Saturday, December 22, 2007

Don't Be Stupid - You Can't Earn Loyalty

I have finally reached the point where I must respond to the never ending blogs and pronouncements about new ways to "earn" customer loyalty. The fact is you CAN"T earn customer loyalty. It is IMPOSSIBLE!!!

Start with the definition for loyalty as found in Webster's Encyclopedic Unabridged Dictionary of the English Language:
loyalty - 1. the state or quality of being loyal; faithfulness to commitments or obligations. 2. faithful adherence to a sovereign or to a government, or to a leader, cause or the like. 3. an example or instance of faithfulness, adherence or the like.

Under the heading of synonyms there are the following:
1. Loyalty, alligiance, fidelity all imply a sense of duty or of devoted attachment to something or someone.
2. Loyalty connotes sentiment and the feeling of devotion which one holds for one's country, creed, family, friends, etc.

I think those who use the phrase building loyalty really mean building trust. Again referring to the same dictionary for defintion of the word trust:
trust - 1. reliance on the integrity, strenth, ability, surity, etc. of a person or thing; confidence. 2. confident expectation of something; hope. 3. confidence in the certainty of future payment for property or goods received; credit. 4. one on whom or that on which one relies; God is my trust. 5. the condition of one to whom something has been entrusted. ...

Under the heading of synonyms there are the following:
1. certainty, belief, faith. Trust, assurance, confidence imply a feeling of security.
2. Trust implies instinctive unquestioning belief in and reliance upon something: to have trust in one's parents.

I hope that by examining these two definitions, the distinction is clear. Loyalty is derived from trust. Therefore, the way customer loyalty increases is through increased trust by the customer in the company's products and services.

The bottom line is that the words loyalty and trust need to be used correctly so that business plans can be developed to solve the correct problem. If it is the desire of a company to increase customer loyalty, then the challenge is to create programs and processes that will build trust with the customer.

Remember, you can't earn loyalty BUT you can earn trust!

Thursday, December 20, 2007

Five Stages of Customer Bonding

Customer-driven quality improvement is critical to long-term profitability. Increased competition and concern over diminishing market share motivates companies to invest in their futures.

Customer loyalty develops from personal relationships and trust between the company and the customer over time. This includes keeping customers involved throughout the product lifecycle as well as developing products and/or services to meet changing customer needs and desires.

This bond results from effective one-on-one communication, mutually-beneficial interaction, the company's genuine interest and involvement in the customer's life and lifestyle, a combination of customer allegiance and company advocacy, and a shared sense of purpose. Several years ago Richard Cross identified five important aspects of customer bonding; namely, awareness, identity, relationship, community and advocacy. I think these five aspects are still applicable and hence have described them in some detail below.

The art of earning customer "share-of-mind" involves creating an impression of personal identitication with the company's products and/or services. This first stage, awareness, represents the weakest aspect of a relatioinship because it is non-interactive and depends entirely on the customer's perception. Madison Avenue advertising agencies know that because nothing is required of a customer at this point, advertising must capture the atention and stir the emotions of prospective customers, without a clear understanding of who they are.

A company does not know the basis for a customer's positive or negative reaction to a communication or advertising message at this stage of the relationship.

The identification stage occurs when a potential customer asks the question, "What's in it for me?" A customer idnetifies a product of service as meeting one or more important personal needs, such as self-fulfillment, status, or belonging. A customer may perceive the company as having values and preferences similar to his own and begin to form a relationsip with the company.

At this stage, customer and company interaction is limited to one-way communication, so the customer's perception is his reality because no feedback loop exists. Because an impression results from minimal information, the "relationship" remains extremely tenuous and a cusotmer can be easily swayed. Druing this initial stage of contact, the goal is to entice potentional "best" customers to take action relative to using a company's products and/or services.

At this stage, the customer receives the benefit of products and/or services tailored specifically to his individual needs (at least as nearly as the company can provide). Once a customer interacts with the company, repeated experiences of individual customer satisfaction take on significant importance.

Thus, customer satisfaction is an on-going process rather than a single discrete event. Customer satisfaction is not a goal, it is an obligation. Customers expect that products will work and that they will receive good service. Customer delight results largely from how a product is sold and is serviced as well as how the company responds to inquiries and solves problems.

Customer retention is critical becuse it typiclly costs five times as much to attract a new customer as it does to retain and existing one. (This statistic first came to me through stories by Tom Peters author of "In Search of Excellence" and several of his follow-on books). I do not have evidence that this statistic is true, but it seems reasonable and it seems to be used by many who tout the value of customer retention. In any case, focusing on product and service qualtiy provides an effective customer retention strategy and barrier to competitive threats.

One important aspect of a successful customer-driven marketing strategy is the use of comprehensive and accurate databases to frequently market products and services to specific customers. Because the process of relationship-building involves direct and intereactive communication, the customer learns that the company recognizes his specific interests and values his business.

