The following article is scheduled for publication in Entertainment Management magazine.

Fill Your Bucket by Managing for Zero Defections

By Randy White

© 2000 White Hutchinson Leisure & Learning Group

The tale of the old man and the water pump is well known among folklorists of the Lesser Hebrides. A traveler walks down a dirt road and comes upon a man working a water pump. Up and down, a steady rhythm, the man works the handle with his right hand. Water gushes from the spigot and into the wooden bucket he holds in his left. His muscles are straining and his shirt soaked with sweat. The traveler looks down, then he asks, “Old man, how long you been working that pump?” “Coupla hours.” “You notice anything?” “Yep. Won’t fill up.” “To quote Hank Williams, oldtimer, your bucket’s got a hole in it.” The fortunes smiled on the old man that day, because the traveler happened to be a peddler of duct tape. The moral: If your shoes are wet, you got a problem somewhere.

Well, yes, we made that up, but we think it illustrates our point nicely. A lot of location-based entertainment [LBE] owners are like that old man, working feverishly to attract new customers while their existing customers trickle away. Plugging the hole in the bucket or, in this case, reducing customer defections, means the end of wasted effort and a new era of profitability.

So what’s the duct tape for leaky LBEs? How do you keep the customers you already have? To start, you borrow a page from the manufacturing industry, which has embraced the revolution of zero defects. The industry has found that manufacturing without defects, rather than inspecting for defects at the end of the line or repairing defective products later, has proved to have enormous advantages for production costs, marketing, customer satisfaction, brand loyalty and profits.

Service industries, which include LBEs, have jumped on the bandwagon, enthusiastically committing themselves to “customer service” and “customer satisfaction.” But often they find that commitment alone is not enough to bring results. LBEs are learning a lesson manufacturers also had to learn: unless you measure it, and measure the right things, quality cannot improve.

Satisfaction won’t plug the holes

Conventional wisdom says that the right way to measure is to focus on customer satisfaction. Conventional wisdom is incorrect. There are two main problems with using satisfaction surveys:

1. Satisfaction no longer results in loyalty because customers expect to be satisfied. Studies in service industries show that although 90% of customers report they are satisfied or very satisfied, as few as 40% repurchase.
2. Satisfaction ratings don’t give management the information it needs. Knowing that most guests are satisfied doesn’t tell what changes and investments are needed to improve the guest experience and increase perceived value.

The only meaningful measure of customer satisfaction is repurchase loyalty, the number of customers who come back. Where manufacturers focus on zero defects, the service industry must have as its goal zero defections, or keeping every guest that the facility can profitably service.

The economics of zero defections

Our company has analyzed many existing LBEs for clients who wanted to improve sales and profitability. Consistently, we have found guest defection rates of anywhere from 25% to 40%. Most LBEs are leaking guests from holes in the bottom of their businesses, so, just to stay even, they spend thousands of dollars marketing to new customers in a futile attempt to stay profitable. But plugging up some of the holes, decreasing the defection rate, can have an enormous impact on profits and is more cost effective than attracting new guests.

We illustrate the economics of striving for zero defections with a hypothetical LBE. Currently the LBE is attracting 50,000 guests who visit an average of four times a year and spent $10 per capita on each visit. Each year 25% of guests (12,500) defect and don’t return. If we assume the LBE is lucky enough to replace the 25% each year with new ones, and we don’t factor inflation into the computation, the five-year financial statement looks like this:

 
Year 1
Year 2
Year 3
Year 4
Year 5

Revenue
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000

Variable Expenses
(1,100,000)
(1,100,000)
(1,100,000)
(1,100,000)
(1,100,000)

Fixed Expenses
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)

Profit
$260,000
$260,000
$260,000
$260,000
$260,000

Now, let’s look at what happens when the guest defection rate is decreased by only 5%, from 25% per year to 20% per year:

5% Decrease in Guest Defection Rate

 
Year 1
Year 2
Year 3
Year 4
Year 5

Revenue
$2,000,000
$2,000,000
$2,000,000
$2,000,000
$2,000,000

Variable Expenses
(1,100,000)
(1,155,000)
(1,212,750)
(1,273,388)
(1,337,057)

Fixed Expenses
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)

Profit
$260,000
$305,000
$352,250
$401,863
$453,956

Over the five years, profits increase a total of $473,000. In the 5th year, profits are 75% higher. For every 1% decrease in the guest defection rate, profits increase by about 15% in the 5th year.

