Wednesday, November 28, 2007

Some Thoughts on Building Customer Loyalty

Most companies recognize the need to achieve product quality and deliver good customer service that meets or exceeds the customer's expectations. In an article from the past autohors David Stum and Alain Thiry describe three common misassumptions that involve efforts to influence a customer's attitude and presume a cause-and-effect relationship:
1. internally-developed quality standards of product and service lead to customer satisfaction;
2. high levels of customer satisfactionresult in a high volume of repeat purchases;
3. measurements of customer satisfaction can predict a customer's future behavior.

Customer satisfaction is not a surrogate for customer retention or customer loyalty.A satisfied customer is a repeat customer, maybe. A loyal customer will keep coming back and will refer others. Between 65 and 85 percent of customers who defect say they were satisfied or very satisfied with their former supplier.

Loyalty-based companies
The primary mission of a loyalty-based company is to deliver superior value to customers. Success or failure can be measured by customer loyalty, best quantified by retention rate, share of purchases or both. Achiving customer loyalty has three effects:revenues grow, costs decline and employee retention increases.

Loyal customers exhibit some or all of the following characteristics: repeat purchases, purchasing across product and service lines, giving referrals and demonstrating an allegiance in spite of the lure of competition. Building a highly loyal customer base cannot be done as an add-on process. It must be integral to the comany's basic business strategy. Companies that recognize customer loyalty is earned by delivering consistently superior value, design their entire business around customer loyalty.

Self-enforcement is the key to achieving outstanding loyalty because the benefits of a customer-driven system are cumulative. First, the company must understand the relationships between customer retention and the rest of the business. Then, they must quantify the relationships between customer loyalty and profits. The program should focus on four aspects of the business, namely: customers, products and/or services, employees and measurement systems. When all these areas align, they reinforce each other and the results are outstanding.

Customers form the basis of a loyalty-based company and success depends on their staying with the company for a long time. However, not all customer are equal. The company should target the "right" or "best" customers and be ready to "fire" those customers who do not fit the business. The customers to fire are those that either use more resource than the margins they generate, or their needs do not fit well into the company's basic business. (I often suggest that customers who consume too much resource are better to fire and then lead them to your competitor.)

Demographics and purchasing history give some indication of a customer's inherent loyalty. Finding loyal customers requires taking an objective look at the kinds of customer to whom the company can deliver superior value. An accurate analysis will identify a customer segment that is fairly homogeneous that improves the economics of serving those customers.

Products and Services
Once a company identifies the customer it should keep, it must figure out how to keep them. That often means the company must consider adding new products and services to meet customers' evolving and changing needs. Companies that fail to use the intelligence they have gathered about their customers to develop the products and/or services customers need or want become vulnerable to competitive threats from other companies who will lure their customers away. Over time, as a company developes an intimate understanding of those (loyal)customers, it can exercise good intuitive market judgement because it knows the wants and needs of its loyal customers. In addition, it is easier to build sales volume with customers who already know the company than it is to build sales volume with new customers. So, the choice is to create new lines of products and/or services to meet the changing needs of loyal customers or to search for a new market segment and create new customers.

Employees as a resource
Employee retention is another significant aspect of customer retention. A customer's contact with a company is through its employees, NOT the top executives. Those employees who deal directly with customers day after day have a powerful effect on customer loyalty. Learning accumulates as people stay on the job. The longer employees stay with the company, the more familiar they become with the business. The more they learn about the company, the more valuable they become. Long-term employees tend to be more productive and more loyal as well.

When long-term employees leave, the bonds of trust and expectations built between the employee and the customers are broken. Successful customer-driven companies know that their best employees are as important as their best customers; once a company recognizes that it has loyal, long-term employees, they should, and most do, everything possible to keep them. The companies often provide incentives that align the employee's self-interest with the interests of the company such as remuneration based on aggregate customer retention rates and sharing their "loyalty surplus" with employees as well as stockholders.

Loyal employees take pride in delivering value to a customer over time, take satisfaction in contributing to the company's growth and eventually those employees will develop a company loyalty as an integral part of a shared sense of purpose with the company.

I think I will take some time to think about the measurement systems in a company that are necessary to support both employee and customer loyalty becasue they are not necessarily those that are normally in place.

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