by David Ham | September 19, 2017
Many mergers and acquisitions are viewed as an opportunity to cut costs while acquiring new customers or channels for existing customers. Instead, they often end up as a marriage of two flawed partners. To succeed, businesses need to think about M&A in terms of how customers will respond to the change.
A study published in the Harvard Business Review evaluated 2,500 merger and acquisition deals and concluded that over 60% of them destroyed shareholder value. Research by CFI Group Chairman, Dr. Claes Fornell, shows that this destruction happens because such deals are often detrimental to customers.
In his book, “The Satisfied Customer,” Dr. Fornell gives several reasons why that is the case. For example, mergers and acquisitions often focus on streamlining, leading to fewer alternatives and less competition. Related cost-cutting efforts frequently reduce the quality of customer service.
Many mergers and acquisitions are viewed as an opportunity to cut costs while acquiring new customers or channels for existing customers. Instead, they often end up as a marriage of two flawed partners. It’s hard to see how combining debt or inefficient operations of two organizations will benefit customers. Often one partner believes it can fix the other’s flaws through corporate “marriage,” but all too often it gets ugly. As the customers suffer the consequences, many will take their business elsewhere.
The bottom line is that businesses need to think about acquisition and partnerships in terms of how customers will respond to the change. Will they enjoy better service? Will they value the new product options?
Sometimes mergers or corporate partnerships make sense from a customer standpoint. One recent example may prove to be Amazon’s acquisition of Whole Foods. Both deliver higher quality customer experiences relative to their industry, with ACSI (American Customer Satisfaction Index) scores three points above their respective industry averages in 2016.
One common criticism of Whole Foods was that its prices were too high for many consumers. An initial change made by Amazon was to lower the price on many products, hopefully allowing Whole Foods to bring high quality products and customer service to a broader audience. This change should create more competition for satisfying and retaining customers and challenge other grocers to perform better. Amazon gains by broadening its reach into the grocery retail sector and, presumably, logistical advantages for its AmazonFresh business line.
Another interesting example is the recent announcement that customers on T-Mobile family plans with unlimited data streaming, can sign up for a free Netflix membership. For such customers who already subscribe to Netflix, they can maintain their membership and have T-Mobile cover the monthly fee for a standard streaming membership.
This seemingly makes sense for both companies. Netflix has the opportunity to grow its customer base among T-Mobile users. Presumably Netflix is offering a discounted bulk rate to T-Mobile, but it also likely reduces the risk of churn amongst these customers as they’re essentially receiving a free service as long they remain with T-Mobile.
For T-Mobile, it is a great opportunity to promote its unlimited data offerings which can help attract new customers, convince existing customers on smaller plans to upgrade, and give existing customers on unlimited plans another reason to remain loyal.
For customers, the benefit is apparent. For those who did not previously subscribe to Netflix, it’s a new benefit for using the unlimited T-Mobile data plan. For those who were already Netflix customers, it’s a savings of nearly $120 per year (for which I will add a personal “thank you” to both companies). Netflix stock also enjoyed an initial 3% jump on the news of this partnership, reinforcing Dr. Fornell’s idea that offering real value for customers will benefits shareholders as well.
The bottom line is that businesses need to think about acquisition and partnerships in terms of how customers will respond to the change. Will they enjoy better service? Will they value the new product options? And, importantly, will the newly acquired customer base value the product and service offerings that will be offered going forward?
CFI Group offers the expertise to measure the value of an organization’s customer base and assess how well they will (or will not) respond to the new partnership. An investment in proper measurement upfront will benefit your customers – and shareholders – down the road.