Why Customer Participation Matters

MITSloan Management Review

Magazine: Winter 2014

December 19, 2013 

Omar Merlo, Andreas B. Eisingerich and Seigyoung Auh

 

These days, many businesses are focused on increasing customers’ positive word of mouth. But emphasizing customer participation may be a more important vehicle for generating valuable repeat business.

 

Most managers know that listening to customers makes good business sense. Businesses have much to gain from actively seeking and encouraging customer participation, which we define as getting customers to provide constructive suggestions and share their ideas on how to shape product and service offerings. Yet while the idea that soliciting and listening carefully to customers is old, many companies only pay lip service to it. A senior executive of a global specialty retailer told us: “We spend millions on market research yet fail to take note of what our customers could tell us every day.” Indeed, many organizations systematically fail to let customers participate or are wary of customer input. This is problematic, because the return on participation is higher than many managers think.

A senior manager at a leading social networking company told us that the company didn’t actively seek customer input. “Most of the ideas come from internal product development teams,” he explained. “Once the product is out, engineers track data and extrapolate hypotheses … then the new product is rapidly updated and launched for further testing and data collection.” The manager added: “[We are] all about word of mouth and viral spread of our business platform.” Although neglecting customer participation in favor of word of mouth might be understandable for a company built on customer-to-customer interactions, we heard similar comments from managers elsewhere, including the head of strategy and development of a large global food service company and the marketing manager of a leading online coupon distributor. “Asking customers for feedback is the last thing on our mind,” the coupon marketing manager told us. “We have no clue or no system in place to deal with customer feedback effectively.”

Rather than encouraging customers to share their views about the company and its products with managers, we found that companies tended to focus on encouraging customers to take part in spreading positive word of mouth. There are at least two reasons for this preference. First, many managers consider new customer acquisition to be more critical than customer retention. Second, a popular refrain in the business press is that word of mouth is associated with increased customer loyalty. Often, a financial services executive observed, when his company invites customers to share their views with managers, the objective is less to gather useful intelligence than to turn them into brand evangelists.

Some analysts believe that word of mouth — specifically, a person’s willingness to recommend a product or service he or she has used to others — is crucial to customer loyalty. The power of word of mouth lies primarily in the fact that customers perceive the views of other customers to be less biased and more trustworthy than information generated directly by a company.1

Yet word of mouth is only one type of voluntary behavior that customers engage in. Moreover, it indicates only what people on the outside are saying. It doesn’t really tell managers how they can improve their offerings or what customers may be looking for. In one phase of our research, we asked 30 senior executives in a variety of industries to assess their companies on two dimensions: the extent to which they relied on activities, strategies and tactics that (1) actively and systematically encouraged customers to recommend the company to others; and (2) actively and systematically encouraged customers to volunteer constructive ideas and suggestions to improve product and service offerings. (See “About the Research.”) The mean for the former (that is, word-of-mouth behavior) was 82%, versus just 18% for the latter (that is, customer participation). The head of strategy of a global food company told us: “Our focus on customer participation is marginal at best. Everything is about word of mouth. I guess we are not very customer-centric.” An airline executive we spoke to was concerned that his airline had “invested a lot of money on consultants and infrastructure to strengthen word of mouth. That has become embedded in the way in which the company thinks. But we don’t try to foster customer input.” While customer participation may be neglected in favor of word of mouth, we believe that much value may be harvested by focusing more on customer participation.

The Business Case for Customer Participation

Although word of mouth may get more attention,2 our research shows that both customer-to-customer reviews3 and customer-to-business interactions4 can influence a customer’s propensity to buy more of a company’s products and services. While not all satisfied customers become repeat buyers, encouraging them to provide feedback and suggestions helps tie them more closely to the business. Companies can even recapture defecting customers simply by contacting them and encouraging them to participate.5 In addition, customer-to-business interaction is often more malleable than customer-to-customer word of mouth and more readily within the control of management. When customers provide feedback, management can monitor their contributions, whereas word of mouth works best when the company is not directly involved.6

Paying Attention to What Customers Tell You

We found that customer participation is more strongly associated with customer spending than is word-of-mouth activity. As part of our research, we conducted a survey of a sample of a global retail bank’s customers about the extent to which they had recommended the bank to others and/or provided feedback or recommendations directly to the bank. We divided the bank customers into four groups: high participation and high word of mouth; high participation and low word of mouth; low participation and high word of mouth; and low participation and low word of mouth. We then analyzed the total amount customers purchased from the bank (the dollar value of the customers’ portfolios). The bank customers who purchased the most were individuals who both participated and engaged in much word-of-mouth behavior. The second most valuable group was made up of customers who participated but did not engage in much word-of mouth behavior. (See “Identifying the Most Valuable Customers.”)

