In his book, Customer Centricity: What It Is, What It Isn’t, and Why It Matters, Peter Fader, Professor of Marketing at the Wharton School of the University of Pennsylvania, defines customer centricity as “a strategy to fundamentally align a company’s products and services with the wants and needs of its most valuable customers.”

One of the areas of customer centricity that Fader explores is customer development. By matching products and services with the wants and needs of their most valuable (focal) customers, customer-centric companies can increase repurchase rates, up-sell or cross-sell a variety of different products/services to existing customers, and realize price premiums—as loyal customers tend to be less price-sensitive.

In his article, The Skinny on “Fattening Up” Customers, Fader identifies Wells Fargo as an example of a company “whose relatively robust success through the recession seems due…to its customer development efforts. The average Wells Fargo household has over five different bank products, roughly twice the industry average, while about 20% have an impressive eight or more products from the bank. And Wells Fargo credits cross-selling with lowering its selling and advertising costs, given that it’s cheaper to target existing customers than new customers.”

Wells Fargo’s success with cross-selling to existing customers reminded me of an experience I had several years ago with the Denver-area furniture store where my wife and I had spent thousands of dollars furnishing our new home in 2000.

The arrival of our first three children between 2001 and 2004 prompted the need for additional chairs for our kitchen table. So, in early 2005 (five years after originally purchasing a kitchen table and four chairs with custom-upholstery depicting the French countryside), I phoned the store to order two more matching chairs.

After placing the order, I asked to be transferred to the store manager. When he came on the line, I introduced myself and mentioned the order I’d just placed and what prompted it. I then inquired as to whether or not his sales staff ever followed up with young couples who bought tables (with expansion leafs) with only four chairs after some period of time to determine whether or not their needs had changed and, if so, how the store might be able to serve those customers now.

I don’t recall the specifics of our conversation but I do remember that the store manager seemed preoccupied and dismissive during our call. It’s likely that he and his sales staff were busy servicing the prospective customers on the sales floor, reviewing sales forecasts, and planning the next direct marketing or advertising campaign that would ensure a steady stream of foot traffic in the showroom.

While customer acquisition is vital for growth, all too often companies squander opportunities to increase their market share amongst existing customers—what Fader refers to as “share of wallet.”

What if the furniture store had developed a simple customer relationship management (CRM) database that captured the formal demographics of its customers together with casual insights gleaned by the salespeople who had spent hours with customers coordinating furniture, selecting fabric, securing financing, etc.? And what if salespeople accessed this information afterward to reconnect with existing customers and make informed product recommendations to them?

No doubt this would have required an investment of time and money. Based on the robust economy in 2005, creating a CRM database (in order to gather information and better understand the unique characteristics and expected value of its focal customers) may not have seemed like the best use of the store’s resources. Although, as the Wells Fargo example illustrates, using customer data to capitalize on cross-selling opportunities has proven to be particularly effective in recent recessionary years.

Now consider your situation. What can you do today to develop your own customer base?

(Don’t wait. The furniture store waited and eventually closed in 2010 after being in business for 45 years.)

Remember the Aesop’s Fable, The Goose with the Golden Eggs?

A man and his wife had the good fortune to own a goose that laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough. Imagining the goose must be filled with gold inside, they decided to kill it to obtain all of the gold at once. However, upon cutting the goose open, they found its innards to be like that of any other goose.

The primary moral of this story that many companies would do well to acknowledge is that greed destroys the source of good. In the same way, by nickel and diming customers, many companies are damaging the relationships they have with loyal customers.

My favorite nickel and diming story comes from Bob Farrell, co-founder of Farrell’s Ice Cream Parlors. In his timeless book Give ‘em the Pickle, he shares a letter he received from a customer:

“Dear Mr. Farrell,
I’ve been coming to your restaurants for over three years. I always order a #2 hamburger and a chocolate shake. I always ask for an extra pickle and I always get one. Mind you, this has been going on once or twice a week for three years. I came into your restaurant the other day and I ordered my usual #2 hamburger and chocolate shake. I asked the young waitress for the extra pickle. She said, “Sir, I will sell you a side of pickles for $1.25.”
I told her, “No, I just want one extra slice of pickle. I always ask for it, and they always give it to me. Go ask your manager.” She went away and came back after speaking with the manager. The waitress looked me in the eye and said, “I’ll sell you a pickle for a nickel.”

Needless to say, the customer refused the offer, left the restaurant, and was instantly transformed from a promoter of Farrell’s Ice Cream Parlors, a loyal enthusiast who keeps dining at Farrell’s and urges others to do the same, to a detractor—an unhappy customer who doesn’t return, refuses to recommend Farrell’s, and shares his negative experience with others. In the pursuit of golden eggs, Farrell’s was killing the goose.

