go from 100,000 to 120,000 to 140,000, giving you more profit and more market share. How can you improve your retention rate so as to reduce exit?

Here is where Hirschman’s theory comes to our aid. The alternative to exit is voice. The best companies find a way to reduce exit by giving customers a simple and painless way to exercise their voice. The process is called building loyalty. The principle is related to well known management principles.

Management experts point out that you get the best work out of your subordinates if you let them influence you. If they believe that they can come to you with their ideas, and that you will listen to them, and take their ideas up the line to get action on them, then they will take advantage of this opportunity. In their jobs, they will start thinking of how the work could be done more efficiently. They will suggest things that you might never have thought of. If, on the other hand, you discourage such feedback, they will simply do their jobs, and not make suggestions. They will consider that the workplace does not belong to them. You will get a day’s work out of them, but not their imagination nor their loyalty.

In many ways, customers are similar to employees.

  • If you make it easy for them to voice their ideas and complaints
  • If you listen to what they say and act on their suggestions
  • If you let them know that you are paying attention
  • If you can make them feel that by being customers they have some ownership of the brand, or some equity in the relationship,

then you can help foster a feeling of loyalty which will improve retention. You will be substituting voice for exit. Here are a few examples:

I once worked with a public television station on their annual fund drive. They had a large house file of former donors that they mailed each year. One year, in a change of tactics, they included a survey form asking which programs the donors most enjoyed. Here was a chance to vote for Sesame Street, Nature, Masterpiece Theatre, and the MacNeil Lehrer Report. The survey suggested that the donor’s views would be considered in developing the coming year’s program. The result? Contributions exceeded the previous year by a wide margin. Voice worked to foster loyalty.

Dayton Hudson initiated a Regards Program for the top 5% of their customers. The program included special cards, recognition and benefits. Many of the Regards customers began to feel as if they were someone special. They began to make suggestions to store managers – an innovation that was not always welcomed by the store personnel, but which served to build the loyalty and increase sales by a significant amount from these top customers. Voice fostered loyalty.

When airline customers reach the Platinum Level, they are given recognition and benefits that are not enjoyed by regular passengers. As a result, some of them feel that they are important to the airline and that they should get attention when they complain about poor service. If the airline listens and responds to them, the airline can help cement its relationship with these valuable travelers.

Not all products and services can have this kind of close relationship with their customers. How can the makers of Ivory Soap encourage their customers to voice their opinions about the brand? They can put a toll free customer service number on the package. This helps. It is not as powerful as the previous examples because Ivory cannot afford to maintain a database to build relationships with its customers. On the other hand, it may help reduce exit, by enabling the most vocal customers to exercise their voice instead of exiting. The value of this customer service needs to be measured, but it is probably worth the money. The problem with packaged goods is that exit is so easy. If you don’t like Ivory, you can buy any one of a dozen different brands at the same supermarket. Life is too short to spend it corresponding with the makers of the hundreds of products that we purchase every year. You may try to talk to them, but most companies won’t give you the feeling that your views will have any influence on their behavior. Hence, why bother?

To do a good job of building loyalty to reduce exit, you have to examine the reasons why customers exit. Unless they have died or stopped buying in your category, there are only three possibilities.

  • they are dissatisfied with the price they are paying
  • they are dissatisfied with the quality of the product or service
  • they do not like the way they are treated

In most cases, management assumes that price is the problem. The solution? Offer a discount. Have a sale. Issue coupons. Reduce the prices. Competitors are doing this every day. Sometimes it works. Compaq turned things around dramatically after a drastic reduction in profits. They introduced a new line of lower priced computers that revolutionized the industry. Why did it work? Because Compaq was already known for quality, and had already established an excellent reputation for customer service. They correctly saw the price reductions as a way to turn things around. It worked. The price reductions, combined with their reputation for quality and service, boosted Compaq to a leadership position in a field that had been dominated by clones.

But, in most cases, price reductions are not the answer, because price is not the problem. A close analysis of reasons for exit will show, in many cases, that dissatisfaction with the quality of the product or the way they themselves are treated is what leads most customers to exit. Most product managers are either unaware of these reasons, or unable to do anything about them. Reducing the price is what most brand managers end up recommending because they have no effective control of the quality of the product or the customer management process.

That is really unfortunate because price reductions in many cases do not solve the problem at all. Furthermore, they precipitate price wars with the competition that no one can win. Margins shrink. There is no money left over to improve quality or service. A good business is ruined by lack of knowledge and incorrect strategy.

The ideal marketing situation is one in which customers are so loyal to the brand or the organization, that they will not exit, even when the competition is offering lower prices. Sixty percent of AT&T customers never switched to Sprint or MCI, even when most customers knew that AT&T was a more expensive service. Why not? Because of brand loyalty. AT&T had a forty year head start over Sprint and MCI in building customer relationships and brand loyalty. Most Sprint and MCI customers were essentially traitors: they deserted the brand that they had grown up with. Why did UPS retain most of their customers after the strike? Because over the years UPS had treated their customers extremely well. That loyalty paid off when it was needed.

How can you build customer loyalty so as to reduce exit in the face of price competition? By building a customer relationship that permits customers to exercise their voice in a friendly and non-confrontational way, and by creating real or psychological barriers to switch. There is often some cost involved in exit. Someone who has proudly bought Fords all his life is bound to take a little ribbing when he drives home for the first time in a Toyota. Some companies have been experimenting with loyalty programs. Examples are the Hallmark Gold Crown program, the Famous Footwear Celebrity Club, the Central Bank Loyalty Program, the Wilmington Savings and Loan MVP program or Club Greg at Gregerson’s Foods. In these programs, customers build up equity in a relationship with their suppliers. The equity increases the cost of exit – they will lose the equity if they leave. At the same time, the suppliers use the database to build a dialog with their customers so that the more vocal customers can exercise their voices.

If we are to take Hirschman’s ideas seriously, we can see what needs to be done to reduce exit. Companies need to build a customer marketing database, and use it to understand what is happening. They must:

  • Measure their customer retention rate

  • Learn the reasons why people are exiting

  • Understand the relative roles of price, quality and customer service in customer dissatisfaction and exit

  • Find out ways to make customers feel that they have an ownership stake or equity in their brand – that they can make suggestions which will be listened to and acted upon

  • Make it easy for customers to exercise their voices

  • Give their brand managers some input into product quality and customer relationship building programs.

Most of these activities are relatively inexpensive to carry out. Their effect on the retention rate should result in increasing customer lifetime value by far more than the cost of the voice enabling programs.

 


Arthur Middleton Hughes is Vice President of The Database Marketing Institute. Ltd. (Arthur.hughes@dbmarketing.com) which provides strategic advice on relationship marketing. Arthur is also Senior Strategist at e-Dialog.com (ahughes@e-Dialog.com) which provides precision e-mail marketing services for major corporations worldwide. Arthur is the author of Strategic Database Marketing 3rd ed. (McGraw Hill 2006). You may reach Arthur at (954) 767-4558 .


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