We saw a similar pattern with other measures in our survey as well, such as loyalty and attachment to the brand.7 High participation/high word-of-mouth customers were the most loyal and attached to the brand, followed by high participation/low word-of-mouth. Customers who did not participate tended to be the least profitable, the least loyal and the least attached to the organization, regardless of whether they spread positive word of mouth.
Discussions with managers from other industries suggest that these patterns are not unique to banking. The chief operating officer of an international consumer electronics company noted: “Levels of feedback is a way we identify our most profitable customers. Those that bother to write to us do care. And they do spend money with us.” This statement suggests that some managers even use customer participation as an indicator of customer profitability. The chief marketing officer of an international airline commented: “We found out that customers that defect without letting us know why are the ones that are most price-sensitive.” The CEO of a large Chinese financial services organization recounted an incident in which a customer who was about to defect wrote to the company to give feedback and offer some suggestions. The company immediately contacted the customer, addressed his concerns and recommendations and offered him the honorary title of “quality controller.” The customer decided not to take his business elsewhere and became one of the company’s most loyal and profitable customers. Customer participation can also act as an important source of cross-selling, allowing companies to identify customers’ unmet needs and develop new business through enhanced customization, which can reduce customer defections.
The implications of our findings are that fostering customer participation can be very profitable and that companies are better off when they emphasize customer participation over word of mouth, as opposed to the reverse. Our study of the retail bank mentioned earlier suggests that customer activity directed toward the company creates more customer “stickiness” (greater attachment and commitment) than customer-to-customer activity.8

Harnessing the Return on Participation

Active participation, such as a willingness to provide critical feedback and guidance, strengthens the links between customers and companies. In an interview, the chief operating officer of a large consumer electronics company noted that customers were appreciative when the company asked for feedback and followed up on their suggestions. “I had customers email me to thank me personally for caring. The very fact that we did ask for feedback and followed up on some of the suggestions made a big difference to these folks. They felt they were part of it and that we take them seriously,” he said. Strengthened links between companies or brands and their customers in turn led to increased customer willingness to repurchase.9 The chief marketing officer of an online search engine company told us: “People are always surprised to see that customers who offer feedback become some of the most loyal customers. … They just invested their own time and effort to help you out. Of course they will buy from you in the future!”
One of the people we interviewed was the strategy director of a food service company that was testing a new retailing model; it needed to generate a name for the new stores and finalize some details of its service offerings. The company encouraged customers to participate in this process through Facebook and its own network and Web platform. Initially, this manager noted, people within the business were apprehensive about interacting in this way with customers, as they had never done it before and did not know what to expect. But the concerns proved to be unfounded. “Customers were delighted to participate and gave us useful feedback. Sometimes they confirmed things we knew already, and sometimes provided new ideas.” According to the strategy director, the benefits have continued. Customers who took an interest in the initiative and offered their opinions have remained engaged in what the company is doing.
Companies should not emphasize customer participation to the exclusion of encouraging positive word of mouth. Rather, these are two sides of a coin, working both internally and externally to build financial value for companies.

Managing Customer Participation

In some ways, customer participation is easier to encourage and manage than word of mouth because companies, by definition, are at the center of the exchange. Customers usually perceive word of mouth, by contrast, as more credible when the company isn’t involved. Based on our research, we have developed six guidelines for companies thinking of implementing customer participation programs.

