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Does a Better Customer Experience Really Pay Off?

Customer Experience

By Donald Davidoff

In some industries, such as hotels, customer experience differentiates great brands. But what does it mean for apartment operators?

We often talk about how the rental housing industry is really a “people business” and about how, although we owner operate multi-million dollar assets, it’s really our people that make a difference and that operations is ultimately a service business. That easily leads to discussions around “customer experience” investments.

So, let’s take a look at what customer experience is, why we should care about it and why we should be careful.

Many people fall into the trap of using the terms “customer service” (CustS) and “customer experience” (CustX) interchangeably. But to really appreciate CustX, it’s critical to understand the difference between the two.

CustS is about individual interactions between customers and our associates, the “smile, shake their hand, be courteous and be helpful” kind of thing. These standards can be followed in person, over the telephone or through electronic interactions. In contrast, CustX is much broader since it’s about the customer’s journey. It’s about sum of all interactions, both automated and personal that the customer experiences with a company.

Whereas CustS tends to be reactive (reacting to customer inquiries), CustX is proactive (anticipating and delivering customer needs often before they explicitly articulate those needs).

CustX is about fostering engagement and a wholistic approach at each and every touchpoint. CustS standards are a subset of CustX. CustS is typically transactional, often with a “fixing the problem” paradigm, whereas CustX is relationship focused, always with a “how does the customer feel” orientation.

Why Care?

As McKinsey Consulting quoted in one of their articles, “Companies that create exceptional customer experiences can set themselves apart from their competitors.” There’s clearly opportunity to build a reputation for CustX excellence. Because it takes a complex, coordinated effort over a long period of time to develop superior CustX, this is an opportunity to create a sustainable competitive advantage.

Why Be Careful?

While there’s a clear opportunity for competitive advantage, we have to ask ourselves, “How will we monetize customer service?” We can’t get higher occupancy as well-run operations typically already have high occupancy. We might get a higher renewal rate; however, given the naturally transient nature of our customer base, there’s an upper limit to that as well.

Maybe we can get some extra rent? That seems like the best opportunity, though there are challenges here as well. For example, unlike a restaurant, it’s virtually impossible for someone to just test us out. So, people living in an acceptable, but lower-quality service environment don’t easily have ways to find out they could get more if they paid more—even if they’re more than willing to pay the premium.

More to the point, Forrester Research released a white paper in early 2017 with very interesting analysis. In the paper, Forrester describes how it analyzed 13 industries to understand the relationship between CustX and revenue potential. It used its own proprietary CustX Index and compared that to the revenue potential based on a combination of retention loyalty, enrichment loyalty and advocacy loyalty .

Forrester discovered that all industries do not derive value from CustX the same way. In fact, they found three distinct archetypes:

Source: Drive Revenue with Great Customer Service, Forrester, Jan 18, 2017

In some businesses, the revenue potential moves up roughly equally for each improvement in CustX. For others, there’s a large lift for getting away from the bottom end of the spectrum but progressively less return for achieving high levels of excellence. Then there’s a third group that don’t get rewarded much for being just a bit “less bad” than the competition but get high levels of return for great CustX.

Big box retailers are the most obvious in the group where revenue potential moves up roughly equally for each improvement in CustX. Think Kohl’s versus Kmart and then Nordstrom’s versus Kohl’s. Airlines are the classic example of the advantages of getting away from the bottom tier. From my own personal experience, I’ll pay more for a main line carrier compared to the ultra-low-cost providers, but I don’t see myself paying a lot more if there was a truly deluxe airline flying the same route (particularly domestic routes). Lastly, upscale hotels represent the advantages of great CustX. Four Seasons and Ritz-Carlton get tremendously higher average rates (and lifetime customer revenue) than a Sheraton, which in turn gets only modestly higher rates than a Courtyard or Hilton Garden Inn.

So where does multifamily belong? I would strongly advocate that we fall squarely in that middle group, the one that is more like airlines than anything else:

  • We have more opportunities to disappoint our customers than to “wow” them. 
  • Given the hassles and costs of moving, controllable retention is more about avoiding reasons for resident defection than giving explicit reasons to stay.
  • There are limited upsell opportunities, so revenue enrichment is not a big driver for return.
  • Given the generally negative public view of “landlords,” there’s more opportunity for advocacy value from avoiding the negative word of mouth than from explicit positive advocacy.

Please note this doesn’t mean there’s no opportunity to “wow” residents, no opportunity to give them positive reasons to renew or no value in creating positive word of mouth. There clearly is. However, I believe there’s a diminishing return in this business as you walk up the CustX curve. 

In other words, there’s a “Godilocks zone” (not too good, not too bad) where the return on investment in CustX pays off the most. And that’s why we need to be careful about CustX investments. They’re worth making, but only to the degree that we feel we will get a meaningful return.

Donald Davidoff is President, D2 Demand Solutions in Littleton, Colo.

1Retention loyalty value comes from customers continuing to spend; enrichment loyalty value comes from customers spending more; Advocacy loyalty value comes from customers spreading word of mouth