Southwest Airlines’ Customer Management (Pt 1): How to Turn Bad Experiences into Loyalty, Profit

Stephen Blanchette, principal at LeapQ and a new contributor at Call Center IQ, recently interviewed Fred Taylor, senior manager of proactive customer service communications at Southwest Airlines. Part one of the interview follows:

Question: Before I ask you more specifics about how you do what you do, I’d like to step back for a moment and ask you for your personal view on what has allowed Southwest to be so successful for so many years. To remain profitable for 38 years in a row would be impressive in any category but it’s especially so in the airline industry…

Answer: We’ve always taken a lot of pride in going out of our way to say that it’s the people of Southwest Airlines that have made the difference for us in the service we deliver, in how successful we are with our strategy and in the experience they have within our organization and also that our customers have when they buy our products and services. So I’d have to start with people as the number 1 reason for our success.

Question: So if it’s people that are number one, then what is it that defines the Southwest culture?

Answer: The first element of our culture is what we call our ‘Warrior Spirit’. It represents our fight to be successful and it’s what makes Southwest different – not only setting us apart in our industry but in the US overall and around the world. Forty years ago our founders, Herb Kelleher and Roland King, really had to fight to get our airline off the ground because our competition was doing everything they could to squash us. The Warrior Spirit continues to live on in our culture to this day and is brought to life through great people and great leadership.

When we talk about great people, first of all, we’re talking about people who, in their heart of hearts, genuinely enjoy serving people. They also have to have a fun-loving attitude in the way they go about serving our customers and each other. Next, our people have to be resilient when it comes to finding win-win solutions for our company and for our customers. And we also want our employees to be intuitive enough to be able to foresee problems before they surface and start working on solutions before there’s an actual breakdown in service.

Then there’s the leadership side. Our leaders take a lot of pride in being supportive of our employees. When I say ‘supportive’ I am talking about coaching and feedback, and giving our people the direction they need to be successful. And that goes for every one of our leaders – it doesn’t matter what department they’re in.

Then comes our business strategy. We’re pretty astute and clear about the things that we will do and the things that we won’t do. We manage our business very closely by setting SMART goals that are flexible. We monitor these goals very carefully and make sure those goals and objectives are in line with the things that are going to be most important and most relevant.

We are also very conscientious of our costs and how our revenues are related to our costs. It’s particularly important in the airline industry because there are a lot of factors that are uncontrollable that affect our bottom line – such as the cost of commodities like fuel – and the impact of weather conditions. What we cancontrol is the service that we offer and the way our people handle situations. And that’s very important.

[Another] very important part of our business strategy is about setting the right expectations. There’s nothing more deflating than expecting one thing and then getting something less. On the flip side, when you expect one thing and get something more, it heightens your experience. So we always aim to under-promise in a way that sets us up to be able to over-deliver. And that goes for our employees as well as our customers.

Question: [Let’s continue] by clarifying what you do for a living. In a nutshell (to use a ‘Southwest-ism’) – your job is to proactively manage customer emotions. Isn’t that right?

Answer: That’s right. My team and I have the responsibility for proactively reaching out to customers who have experienced substantive inconveniences and disruptions of flights with the right words and the right gestures of goodwill that let them know how sincerely sorry we are for the bad experience they’ve had – whether that’s due to an internal operational issue we’ve had or to storms caused by Mother Nature – and to invite them to give us a chance to make it up to them the next time they choose to fly with us.

Question: Most companies still take a passive approach to customer experience problems – only responding to complaints from customers after they come in. You’re doing the opposite and reaching out to customers proactively and preemptively. I imagine your approach would have drawn a lot of skepticism from your finance team at first in terms of the additional costs a proactive approach would require. But after more than 10 years of doing this, are you still facing challenges from your finance team?

Answer: Of course there’s challenge but that’s part of our DNA. We know that it’s our finance department’s job to ring out every penny and so they are going to look for opportunities to question whether a process or initiative is as efficient and as profitable as it can be. They’re not doing it to be malicious, they’re simply doing their jobs. As a leader, that is the perspective that I have to take. When we get these kinds of questions, I explain to my team that the finance team are trying to better understand what we do and how we do it so that they can help us be as cost-effective as possible. We try not to take it as a threat – even though it does get old after a while.

Question: Is there any challenge that you’ve received from your finance team where you’ve had to admit they we right – that you were thinking of the customer first but in the end this particular facet of your initiative was too expensive to continue with?

Answer: No, there was a challenge about whether the gestures of goodwill we send out were costing us too much money. That was the big question – we had never really tracked these and so we got some very smart people together to crunch the numbers and we ultimately proved that not only are the goodwill vouchers a break-even, we are actually making a profit from the vouchers we’re sending out.

We used to have just one 50 dollar denomination for our vouchers but through technology and electronic analysis of the fares that people pay, we figured out a way to graduate the vouchers in relation to the fares people actually paid to fly. By graduating the value of each voucher, we ultimately get to a sweet spot number per flight and by using the sweet spot average, not only do we generate a return on investment on a per-flight basis but on a per-passenger basis as well. With this new approach – despite a down economy when flying is down about 25% overall – we’re seeing an ROI of 14-16% on the vouchers we issue. And even though making a profit on the vouchers has never been our goal, we had to prove to our finance department that we weren’t a cost drain on the company.

Question: How big is your proactive care program?

Answer: We send out a lot of vouchers to our customers – We contact over 60,000 customers a year and push anywhere from 8 to 12 million dollars in gestures of goodwill out the door. It’s a significant amount of money and our financial department is highly interested in knowing what is going on with it. So we can’t blame them for being attentive to what we are doing.

Question: And what’s the loyalty impact of the proactive care program?

Answer: Well, I’ve seen statistics that say that the average company can expect approximately 25% of customers coming back after having a bad experience. In comparison at Southwest, we are getting 50-75% of our customers coming back. We know that because that is the percentage of vouchers being redeemed by customers within a year of them being sent out.

Question: So how do you decide when to sent out the letters and vouchers – and when not to?

Answer: We don’t reach out for every stubbed toe and scuff or scratch. When people fly, they typically expect that mechanical and weather delays can be nuisances. But when that delay becomes nagging and is compounded and ultimately leads to multiple problems – for example, if you’re on a flight and there is a mechanical problem with an engine and we have to divert an airplane and land somewhere other than planned, then we are going to reach out to you. Those are what make bad experiences.

Question: But is there some sort of numerical formula that you and your team use to decide when to issue vouchers?

Answer: No, there is no formula and this is what boggles some of the other leaders in our business who might be new to the company or to our process. It comes down to people again. When I’m hiring someone for my team, I want them to be able to think like a customer and put themselves in the customer’s shoes. They need to be able to quickly gather the facts, analyze those from the business side and more importantly evaluate them in terms of the experience the customers have had as a result of those facts, then determine what the right words are to say and what the right gesture of goodwill is to give. And so that is very, very subjective and it’s hard for someone to get if they don’t work in our team.

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Stephen Blanchette is the founding Principal of LeapQ, a Munich-based consultancy focused on business and brand strategic integration. He blogs regularly at LeapQ.org/blog.