1 Don’t be afraid of participation.

Many managers worry that managing customer participation can be unwieldy and that businesses might lose their focus if they pay too much attention to customer feedback. For example, the chief operating officer of an international online gaming company noted: “If we listened to every single comment we receive from users, we would run out of time running our business. We simply do not have the resources to do everything our customers ask for.” Similarly, a senior executive of an older airline that has long struggled to be profitable observed: “We would like to look to customers as a source of sustainable service improvement. But they don’t really understand all the constraints that the industry is under.” However, an executive of a younger, highly profitable airline observed: “Customers may not have much in-depth understanding of the business model, but actually that can be a good thing. If a customer years ago had come up with the idea of having flights as cheap as bus tickets, 100% ticketless flights, no allocated seats and generally other aspects of the low-cost model, people would have said, ‘You don’t understand our business model.’ But, of course, these ideas worked. You have an established order, and a customer who has no existing stake in that order comes along with a revolutionary idea. … They may well be right!” Organizations that are willing to let go of the assumption that the company always knows best can reap benefits.

Another concern that executives voiced about customer participation has to do with intellectual property — specifically, who will “own the ideas.” For example, the CEO of a European airline is reluctant to speak with customers for fear that “someone will attempt to derive some monetary advantage,” reported one of the company’s senior executives. A senior manager at a leading online group buying company added: “We try to avoid feedback on the basis of lawsuits over intellectual property infringement and people claiming that we stole their ideas.”

While such concerns may be justified in some instances, we are troubled by the view that customers can’t be productive resources or are untrustworthy and driven by greed. After all, trust is a prerequisite to mutually beneficial business relationships.10 We found that companies that are receptive to customer input and customer participation tend to have longer and more profitable relationships with their customers than companies that keep customers at arm’s length. Why? Because customers are more engaged when they perceive that the company values their feedback. This doesn’t mean that companies are obliged to implement every customer suggestion. The very act of encouraging and listening to feedback makes customers feel more appreciated and part of the value creation process.

2 Start simple and expand over time.

We found that many organizations were slow in implementing customer participation initiatives because they didn’t know where to start, or they found the idea overwhelming. As one manager of an international supermarket chain put it, “We did not know how to approach customer participation, where to start, what to do with the feedback we get.” Customer participation does not have to be complex. The easier it is for customers to participate and the less time it takes, the more likely it is that different types of customers will engage.

A company offering online personal shopping assistance services has established a simple yet effective way to open a direct, personal communication channel with customers. When that company sends customers their first order, it includes a handwritten note and sometimes a personalized gift. The note initiates a dialogue with the customer. The result: The company says it gets information that is richer and more detailed than anything it might obtain from an equal investment in elaborate analytics.

After taking their first steps, companies can move to more rigorous, organized programs that encourage, gather, assimilate and analyze customer participation. Although Apple is known for shunning traditional product testing and market research, the company is deeply committed to customer participation and fosters it in several ways. In addition to having customer feedback Web pages that are extremely easy to find and use, the Apple Support Communities website provides a forum where customers can interact among themselves and with the company to discuss issues pertaining to Apple products. The forum has become a source of invaluable information for the company. Another tool is Apple’s Express Lane advanced support website, which helps customers to pinpoint and describe their issues and lets them open a dialogue with Apple technicians; the site enables the company to fine-tune its responses.

Apple has found that another simple yet effective way of fostering customer participation is through its online communities of selected customers, who are asked for input on a variety of subjects and issues. For example, Apple Customer Pulse, initiated in 2011, involved customized surveys sent to selected customers to study their views and the ways they use Apple products.

Apple is actively exploring how to leverage the power of word of mouth and customer participation at the same time. It measures word of mouth regularly in its stores while soliciting input from targeted customers. Store managers often use customer comments to initiate service failure recovery activities, design training programs for store employees and motivate and reward staff with positive customer comments. In addition to trying to gauge how well it is building an army of brand evangelists, Apple compares word-of-mouth and satisfaction scores with customer comments and feedback to uncover the dynamics behind customer reactions and purchase behavior.

3 Move from the tactical to the strategic.

We found that some organizations were keen to implement customer participation programs but then failed to capture the benefits of them. This was often because managers saw participation as a “bolt-on” tactical solution, as opposed to something that was more strategic and central to their brand. The head of new media of the organizing committee of a major global sporting event explained: “Fostering word of mouth is a natural extension to the marketing team. In contrast, customer participation is often complex [and] to act on it requires a bigger and more substantial cultural shift.”
Customer participation can begin as a new tactical element of the marketing mix, but it should evolve into something that is more embedded in the strategic fabric of the organization. Southwest Airlines, for example, makes customer participation an integral part of its strategic activities. It invites frequent fliers to group interviews with prospective flight attendants and solicits their feedback as part of the hiring process to help the company decide which job applicants make it to the next round of interviews.11 Similarly, a European consumer bank is testing a program whereby customers provide input into its recruiting process for private banking relationship managers and other customer-facing employees.

