Good to Great? Or Lousy to Good?
Business Journal

Good to Great? Or Lousy to Good?

Lousy companies sell 100% on price. Great companies pursue organic growth.

My phone rings, and it's the division president of a large telephone company. She offers to replace our current Gallup long-distance lines for a quick 10% savings. This means a lot of money to us. And the telephone lines we need in the United States and around the world are a commodity. They all seem to work well and sound fine, regardless of the long-distance carrier we use. As we are a business with serious employee owners, it seems an easy decision to dump our longtime partner for one offering a significantly lower price.

I call our top managers in the IT department, Phil and Phil, and they say they will study it. They soon get back to me with their recommendation to stay with our current technology partner -- Partner A. Phil and Phil are super-competent technology leaders at our company, and I was sure that they would have a great explanation.

Phil and Phil described in detail the innovations that Partner A has brought to the table over the past few years, including a deal-saving technology breakthrough that helped us rescue one of our best accounts, a large and demanding retailer. They felt that Partner A brought more to the table than just global lines. This partner helped us win, save, and grow accounts.

Phil and Phil reported that Partner A knew our industry as well as or better than our own people. They also informed me that Partner A was re-engineering our global teleconferencing to VOIP and building a new state-of-the-art interviewing system throughout the 25 European Union states that would quickly make us the technology leader in our field in the EU. And they are in the middle of helping us compete to win a complex project in Brussels.

Higher margin business from current customers

If you've ever wondered what, exactly, is meant by the financial term "organic growth," there is no better example than this story. Organic growth occurs when an organization like Partner A creates more transactions with its current customer base and with continuously growing margins. Organic growth first occurs by retaining current customers, then by increasing transactions with them. Whether your company has 100 customers or several million, organic growth occurs when you increase the amount of sales with your current customer base.

Many executives think that an organic growth strategy is the opposite of an acquisition strategy. They are not opposite as much as they are extremely different, and they require extremely different approaches and cultures to execute them successfully.

Let's go back to the story about Partner A for a moment. Partner A has developed a "fully engaged" relationship with our company. Fully engaged customer relationships like these embody four distinguishing characteristics:

  1. Fully engaged customers renew. You keep them.
  2. Fully engaged customers buy more often. You have more transactions per customer per year.
  3. Fully engaged customers create positive conversations in your organization and in the market. They create leads.
  4. Most importantly, fully engaged customers will pay a higher margin. Put a better way, they value their total partnership with your organization rather than just its price.

Partner A perfectly executed an organic growth strategy. An organic growth strategy succeeds when companies maximize relationships with current customers. This is very different -- and much more powerful -- than losing existing customers based on price, then replacing them with new customers based on price.

What Wall Street is missing

QUOTE: Financial analysts often miss this crucial point: Lousy companies can churn through customers and still show sales growth through replacement.

Financial analysts often miss this crucial point: Lousy companies can churn through customers and still show sales growth through replacement. But accounting reports won't reveal their huge customer turnover. This cycle -- losing customers based on price, then getting new customers based on price -- is what I call "riding the razorblade," and it has been the unspoken strategy of most companies over the past 20 years. (See "Winning Business in the Emotional Economy" in the "See Also" area on this page.)

Company leaders talk a good game about growth at state-of-the-company speeches. But then they go right back to their offices and continue okaying new contract lows to hold customers or win replacement business. They do this largely because Wall Street has not really caught onto the deep implications of organic growth and how to spot it, even though it remains the best single metric to predict sustainable growth, sustainable profit, and share growth. If someone said to me, "In your 30 years of studying customer data, what is the indicator or single metric that is the key to buying or selling stock?" My answer would be, "Same-customer sales."

Wall Street analysts deserve credit for closely studying same-store sales in retail. But even there, financial analysts can't be sure if they are seeing improved sales with fully engaged customers or through tricky marketing and merchandising that compensates for customer defections -- in other words, through what is actually a replacement strategy. It's impossible to see if a company is achieving true organic growth.

The key to organic growth is how your organization performs one customer at a time. And here are the million-dollar questions: Are you developing fully engaged relationships with every single customer? Is your company a partner with every customer, or are you just a vendor? Consider your answers carefully, because the sum total of these relationships is your stock price.

