During the mid-1970s, a guy walks into a Nordstrom store to return a pair of snow tires, asking for his money back. The first problem that occurred is that the guy didn’t have the receipt for the purchase. Another problem is that Nordstrom is a fashion retailer. They were never selling any tires. Regardless of that, the customer gets his full refund. The customer happily walks away, but this story remains for decades.
This is a true story that happened somewhere in Alaska. Not to spoil it, but there actually was a store at the location that was selling the tires, just before Nordstorm acquired them. Still, the fact they refunded the customer anyway is mindblowing. Nordstrom is well known for its extraordinary customer service. They are always putting the customer first, and their focus on the customer is great. But, is their approach customer-centric? Not exactly, and you will see why.
What is a Customer Centric Approach?
Many companies believe they are customer-centric because the term itself sounds pretty self-explanatory. You may think the customer-centric approach is when one puts their entire organization’s focus on the customer and fulfilling their needs. Or when one is investing time and resources to perfect their customer service.
Well, not quite.
The problem lies in the assumption that every customer is the same, that they communicate the same way, and that they have a tendency to react a certain way. When in reality, this is not the case.
“Customer centricity is a strategy that aligns the development and delivery of a company’s product and services with the current and future needs of its highest-valued customer in order to maximize the customer’s long-term financial value to the firm.” (P. Fader, 2012.)
Let’s break this definition down a bit.
High-Value vs. Low-Value Customers
A high-value customer is a customer on whom your survival or profitability depends. It’s the one who brings the most value to your business. These customers will most likely be passionate about your business and spread the word. They are the customers you want to pay attention to in order to recognize their current, but more importantly, future needs.
On the other hand, we have a low-value customer. This is the type of customer who will make a dozen new Netflix accounts so they can use a one-month free trial continuously.
The Core of Customer Centric Approach
The main idea around the customer-centric approach (and this may sound rigid) is: since not all customers are equal, you shouldn’t treat them equally.
Of course, this doesn’t mean you should abandon your low-value customers. On the contrary, you should recognize who your high-value customers are, and invest more time and resources to meet their current and future needs. Think of it more as a question of priority.
Speaking of future needs, P. Fader summarized customer-centric companies well in his book “Customer centricity”:
Companies don’t make and sell the products they think their customers will want. They make and sell products they know their customers will want.
The Paradox of Customer Centric Approach
According to this idea, low-value customers are also important for your business, you shouldn’t think the opposite. You need those customers as well since they are also supporting your business. Or, to be more precise – they are generating profit. As a matter of fact, they will most probably generate more profit collectively than the “right” customers. However, this profit you will use to invest in your high-value customers. This is what is called the paradox of customer-centricity.
While this may sound a bit harsh, from a business perspective it is considered to be extremely beneficial, if you want to maximize profits. Especially in the long run.
Why Doesn’t Everyone Adopt a Customer Centric Approach?
If this model is so beneficial, then why are many companies still not customer-centric, you might ask? Well, because like with everything in life, there are a few challenges.
The biggest challenge with this approach is not only that a company has to rethink every aspect of its business, but more importantly, it has to acknowledge that its former strategy was a bit misleading.
Financial reasons may also be a deal-breaker for some companies. In order to implement a customer-centric approach, you have to shape your entire business model to recognize and meet the needs of your most valued customers. And that goes from top to bottom. It is not simple and especially not cheap. But the good news is that it is definitely worth it. You will experience a short-term loss for something that will bring you a long-term, more sustainable gain.
Conclusion
Was the decision to refund tires that Nordstrom doesn’t sell wrong? From the marketing point of view, obviously no. But from a customer-centric approach, it was.
To have a customer-centric approach, you have to know your customers. How long do they shop here? How regularly do they purchase from us? How much do they spend here? These are just a few questions you should know the answer to. And then you should respond appropriately.
Nordstrom has excellent customer service, but every customer is the same for them. They treat them equally great, regardless of the “value”. They decided they won’t differentiate customer A from customer B, in order to put their efforts toward their high-value customers. At least in our example from the beginning. And that is also ok! There is no perfect approach that one can guarantee will definitely work for your business. However, I do believe we can all agree that the customer-centric approach is definitely worth considering.
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