Here’s another truly outrageous example of nickel and diming customers:

Ryanair, the Irish discount airline, has taken nickeling and diming passengers to a whole new level. Last year, its CEO announced—with a straight face—that he was working with Boeing to install pay toilets in the airline’s 168 Boeing 737s.

It’s true. Passengers would be required to spend one British pound (about $1.50) to use the toilet. No word yet on options for those passengers who either don’t have cash or don’t have the proper change. I suppose they can cross their legs—assuming there’s sufficient legroom…

And, just today, The Consumerist reported that a class action lawsuit was filed against Hilton for allegedly charging hotel guests 75 cents for newspapers they did not request and believed were provided at no charge.

Any time making money becomes more important than properly serving customers, the business suffers. When the bottom line drives a company’s decisions relative to serving customers, it will begin cutting back on product and service quality in order to improve its near-term operating statement at the expense of long-term customer goodwill and loyalty—not to mention comfort.

If companies genuinely believe that there’s a valid relationship between customer satisfaction and financial results, why would they ever agree to nickel and dime customers to capture another half-percent when they could invest in and deliver exceptional customer service and reap double digit returns on every metric that matters: employee satisfaction, customer satisfaction, market share, revenue, profit, etc.?

The American Customer Satisfaction Index (ACSI) produces scores for the causes and consequences of customer satisfaction and their relationships to, among other things, financial results.

Claes Fornell, Professor of Business Administration at the University of Michigan’s Ross School of Business, oversees the data collection and analysis of the quarterly ACSI results.

According to Fornell, “A five percent improvement in customer satisfaction leads to an increase of over 35 percent of future operational cash flow.” That’s a lot of golden eggs!

He refers to customer satisfaction, or the goose’s health, as “the ultimate economic asset for business, because the sum of the value of all its customer relationships is also the true value of the company.”

If companies would channel the same energy and ingenuity into customer satisfaction that they use to identify and apply creative ways to nickel and dime customers, they would more than recover the revenues gained from these irritating practices.

Instead of nuisance fees, these companies should look for efficiencies and cost containment strategies that will have the least negative impact on customers. By searching for ways to add value rather than fees, they will be caring for the goose—customers—while earning plenty of golden eggs!

I’m currently reading the book Smart Pricing by Jagmohan Raju and Z. John Zhang. Anything published by Wharton School Publishing has been thoroughly researched and applied in the real world of work—beyond the ivory tower of theory and abstraction often associated with academia.

In the book’s introduction, the authors present a simple concept: “A manager can pull only four levers to increase a firm’s profitability: sales, variable costs, fixed costs, and price.” If he spends more on advertising to gain market share, then he’s pulling the sales lever. By reducing hours to schedule and lowering payroll costs, he’s pulling the variable cost lever. If he’s able to negotiate better lease terms on space, vehicles, or equipment, then he’s pulling the fixed cost lever. The fourth lever, price, is pulled whenever prices are adjusted.

Though only four levers exist, there are some economic probabilities and consequences to consider that make the manager’s choice of levers more like a chess match. Conventional wisdom suggests that, in a soft economy, the most effective way to preserve profits is to reduce costs. With shrinking demand, increased competition, or both, most companies look to reduce their biggest expense: payroll. This results in the furloughs and layoffs we’ve been reading about (or experiencing personally) for the past several years…

Increasing sales is an attractive option but may be hindered by firms choosing to reduce their sales forces and/or marketing expenditures. And who really wants to tamper with pricing in such an uncertain economic environment?

I was surprised to read that the authors’ analysis found “that if a firm can cut its fixed costs by 1% without affecting its operations, its profitability can increase, on average, by 2.45%. Similarly, if a firm can increase its sales by 1% without changing its cost structure or price, the firm’s profitability can rise by 3.28%. The effect of lowering the variable cost by 1% is larger: Profitability can increase 6.52%. However, the effect of improving a firm’s price by 1% is the largest of all: 10.29%. Remarkably…this effectiveness ranking order holds for each of the eight industry groups using the standard industry classification (SIC) scheme.”

In my last blog post, I referenced a number of studies on the relationship between superior customer service and profitability. The latest study, by American Express and Echo Research, compiled research that revealed American consumers are willing to spend, on average, 9% more with companies that provide excellent customer service.

Do you see where this post is heading?

If companies took steps to improve the customer experience, then customer satisfaction would likely improve. Studies show that customers are willing to spend more with companies that provide superior customer service. And research finds that by adjusting the price lever and improving prices by only 1%, companies can increase profitability by 10.29%.

Companies with subpar customer service: It’s your move.