How the ‘Volume to Value’ business model undermines customer trust

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Content Copyright © 2008 Bloor. All Rights Reserved.

Many companies today wish to move their customers ‘from volume to value’ using CRM (Customer Relationship Management) and contact management systems as a facilitator.

Take the example of my car insurance company. They charged me 27% less (including free vouchers etc) as a new business customer rather than as a policy renewal customer. I paid £3 commission as a new business customer versus £68 as a renewal customer. I took the new business deal and vowed never to trust that vendor again.

The ‘Volume to Value’ business model is becoming increasingly common today. It works like this: Volume = mass customer acquisition = be the low cost supplier = low profit. This is clearly not a sustainable business proposition and is balanced by the following equation: Value (to the supplier) = maximise profit from customers = add extra services revenues + quietly push up prices by changing terms and conditions. This has nothing to do with value to the customer, but everything to do with value to the vendor.

One retailer that did well over Xmas 2007 was John Lewis, who increased sales by 6.2% whereas M & S and other notables suffered sales and share price collapses. The latest 2008 Which? Report of 77 UK stores shows that Waitrose (owned by John Lewis) and John Lewis itself were rated No1 and No2 in overall customer satisfaction. No surprise really. John Lewis offers the same “never knowingly undersold” prices and quality customer services to all their customers, not just the privileged few.

We don’t feel ripped off when we shop at John Lewis—many surveys show that we clearly do feel ripped off by banks, energy companies and telecoms companies. How many times have you heard them say “low price only available to NEW customers”?! We have all fallen foul of discriminatory pricing and other disrespectful treatment by our suppliers. Interestingly for high tech customers,, Phones 4U, and PC World are in Which?’s bottom 10% of retailers. A visitor to Currys said: ‘Dismal place, long waits and ignorant staff.’ No comment.

The ‘Volume to Value’ practice reminds me of a Tom and Jerry cartoon where Tom reads in the newspaper that a $$$ reward is offered by a travelling circus to recapture a lost baby seal. He then sees the seal, and in his mind the seal is visually transformed into a big plump bag of money.

Ironically banks, energy companies and telecoms companies are the biggest spenders on CRM systems. The above illustrates that unfortunately their use is often mis-guided towards exploiting short term profit opportunities rather than facilitating ‘customer relationships’, which of course was the original goal.

At one CRM conference a speaker said “our CRM system tells us who our most unprofitable customer is”. Some wag shouted out “who is it?!” and the speaker replied “a newsagent in Blackburn” to much raucous laughter from the audience.

Today’s unprofitable customers with the correct nurturing can become tomorrow’s highly profitable customers. For example, Carphone Warehouse’s IT Department expanded from 6 people to 600 people over a ten year period—much to the chagrin of some of their early dispensed-with suppliers who treated them as “unprofitable”. A CRM system can only guess at who future profitable customers will be. The trick is to treat ALL your customers with respect, and your reputation and word of mouth referrals will follow.

It is not the product or service that defines winner and loser vendors today, it is the way it is delivered, and the way a company makes its customers feel valued and respected. CRM systems should be used to add value to customer experiences, as that is what drives brand loyalty. Much brand damage has already been done by the volume and value companies, and it should stop now.

A final word of warning. In my recent article SaaS requires established software vendors to be more customer-centric I talked about how SaaS is breathing new life and competitiveness into the software industry. The flip side is that virtually all SaaS companies are funded by VCs and unprofitable for 5+ years while they build a critical mass of customers to get to break-even. There may be a temptation for them to follow the ‘volume and value’ model. The message is clear: when it comes to renewal time, make sure you get the new business rate! Enough said.