Organic growth is revealed by figuring out how many of your customers have an "advice" relationship with your organization versus how many have a "price" relationship. The ratio of advice to price is key to your company's future. The higher the ratio, the better -- and as this ratio moves, so does sales growth. This ratio is your company's best predictor of whether it is creating sustainable growth -- or is riding the razorblade.

QUOTE: The worst thing that can happen to your business is for 100% of your customers to base their relationships 100% on price.

When it comes to managing customer relationships, many Fortune 1000 companies' offenses come in the form of extremely well-run marketing sales and merchandising practices. And practices such as Six Sigma, lean management, and enterprise relationship management have all been brilliantly used to create leak-proof defenses. But none of these strategies or tactics will help your business go from "good to great," as the popular book says, or even from lousy to good. What these approaches are missing is the magic of sustainable stock increase through a sustainable customer strategy. That is exactly why companies need a genuine organic growth strategy -- one that is about moving from price to advice.

The challenge of extreme competition

Now, it's crucial to note that advice-versus-price relationships are present in all businesses, organizations, and professions. Advice-versus-price exists in hair salons just as it does in major technology or medical or government sales. Whether the business is dance lessons, pharmaceuticals, new and used cars, jet shares, real estate, hotels, hospitality, churches, suits and dresses, or delis, advice-versus-price relationships matter to some degree in every business in which transactions matter.

Regardless of its industry, the worst thing that can happen to your business is for 100% of your customers to base their relationships 100% on price. When this happens, your leadership needs to go from lousy to good in a hurry. Yes, price matters, but in a great organization, price should account for no more than 30% of your relationship with any customer; the other 70% should be based on your advice and ideas.

The obstacle that prevents leadership from moving from a price to an advice relationship is extreme competition, and it is everywhere. Not long ago, many markets had a handful of competitors per industry, all of which conveniently shared the market, and all were profitable. In those days, third place wasn't that far from first. These "convenient monopolies" represented the state of national competitiveness.

An easy example is the old network television industry, where NBC, CBS, and ABC ruled. Being number one was about the same as being number three. All three printed money for 20 years. Network news and big-city network affiliates made a staggering 50% pre-tax profit. Ad slots were always sold out.

Imagine a conversation from those days between Joe, an advertiser, and a network TV salesperson at the 21 Club over martinis and cigarettes. "I'm sorry, Joe, but we're sold out until January, but I can get you some spots on Gunsmoke. By the way, the new rate card will be in effect in January, and prices are going up fifteen percent." Joe takes the deal.

Today, many prices have dropped to unimaginable lows. Twenty-five years ago, Gallup paid 30 cents per minute for phone calls. Gallup now pays only 3 cents per minute. Phil and Phil say it will someday go to zero. If someone had said this 25 years ago, during constant rate increases, no one would have believed it. The thought that prices would stop increasing and would actually drop to 3 cents, let alone to nothing, was not something anyone could have imagined.

And if you look at what has happened in Detroit -- where all three car companies used to enjoy a well-defined and rich convenient monopoly -- automakers now give away the cars at the cost of labor and steel and attempt to make money on the loans. So now in Detroit, the cars are the "free toasters" to entice you to take the loan. Nobody saw that coming. This is what happens when you bet your organization's future on price.

Advice relationships

It's pretty clear that companies must re-order their priorities or they will go broke. Many are going broke now. They must find an alternative to price slashing, and the solution is to create value based on relationships.

Now, you might say, "Tell me how relationships can solve this problem." First, let's drill down to make relationships more actionable; let's define an "advice" relationship. In an advice relationship, someone brings you a new idea, teaches you something she has learned about your industry, or offers you a new way to save money or a new process to streamline operations. She might have a sales lead for you; she might connect you with a valuable new partner.

At the core of this kind of relationship lies a tangible business value, like Partner A demonstrated with Phil and Phil. You must know the customer and his business very well and have a passion for it. Above all, the engine driving the relationship must be your imagination. An organic growth strategy demands extraordinary creativity and imagination from the people who interact with customers.

DIAGRAM: Imagination

Many consulting firms refer to the highest level of relationship as that of a "trusted advisor." That relationship works in almost any industry. It is not only true for McKinsey, Ernst & Young, and Gallup; it is also true for the wholesale meat salesman.