Customer feedback can help companies identify and revamp unpopular policies. For example, easyJet, a no-frills airline operating in Europe, used to assign seating on a first-come, first-serve basis because it was less expensive to operate than reserved seating. But the system was unpopular with many customers, who disliked waiting in long lines before boarding. Responding to customer feedback, easyJet studied what it would take to offer reserved seating. Ultimately, management decided to make reserved seating a paid option on all flights. Following the change, management found that 70% of customers said they preferred the new system, with more than 60% of customers indicating that they would be more likely to use easyJet in the future. Industry analysts welcomed the change. In this case, customer participation persuaded the company to redesign a central element of its business model.

4 Let social media and customer participation support each other.

The proliferation of social networks represents an extraordinary opportunity for companies wishing to increase customer participation. For example, a group of several hundred elite customers of a large international airline set up their own Facebook community and then invited company executives to join. The airline’s director of social communications told us that the opportunity to have access to customer opinions made joining the group an easy decision. “We don’t administrate it, but we take an active part in it. So now, something very lonely like traveling the world for business has become something more social. We facilitate meet-ups, we meet them when they come to certain cities. We bring them into the company for visits, etc.”

Companies that know how to effectively and efficiently harness the information generated from social networks can reap significant benefits. An airline, for example, could potentially learn about a problem a customer was having in a particular interaction with the airline and address it immediately. “Imagine someone sharing an idea or criticism while onboard a flight, and us being able to share that feedback immediately on that plane with the cabin crew,” said the director of social communications of a U.S.-based airline. “It’s one thing to get feedback. But closing the feedback loop is the big challenge and opportunity!”

Since 2008, Starbucks has encouraged customer suggestions and participation in part through a website called My Starbucks Idea. Customers can post ideas for improving the Starbucks experience, discuss other customers’ ideas and rate them. Some of the ideas get selected for implementation. However, in our view, whether the ideas are chosen is not as important as the fact that customers are engaged, feel a sense of ownership and have a connection with the brand.

Data management and software can be tools to help companies encourage, manage and reward customer participation. And, as the chief marketing officer of an online gaming company put it, such investments pay dividends in the long term: “One of the biggest challenges we faced was to find out how exactly we should go about encouraging and then also following up on the great ideas users shared with us. One way was to set the right systems in place. What worked for us was not so much users talking to us directly but letting the community vet through the mountain of comments, and we gave away rewards and prizes for the most positively received suggestion — positively received by our community of users. This did a number of things for us. First, we let the community decide. They felt empowered. Second, rather than us having to commit resources to check and assess every single customer comment, we relied on our users to decide. We explicitly told them that they know best, that we trust them and, thus, they should decide.”

5 Make customers feel like they’re in control.

Customers want participation to feel voluntary rather than forced, and sometimes companies need to be creative about how to pull customers into the process. Our research shows that while any form of customer participation can be beneficial, participation by customers who are “forced” to voice their opinions (for example, because they had an unpleasant experience) is less likely to have a positive effect on subsequent customer purchasing behavior. The chief marketing officer of an international airline explained: “The easiest way to lose trust and disenfranchise our customers was by bombarding them with messages about feedback and not following up or sharing with them how we intend to take things further and make use of all the information. We learned it the hard way. The worst is when people feel forced to give feedback. This is an absolute no-go.” The airline we discussed earlier whose frequent fliers established their own Facebook community felt that the forum would not have been nearly as effective if it had been founded by the company as opposed to customers themselves.

Some companies go to unusual lengths to spur customer participation. A senior executive of a software company revealed that product designers sometimes design “small errors” into their products intentionally as a tactic to get customers involved. “Customers usually pick up on these [errors] fairly quickly and contact us, often publicly through Internet forums and similar channels, to provide feedback and request that the problem be addressed,” he told us. “We are then able to roll out the premade solution and demonstrate, often publicly to a wide audience, that we are a responsive and customer-oriented company. By doing so, customers develop a bond with [us] because they feel partly responsible for product improvements.”