The news gets even better. Studies clearly show that long-term customers buy more, their frequency of visits as well as their per capita spending increase, they take less of a company’s time and are less sensitive to price. Additionally, they become ambassadors for the LBE, bringing in new guests and reducing the business’s marketing costs.

So taking our theoretical model, let’s look at what happens if defections are still only 5% lower, but as a result of having more loyal, long-term guests each year, the average frequency of visits and the per capita spending each slowly increase by 2% each year. This means that by the 5th year, annual average visits increase to 4.3 and per capita spending increases to $10.82:

5% Decrease in Defections and 2% Annual Increase in Visits & Per Capita Spending

 
Year 1
Year 2
Year 3
Year 4
Year 5

Revenue
$2,000,000
$2,184,840
$2,386,763
$2,607,348
$2,848,319

Variable Expenses
(1,100,000)
(1,201,662)
(1,312,720)
(1,434,041)
(1,566,575)

Fixed Expenses
(640,000)
(640,000)
(640,000)
(640,000)
(640,000)

Profit
$260,000
$343,178
$434,043
$533,306
$641,743

Now, total five-year profits are $912,000 greater and profits in the 5th year are 146% higher-quite a significant impact.

Why guests trickle away

We think of America as a mobile society, but moves account for only a small portion of defections. Analysis of data from the US Census Bureau shows that 18% of families with children move each year. However, only 1/3 of these (6%) move out of the local area. For young adults in the 20-34 age range, 30% move each year, but only 9% move out of the local area. With common LBE defection rates of 25% to 40%, moves account for 1/4 of all defections at most.

Studies in the service industry show that of the remaining guests who leave, 10% do so because they go to the competition, 15% because of poorly handled complaints, and the remaining 75% for no special reason. In other words, they haven’t been given a good reason to stick around.

Managing towards zero defections

We know that losing guests is incredibly unprofitable and we know that LBEs have some control over their departure. Now we’re going to discuss how LBEs can reduce guest defections. There are two main steps. The first is to define the target guests or niche market, and the second is to deliver an experience that completely meets that group’s needs. The first step begins before the LBE is even opened, at the very beginning of the development process.

Most LBEs rely on a market study to tell them if sufficient demand exists to support the project. However, to assure low guest defections, the market study needs to go much further than normal-it needs to clearly identify who the target or core guests should be, not only in demographic terms, but even more importantly in socio-economic and lifestyle terms. Without a clear focus and vision of whom the facility must please, the LBE will fall short of its mark.

Even when the first step is done right and the market research gives a clear direction, LBEs can trip on the second step. That’s because there is a fundamental flaw in the standard LBE design process.

The problem is that the normal design process is sequential, fractured and missing important information. Typically, once the market study is completed, the owner retains an architect. The architect might have read the market study, but doesn’t really understand its implications and how to translate it into a facility that meets the needs of the target market. That’s because architects are trained to create buildings, not experiences that result in loyal guests. So the project is designed based upon the architect’s personal design preferences and best guess about what guests want.

Then the LBE is built, and during the initial months is perceived as a great success, because everyone in the market shows up to check it out. But then the sophomore slump sets in and guest defections start to take their toll on revenues. Why? Because the business, both the physical plant as well as its operation, wasn’t focused and tailored enough to a market segment to assure loyalty. Correcting the problem, if it can be corrected, is usually very expensive.

An excellent example of this is GameWorks. Launched with much fanfare in 1997 as a young adult entertainment center, the centers produced poor financial results. In 1999, new management was brought in. They examined the centers and found that they were not attracting their target audience, but rather male teenagers. They analyzed the centers and found the design was totally off the mark for the intended audience. Consumer research was conducted and the design was totally revamped, at considerable cost. The new design is now attracting the targeted market with much improved financial results.

Better to do it right the first time. The answer is to use a guest-centric production process that integrates in-depth consumer research with all aspects of the physical and operations design.