Doing a great job

Here's a story that illustrates my point. I recently walked to my local bookstore in Georgetown to get the U.S. News & World Report: America's Best Colleges 2005. This is a major bookstore, with three stories of books, escalators, a big music department, and a Starbucks coffee shop. I looked all over the store and couldn't find the college report. The staff person I checked with was on the phone to a friend and was ever-so-slightly put off that she was interrupted. "If it wasn't where you looked, we don't have it," she said, then went back to her call. Suddenly, it felt like everyone in the store was unhelpful.

As chance would have it, just as I was getting on the escalator, a real young, super-skinny, 15-year-old-looking kid with a bookstore ID tag asked, "Is there something I can help you find?"

He didn't have the greatest personality in the retail world, and he didn't pretend to. He didn't say, "It's great to have you here." He said, "Can I help you find something?" He not only got wound up helping me find my college guide, but he also found a book that was more precisely what I wanted -- a book specifically about law schools. He was grinning because he not only found what I was looking for, but he helped me discover that there was another book that better met my needs.

Then he asked, "Is there anything else I can help you find?" I asked if he was familiar with the book The United States of Europe. He said he was, and it was excellent. I told him that I don't like to read hard academic books. He guaranteed me that this wasn't. In the end, I bought two books I didn't intend to buy, and we looked at some others I will soon consider getting as well.

My trip to the bookstore is a perfect example of organic growth. Three outcomes were possible when I walked in the store. The bookstore staff could do a "good" job and sell me exactly what I came for. They could do a "lousy" job and sell me nothing. Or they could do a "great" job by discovering what I really wanted, which was information about law schools, and advising me to buy something I really wanted, something I didn't even know was available -- then following up by asking what else I needed and recommending another great idea.

I left the store enthusiastic and feeling victorious about my new books. My clerk was genuinely enthused because I had taken his advice, and we became acquaintances. I will always seek him out on future shopping trips.

One million moments of truth each day

These three potential outcomes not only illustrate the concept of organic growth, but also a phenomenon Gallup calls the "Emotional Economy." For this bookstore, the difference between making $0, $10, or $50 from a customer doesn't lie with its merchandising, its ad agency, or its Six Sigma restocking or shipping techniques; it lies with the sales associate who senses an unmet emotional need and fulfills it. Within the concept of the Emotional Economy lies the potential economic impact of millions of missed transactions -- or millions of transactions fulfilled -- every day. (See "The Power of the Fifth P" in the "See Also" area on this page.)

As an example, let's say this large bookstore chain has about 1,000 stores, and each day, 1 million prospects walk into them. So every day, there are 1 million moments of truth -- 1 million opportunities to provide service that's lousy or good or great.

To dollarize this, let's say the range per transaction is $0 to $50. If 1 million customers were treated like I was by the first clerk, this bookstore chain would go flat broke. They couldn't drop their prices low enough to make sales. If their service was good, they might survive on $10 per transaction. But if the service was great every time, the difference would be $40 on every transaction (the difference between a $10 sale and a $50 sale).

It may not seem like much at first glance, but $40 by 1 million customers is $40 million extra sales dollars every day. Over a year, it adds up to $14 billion, which would triple this chain's current sales and boost their profit 5 to 8 times.

TABLE: From Lousy to Good to Great at the Bookstore

This may seem like a crazy scenario, but it shows how enormous a company's untapped Emotional Economy can be. The amounts left on the table are huge, especially when a company's customer service is only lousy or good. If this bookstore could improve just 10% of its 1 million daily customer interactions from good to great, it would easily double its market capitalization.

From good to great through organic growth

Many people have asked me, inspired by the popular book, of course, "How can my company go from good to great?" My answer is, "Create organic growth by maximizing the Emotional Economy that exists within your current customer base."

Gallup provides consulting services of various kinds to 100 of the Fortune 500 companies. Only five of these companies are clearly in the great category. I define a "great" company as one that understands the Emotional Economy and has a clear strategy to increase organic growth.

Gallup's research shows that, on average, only 20% of the customers of business-to-consumer organizations are fully engaged; only 12% of the customers of business-to-business organizations are fully engaged.

