Saturday, October 27, 2007

Satisfaction versus Loyalty

I amy be going over old ground but I think it is time to document some basic issues. Customer loyalty and customer satisfaction are mistaken for each other and otherwise misinterpreted much too often. There are enough differences between these two concepts that I believe should be pointed out.

Some basic Flaws
A logical step in the business process is that if you can truly satisfy your customers, they will remain loyal, and you can achieve the envious position of dramatically cutting the cost of sales by selling to a large satisfied customer base. In other words, the general "leap-of-faith" in one's thinking is that all satisfied customers are loyal customers. Certainly there is a convincing argument that a loyal customer must be a satisfied customer; however, the reverse does not present nearly as strong an argument that a satisfied customer must be a loyal customer.

One statistical approach shows that loyalty increases as satisfaction increases. With this approach, two pieces of information are examined and analyzed for a specific company. The first piece of information is the level of customer satisfaction taken from a survey of customers. The second piece also is taken from the same survey, and it represents the loyalty measure and makes the assumption that if the customer says he would continue to purchase from the company or would recommend the company based on on his experience, he is loyal.

However, the real question is how do you know whether the person asnwering the question actually does any purchasing or has any influence in purchasing or even recommends purchasing additional products or services. A further step would be to be able to verify that the additional products or services did take place. The studies of which I am aware have not shown the relationship to be anything other than statistical for specific companies. Unfortunately, statistical relationships never require cause-and-effect to be valid.

So, what is the real difference between satisfaction and loyalty. Experience tells me, as do the definitions in several dictionaries, that satisfacion relates to the result of a process. the process may be a sales process, product performance process, or a service process. Loyalty relates to a relationship. Customer loyalty does not occur, but customer satisfaction can occur immediately follwoing a successful process. Loyalty can, in fact, survive a negative process. Loyal customers will continue to purchase from a company even though they may have had a bad experience.

When you examine each of these words, it's clear that customer loyalty is somewhat dependent on satisfaction, but satisfaction does not depend on customer loyalty. That's the difference.

Frederick Reichheld noted several years ago that betwen 65 and 85 percent of customers who defect said they were satisfied to very satisfeid with their former supplier. As an example, Reichheld used the auto industry to make his point by showing that satisfaction scores are between 85 and 95 percent, while repurchase rates avereage only 40 percent.

Now that we can see tht satisfaction and loyalty are not the same, it is time show how nicely they link. Many companies have leaped onto the customer satisfaction bandwagon. Companies believe, as I do, that is a good thing to do. A general statement that can be made with some validity is that customer satisfaction is the cornerstone in building the bridge between the company and the customer.

Most companies have limited their vision to building the cornerstone and couldn't see the extension of the vision to customer loyalty. Once the company vision has changed to customer loyalty, customer satisfaction attains a more significant role but it is not the only goal. Customer loyalty also will be affected by finding the right customers in the first place, always having the right products and services to meet their ever-changing needs, and having employees who build levels of trust with the customers through long-term contact with the same customers.

Finally, if you wnat to change the vision from customer satisfaction to customer loyalty, you must change the mearuement system normally used for customer satisfaction. Measures taken of the customer must include those aspects of the business that have cause-and-effect relationships between company operations and the customers. In general, the most direct measure of customer loyalty will be retention rate. A secondary measure could be the share of purchases that a company receives from a customer who usually splits purchases among several vendors (share of pocket).

Customer loyalty must be viewed differently than customer satisfaction. The good news is that customer satisfaction is one of the primary ingredients that creates customer loyalty. The next step is to examine company operations to determine those that most directly affect loyalty and then begin the measurement process.


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