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April 5, 2003

The New Frontier

In an increasingly commoditized product landscape, customer satisfaction may be the only way to differentiate your company from its competitors

by Joshua Greenbaum

One of the great ironies of the software industry is its historical indifference to customer satisfaction. Sure, some companies, PeopleSoft most notably, spent a good deal of time and energy in the 1990s measuring — and bragging about — their customer satisfaction ratings. And most companies do make an effort, particularly for large, name-brand clients. But many software vendors have spent the last two decades largely taking their customers for granted. It's a way of life that needs to change in a big way. If the vendors don't make the changes themselves, market forces will.

These market forces are becoming increasingly compelling, foreshadowing a fundamental shift in the software industry that places customer satisfaction at the very top of the competitive checklist hierarchy. What's at play is a combination of economics, the evolutionary state of the enterprise software industry in general, and a somewhat begrudging acceptance that, in a service economy, the quintessential service industry ought to give more than a passing care to customer satisfaction.

A shift to real customer satisfaction can't happen soon enough. In a relatively short while (I predict over the next two years), vendors that can't show high rates of customer satisfaction — or at least prove that they're doing something to achieve high rates — will be overtaken in the market by those vendors that are paying attention to long-term buyer happiness.

What'S Really Different?

The reasons for this shift are manifold. The first is that much of what is sold as enterprise software is more and more a commodity — or at least difficult to differentiate based on features and functionality alone. I'd argue that at their basic, generic level of functionality, the CRM, supply chain, human resources, financial, and ERP features of the top four or five enterprise applications vendors are largely indistinguishable from one another.

Most leading products have plenty of compelling bells and whistles, and often these functions can be essential to clinching a sale. But even the high-end features can be replicated, albeit at an admittedly high cost in terms of time and money, by a custom-developed add-on to another vendor's suite. And, with many customers using little more than 50 percent of the functions offered by any individual product or suite, differentiating one product from another is increasingly hard to do by comparing features and functions.

Price is another unpersuasive argument these days. Recessions turn the software industry into a buyers' market, and with a glut of beleaguered salespeople eager to deal, prices are dropping across the industry. Ironically, they can't fall too far: Low-balling looks suspicious to the savvy software buyer, as well it should. It's harder and harder for any company to try to be the low-cost leader in enterprise software, and those that try too hard fail.

With feature/function and price comparisons out of the picture, not many true differentiators are left. Vertical-specific functionality is still a good one: A vendor with the most compelling vertical product in its industry could hold sway over its market of choice on that fact alone. After-market service coverage, overall financial viability, and true technological innovation can also make a difference. But for most products sold by most vendors, one of the only things left is customer satisfaction.

Not Just For Customers

Happily for all, the economics of customer-satisfaction require no bleeding-heart altruism. There's real money to be made in making customers happy, and a lot to lose by ignoring them. The most obvious way to become rich and famous from customer satisfaction is to upsell or cross-sell to a happy installed base. It's also possible to upsell to a less-than-happy customer base, but in general the carrot is always preferable to the stick. The value of the installed base has never been greater: Top performers, such as PeopleSoft and SAP, earned 69 percent and 75 percent, respectively, in Q3 2002 from their installed bases.