CHART: Is Your Company Engaging Customers

What Wall Street and even the best CFOs still miss is that in business-to-business companies, lousy, good, or great management occurs about one to two years before it shows up as earnings; it shows up more quickly in retail. Basically, earnings are a one- to two-year trailing indicator of customer performance. And a company's success in managing its Emotional Economy is never included in formulas that calculate future earnings. When you maximize this economy, it is called "organic growth."

Right now, there is enormous variation in how companies serve and engage their customers. In the case of the retail bookstore, customer service that ranges from lousy to great means $0 to $50 dollars to this company, 1 million times per day. In the case of Partner A, a successful relationship with Phil and Phil means retaining a growing account.

One more story: I sometimes interview our clients' customers personally to get a feel for their Emotional Economy. During a discussion with the CIO of a large U.S. grocery chain, I asked how he would rate Tech Firm A on a 1-to-5 scale. He said, "a 1, because they do nothing but deliver cheap technology and equipment." I asked who their best supplier of technology was, and he said Tech Firm B. Get this: He said that he would give Tech Firm B his highest marks because rather than just sell him products, "They teach me how to sell more groceries." This CIO spends about 10 times more with Tech Firm B than Tech Firm A.

QUOTE: Identify teams with fully engaged customers. Make them heroes. Tell everyone in the company their best practices.

For most companies, whether they're going from good to great or lousy to good, there is more cash lying on the table here than through any other leadership approach. The newly discovered Emotional Economy that lies within customer interactions is bigger than what W. Edwards Deming found when he first started looking at defects and variation 60 years ago. Remember, Deming discovered that 50% of all U.S. manufacturing costs came from redoing product. The range Gallup finds in customer service performance is as big as or bigger than the defect ranges Deming found in "lousy-to-great" manufacturing.

First steps to institutionalizing organic growth

So how can companies institutionalize organic growth? How do leaders get a large organization deeply focused on a very different customer service strategy, one based more on advice than price? Here are some suggestions:

1. Measure customer service at the local level, or your employees won't take it seriously. You must use a short, powerful questionnaire with near-perfect question items that can accurately predict whether an account is in trouble or will grow. Gallup has done this for 20 years, and we've found that separating engaged accounts from accounts that are in trouble is an easy way to predict future buying behavior. Then hold managers and workgroups accountable for their customer performance. Very few companies have succeeded in measuring and managing customer service at the local level, but it's the only way to get everyone focused on customer service. Use this audit as your engine for change.

2. Make it 100% about money. First, use your customer service metric to calculate the existing range of performance throughout the company. Just as with Six Sigma, you will find extreme variation in performance from workgroup to workgroup. Use advanced statistical and economic modeling to show where your company and its divisions could be if they were maximizing organic growth opportunities. Then extrapolate organic growth from the divisions all the way to the company's total market capitalization.

3. Change compensation and review programs to reflect leader, manager, and employee performance on this highly predictable indicator of organic growth. Identify teams with fully engaged customers. Make them heroes. Tell everyone in the company their best practices.

4. Create a website that enables managers to scan "state-of-the-customer" data by division, region, and client teams. This can become sort of like a global weather map, something that managers check regularly, like stock prices or baseball scores.

5. Create an organic growth leadership camp. Replace your current leadership development program with one focused 100% on organic growth. Use this program to teach your managers, salespeople, and key employees how to earn "5s" rather than "1s" from their clients. Help them understand what makes your customer relationships grow and what makes them wither away. Teach them that a price-based relationship fails to create organic growth and that an advice-based relationship is 30% price and 70% advice. Give certifications -- like the Black Belt in Six Sigma -- to those who master the new approach. These certifications will become the talk of the company because your leaders will learn that there is more money to be made in growing your current customer relationships than in any other growth strategy.

Jim Clifton is Chairman and CEO of Gallup. He is the author of The Coming Jobs War and coauthor of Entrepreneurial StrengthsFinder.
Gallup http://www.gallup.com/businessjournal/16615/Good-Great-Lousy-Good.aspx Gallup World Headquarters, 901 F Street, Washington, D.C., 20001, U.S.A +1 202.715.3030