Inserting flaws in products and services so that customers are motivated to participate is perhaps an extreme strategy. However, it demonstrates how far some managers are willing to go to encourage voluntary customer participation and to make customers feel as if they are in control.

6 Be creative about how you manage participation.

Customers want their participation to generate benefits — for themselves, other customers and the company. If they are going to invest time, they want to think that their involvement can make a difference and that the company will actually listen to their input. If customers sense that their ideas are being ignored and their feedback doesn’t matter, they won’t bother.

Companies should keep customers informed about how managers are using their information and how the input is shaping company policies. By showing evidence of how prior input improved the experience of other customers or boosted efficiency, they can increase buy-in. Many companies we studied have been successful in encouraging customer participation through online communities, which are likely to become an increasingly valuable platform in the future.

Another potentially fruitful way to promote customer participation is by stimulating customers’ attention through prominent and sometimes controversial activities — and then managing customers’ reaction. Coca-Cola’s infamous launch of New Coke in the 1980s, which was widely seen as a colossal marketing blunder, certainly generated significant and fierce customer feedback. Through this voluntary customer participation, Coca-Cola learned what the brand meant to customers and where the brand value came from. The conspicuous change, the customer participation that it triggered and the ultimate relaunch of the old Coke formula were all factors in eventually boosting Coke sales. By leveraging customer participation swiftly and effectively, the company turned a blunder into an opportunity.

In general, our research suggests that the systematic fostering of customer participation is an underutilized weapon in the marketer’s arsenal. Although most managers would agree that generating positive word of mouth is important, the benefits and positive returns of customer participation are underappreciated. Customers who participate are more likely to become repeat customers, buy more of a company’s products and services and ultimately deliver more profit.

Identifying the Most Valuable Customers

In a sample of 327 customers of a global bank headquartered in Europe, those who engaged in positive word of mouth and also provided suggestions and feedback directly to the company tended to purchase more products and services (for instance, investment products and insurance products).

About the Research

This article is based on a number of sources and involved several research components. First, we drew on our ongoing research on services marketing, customer relationship management and marketing’s role within companies. Second, we held roundtable discussions with numerous senior managers from a large variety of organizations and industries, who attended our executive education sessions in recent years in North and South America (the United States, Canada and Brazil), Europe (the United Kingdom, Finland, Sweden, Spain, Germany, Italy, Switzerland, Belgium and the Netherlands), the Middle East (Qatar and Saudi Arabia), and Asia and Australasia (China, India, Japan, Malaysia, South Korea and Australia). The discussions focused primarily on executives’ experiences managing their customer bases and fostering word of mouth, and on their companies’ activities and programs for encouraging and assimilating customer participation. Third, we conducted in-depth structured interviews with 30 senior managers from a variety of industries, companies and countries. Finally, we employed survey data and actual purchase data collected from a bank over an extended period of time, which provided the foundation for our quantitative analysis.

Based on our research and qualitative data, we developed a conceptual model for quantitative testing. We conducted a quantitative study of a large, publicly traded financial organization that operates globally in the retail banking context. Our data collection effort combined survey-based data and real purchase data. A 12-month gap between the collection of the survey data and the real purchase data allowed us to minimize the chance of reverse causality between customer participation and customer purchase behavior. Model testing was carried out using structural equation modeling.

References (11)

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7. These dimensions were measured through a customer survey that employed well-established and widely used measures in marketing research.

8. In our model, we also calculated the total effect of customer satisfaction on customer spending via the word-of-mouth route and via the participation route. Results suggest that the total effect of satisfaction on spending via participation (.11) is 11 times greater than the total effect of satisfaction on spending via word of mouth (.01).

9. S. Fournier and J. Yao, “A Case for Brand Loyalty,” Harvard Business School case 9-598-023 (Boston: Harvard Business School Publishing, 1998).

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11. F. Reichheld and R. Markey, “The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World,” revised and expanded edition (Boston: Harvard Business School Press, 2011).

About the Authors

Omar Merlo is an assistant professor of marketing at Imperial College Business School in London. Andreas B. Eisingerich is an associate professor of marketing at Imperial College Business School. Seigyoung Auh is an associate professor of marketing at Thunderbird School of Global Management in Glendale, Arizona.