The producer holds the duct tape

To create loyal guests requires a concurrent approach to designing every factor, every sense, every interaction the guest has with the environment, staff, and other guests. Entertainment experiences are produced, not designed, and the process couldn’t be more different from the traditional, sequential, architect-driven process. While architectural considerations are part of the process, they’re only one part and they do not drive the process. Instead, the guest-centric production process is managed by an experienced “producer”.

And, like a movie producer, this person also begins with a clear understanding of whom they are designing for and how to win their loyalty. The guest drives the process, and the producer’s job is to represent the guests’ preferences and make sure every aspect of the business is designed with the interests of obtaining their loyalty.

Concurrent design begins with the end in mind

The producer leads a guest-centric design process that is completely different than the traditional model. One of the big problems with the old sequential model is that each stage squeezes the stage after it, often closing off options that could have improved quality, reduced costs, and sped up construction. Another problem is that each person only sees his or her short piece, without any unified vision to guide the design. Instead, each individual must do the best she can with what’s handed her. A few steps into the process, it may be too late to change decisions made early in the process without costly change orders, confusing details, and possible construction delays.

Our company has found that the best way to create loyal guests is through concurrent design. Concurrent design means pulling together the practitioners of all the disciplines who research, design and will operate the business at the same time. Everyone jumps into the sandbox at once, with the producer and all the specialists from other areas participating as members of a multi-disciplinary, cross-functional design team from the beginning. The guest experience primarily, and staff and operational considerations secondarily, drive the concurrent design process.

Less sacrifice = more loyalty

The concurrent design team focuses on reducing guest sacrifice rather than improving customer satisfaction, and they do this for a reason. We’ve already shown that even high levels of customer satisfaction don’t mean low defections. That’s because customer satisfaction only measures the difference between what guests expect to get minus what they perceive they get. It doesn’t equate to loyalty because their expectations are defined by competition and their other consumer encounters, not by what they really want and need.

Guest sacrifice is the difference between what a guest exactly wants and what they settle for, and it discerns the difference between what the guest accepts and what he really needs. The less the sacrifice, the more loyal the guest. Studies show that guests who have their needs met are six times as likely to be loyal as merely satisfied guests. The secret to knowing what guests exactly want is to ask them, through focus groups and other means, and to have a producer who keeps the wants of the needs in front of the design team throughout the process.

You get what you measure

Crucial decisions are made during the design process, but there are also many actions that management can take to reduce defections even after the project is open and operating. The key is measurement. LBEs measure financial indicators all the time. Along with that, management should measure the single most important driver of long-term financial success-guest loyalty. The first step is to make the measurement of guest loyalty a priority and ensure that the process is unbiased, consistent and broadly applied.

One way to track loyalty is through exit interviews where guests are asked about their future intentions to return. Although their responses are simply indicators of future behavior, intent to revisit is a very strong indicator. While guests generally overstate the probability of returning, the degree of exaggeration is fairly consistent, meaning that tracking the intent over time can show changes in the defection rate.

Exit interviews can also be used to reduce guest sacrifice. Open-ended questions, such as “If you were the manager, what one thing would you change?” or “Please suggest one little thing that we could improve” will identify actions to take. Some LBEs perform exit surveys every day, and immediately act on what they hear. (It is important that the exit surveys be given to the target guests, otherwise the information will be irrelevant.)

Just as important, feedback channels need to be developed so management learns about guest complaints and comments from frontline personnel. Defection analysis is extremely beneficial if defecting guests can be identified and interviewed in earnest to uncover the root cause of each defection, and then solutions developed to correct the problem.

LBEs that transcend mere guest satisfaction and move to guest sacrifice, loyalty and zero defections, will create lifelong guests and find themselves in a league of their own with higher profits and happier owners. It’s a lot more fun that pumping away, trying in vain to fill a leaky bucket.

Randy White is the CEO of the White Hutchinson Leisure & Learning Group, a Kansas City, Missouri, USA firm that specializes in the production and design of family and children’s leisure venues worldwide. Randy can be reached at voice: +1.816.931-1040, fax: 816-756-5058, by e-mail or on the web: www.whitehutchinson.com.