Managing in an Economy of Emotion, Not Reason (Part 1)

The single biggest concern for CEOs globally today is retaining their existing customer base, according to a recent Conference Board survey. This isn’t surprising in a world in which the chief executive of one of the largest corporations operating in the United States said that his goal is to cut customer churn in half.

It looks like companies are rediscovering a basic tenet: no customers, no business. But before executives develop a strategy to retain customers, they must first ask this fundamental question: Why do businesses lose customers in the first place?

At The Gallup Organization, we’ve done considerable research into this question, having interviewed many millions of customers over the past 60 years. Our findings have been fascinating. One big one: Customers may initially switch to another company because of promises it makes relating to the traditional "Four Ps" of marketing -- a better product, a lower price, an attractive promotion, or a more convenient location (placement). But switching isn’t the same as staying. Customers create new and enduring allegiances because, as differentiation on these four Ps becomes negligible, the role of a fifth "P" -- people -- becomes increasingly important. Every day, a company’s people -- its employees -- either build customer engagement or drive away customers in droves.

So just where have businesses gone wrong on the people front? The problem sure hasn’t been a lack of effort -- companies have invested huge sums of money in attracting and effectively managing their employees. They recruit from the best business schools, invest in training, periodically hike already attractive compensation, and build appealing stock-option plans. Why, then, do so many organizations continue to experience high customer churn?

The flaw in companies’ efforts -- and the redemption, ultimately -- lies in the human brain, more specifically, in a tiny part of the brain called the amygdala. The amygdala is the emotional center of our brains and is key to how human beings process information and control behavior. Ironically, in a world where size matters, the little amygdala can determine the fate of companies, because it influences employees’ emotional responses and behaviors. And executives everywhere should take note of what the world’s greatest companies already know: We are competing in an emotion-driven economy.

Emotion versus reason

To understand the power and nuances of the emotional economy, it’s important to focus first on its seductive flip side, the "economy of reason." This economy is easy to explain because its principles are omnipresent. The economy of reason operates on a simple premise: All customers and employees are mercenaries, driven solely by pecuniary gain. It follows that the best -- or possibly the only -- way to motivate employees is through financial incentives. Likewise, companies try to buy customer loyalty by offering customers better products at lower prices, then lock them in with elaborate customer loyalty programs. And what is the result of this approach? Customer and employee churn are rampant.

So what have great companies learned from the limitations of the economy of reason? It seems fairly simple, really. They have realized that human beings, whether they are customers or employees, are naturally predisposed to be emotionally engaged -- and crass commercialism is not the key to emotional engagement.

Great companies have also realized that emotional engagement is the key to developing productive employees and the most profitable relationships with customers. Great organizations set up conditions that cultivate emotional bonds with employees and customers. And they know that even in the information age, the best way to achieve customer engagement is not through technology, but through people -- because human interaction is the fastest and most powerful trigger of emotional states.

The irony is that while about 70% of customers’ buying decisions are based on positive human interaction with sales staff, companies dedicate a miniscule 10% of their resources to ensuring that positive human interactions will take place.

Clearly, corporate priorities have been misplaced.

The proof

If the role of emotions in driving business outcomes seems to be just an interesting but untested hypothesis, let me offer proof to the contrary. The concept of an emotion-driven economy is rooted in data gathered from more than 10 million customers, 3 million employees, and 200,000 managers from Gallup studies across the world and across industries and job types. In these studies, one key number emerges. Companies -- including some of the biggest and best known in the world -- are, at best, operating at one-third of their human potential. As I stated before, the problem is within, not outside, organizations.

Are CEOs even aware of this wasted potential? Are they bothered about it? Or do they accept it as one of the hazards of doing business?

Great companies do care about this problem, and many are starting to address it. As Gallup’s management book Follow This Path points out, Gallup research shows there are six things these companies have come to realize and that form the basis for the actions they take:

• Employees who use their natural talents in their jobs produce significantly more than average workers.
• Emotionally committed employees form teams that deliver exceptional outcomes.
• Customers recognize the passion and commitment employees feel toward them and cannot help but respond in an emotional way.
• This emotionally driven reaction builds a bridge between employees and customers that creates engagement.
• This engagement becomes the key factor that drives sustainable growth.
• Sustainable growth is the route to profits and, ultimately, higher stock value.

Following these six steps -- an emotional-economy pathway that we call The Gallup Path -- is essential if a company wants to survive and flourish in the years to come.

Every company that wants to follow this path must focus on three areas that are crucial to sustainable growth:

• selecting and developing employees
• how managers create employee engagement
• how engaged employees develop engaged customers

In part two of this series, we’ll consider how companies can start their journey toward sustainable growth. The first step is to answer these key questions: Are your employees cast in roles according to their talents? Are they working with great managers and on great teams? And are they creating customer engagement?