A leading customer experience theorist and practitioner expands on why companies need to go beyond customer service -- and how cost cutting helped raise the bar for customer experience.

by Jena McGregor

Tom Knighton works as executive vice president at the consulting firm Forum Corp., where he leads the organization's customer experience practice. In this Web-exclusive Fast Company interview, Knighton expands on what's driving the increasing importance of the customer experience -- and how incremental improvements might not always lead to success.

Fast Company: What's happening today that's causing companies to talk about becoming more and more on being customer-focused?

Tom Knighton: I think customers are getting smarter. And because customers have so much choice, they're starting to distinguish the companies that they will do business with, not just based on service, but based on the entire experience. The bar has been set by some of the experience leaders, those that were first out of the box in doing this -- Disney, Southwest Airlines -- companies that have been out there for a while. I think there is just so much choice out there, and customers are becoming more discerning. So I think some of it is being driven by customers and what it takes to win customers' loyalty.

I think the other thing that's happening, and this was documented by the Conference Board, which does an annual survey on management issues, is that for the last four years the number one management issue on the minds of senior management has been customer loyalty. [Editor's Note: This year, top-line growth took over the top spot.] The Conference Board then got a panel of CEOs together to comment on the survey, and the comment was that CEOs feel they are coming out of a period of severe cost cutting to where they don't believe there's any more advantage they can get by cutting in their organization. They've cut as lean as they can, they can't become cost leaders anymore, so the only thing that's left for them is differentiation.

FC: We heard a lot of companies mention that, directly referring to Wal-Mart.

Knighton: Wal-Mart's got the high ground on price, so they've got to figure out another way to differentiate and draw people in, and price isn't going to win the day. It's going to get a share of the market, but it's not going to win the day.

FC: Clearly today, the quality of customer service is a big issue. Offshoring call centers is making customers angry; technology continues to replace people when it shouldn't. On a pure service level, where are we today versus years past in terms of service quality?

Knighton: If you look at the American Customer Satisfaction Index indicators, they'll tell you service has gotten incrementally a little bit better, but not significantly better. What that means is that it's great for the consumer, but competitively it becomes tougher and tougher. So I think people are understanding that the customer experience is the next competitive battleground. Jerry Gregoire, the former CIO of Dell, has gone on record and said, "The customer experience is the next competitive battleground." I think that's true. That's where business is going to be won or lost in the next five years at least.

FC: What other factors besides cost cutting are entering into the mix?

Knighton: As consumers have more choices, the market wants to drive prices down. But as consumers get all those choices, the companies that are going to stand out are going to provide more than what satisfies customers.

We used to think there was a straight-line correlation between customer satisfaction and customer loyalty. New research that just came out last year from the Corporate Executive Board has redrawn that curve, and it actually looks like an S curve. It's flattened in the middle. What it shows is that as you invest in customer satisfaction, there actually is a period in which incremental improvements in customer satisfaction do not drive customer loyalty. They make no marked difference. It's only when you turn the corner and really try to drive towards a total differentiation/experience strategy that it makes any difference in terms of loyalty.

What it really means is your investment in service pays off in two places: If you're moving from customers who are dissatisfied and getting them to a point of satisfaction or if you're moving from customers who are satisfied to becoming very satisfied. Those are the only two places where an investment in customer service pays off. Trying to move people along the middle of the customer satisfaction curve by just doing things -- putting a loyalty card in place, improving your IVR, or getting people to use customers' names -- little things like that have essentially no impact on customer loyalty. The only thing that impacts is when you in fact look at the total customer experience and determine strategically to make major advances.

FC: But service is obviously a major piece of that total experience?

Knighton: Absolutely. It's foundational. You can't build a total experience without having a good foundation of service. However, a good foundation of service will not create all the differentiation you need in the marketplace.

FC: Do you throw in things like environment, architecture, and design into that total customer experience?

Knighton: I do, but all of those things pale in comparison to the people.