Service, a second critical element of an effective customer retention strategy, relies on the premise that each employee within the company must recognize that if he if not directly helping a customer, then he is helping an employee who is.

As bonding occurs, the customer has an investment in participating, maintaining and perpetuating the relationship. A customer requires awareness and idnetification with potential personal benefits of the company's products and/or services prior to investing time and energy in a relationip with the company. By the time the intersaction develops to this level of satisfaction, loyalty and trust begin to accrue.

Customer bonding requires high levels of effective interaction. When the company integrates its products and services into the life and lifestyle of its customers, communal bonding occurs. The community relationship stage achieves an integration of values, preferences and priorities between customer and company where each derives mutual benefit. Companies that achieve this type of loyalty consistently delight their customers.

Depending on the type and frequency of interaction, loyal customers are more resilient to competitive threats and/or higher price points because of their perception of shared values.

At this advanced level of custoemr bonding, the company services as an advocate for the customer, and the customer shows an allegianfce to the company; word-of-mouth advertising flourishes. Because the company now can encourage buyer-get-a-buyer programs through appropriate incentives, it must be prepared to follow through professionally to make new recruits feel as valued as the advocates who recommended them.

The bottom line is that loyalty results from customer bonding and does not automatically follow from successive customer interactions without a plan to build the customer bond. Building the bond with the customer is one of the most often overlooked aspects of customer loyalty.

Monday, December 17, 2007

One of the Toughest Markets to Get Loyalty

I just read a study done by the IBM Institute for Business Value. The title of the study is "Why Advocacy Matters to Grocers." The study was performed in 2007 and provides both interesting statistics as well as some very insightful perspectives about loyalty. It appears the full study is available from IBM at The following information is just a taste of the information that is in the study.

Perhaps one of the innovative (at least from my perspective) classifications of customers used in this study is:
1. An advocate is a customer who likes your store, buys from you and stays with you. These customers recommend their grocer to others, would not switch if another valued grocer moved to the area and would increase purchases if grocer offered other store products. The study found that only 27% of grocery customers are advocates.
2. An apathetic is a customer who is neither an advocate nor an antagonist.
3. An antagonist is a customer who carries a poor attitude toward their grocer and may be actively casuing damage to the business reputation. Almost half (46%) of the entire surveyed group was identified as antagonists.

Some of the consumer attitude statistics derived from the study include:
1. 79% of customers will commit to a deeper product or service relationship with a brand after a satisfying experience.
2. 31% of grocery customers tell multiple people about their bad experiences.
3. 48% of grocery customers avoid a store based on on someone else's experience.
These statistics come form "Retail Customer Satisfaction Study - 2006" by The Jay H. Baker Initiative at Wharton and the Verde Group.

These statistics clearly point out the need to create a satisfying experience for customers and pay attention to customer perceptions that may breed a contagious negative message.

Some of the observations that were derived in the study include:
1. The large national and regional grocers are the least customer-focused and have earned the fewest advocates (19%).
2. The Regional and local specialty stores ranked the highest in terms of advocates
3. 19% more advocates give the majority of their business to their chosen grocer.
4. Conversely, twice as many antagonists as advocates decreased the amount they purchased from their primary grocer over a two-year period.

The study did an excellent job of identifying the key attibutes that drive success.

1. Quality - 97% of advocates strongly agree their grocer does this well. 73% of the apathetics strongly agree and only 48% of the antagonists strongly agree.
2. Convenience - 94% of advocates strongly agree their grocer does this well. 53% of apathetics strongly agree and 38% of antagonists strongly agree.
3. Employees - 94% of advocates stongly agree they are happy with the service from store employees. 61% of apathetics strongly agree and 38% of antoagonists strongly agree.
4. Availability - 84% of advocates strongly agree their grocer has products that I want always on the shelf. 48% of apathetics stongly agree and 17% of antagonists strongly agree.
5. Social responsibility - 78% of advocates strongly agree their grocer is socially responsible. 39% of apathetics strongly agree and 22% of antagonists strongly agree.

The grocery business is probably under more continuous consumer scrutiny (daily) than most businesses - most people visit their grocer more frequently than any other business. As pricing, quality and options for consumers keep improving, grocers must figure out how to maintain,or even better grow, their customer base and then how to increase the percent of advocates in their base.

Thursday, December 13, 2007

When Loyalty Does Not Include Customer Service

J.D. Power and Associates published a list of the retention rates for the various car manufacturers in early December 2007. The list indicated Toyota Motor Sales USA, Inc as the car company with the highest retention rate at 68.9%. General Motors Corporation came in second with a retention rate of 64.7%. At the very bottom (and I do mean bottom) was Isuzu Motors America, Incorporated with a retention rate of 1.6%.

There are two interesting points that can be made from this release. The first point is that the scoring is now done by car company and includes all the makes and models produced by that company. Thus, the retention rate for General Motors includes customers moving from Chevy to Buick to Cadillac ot GMC and any other brand produced by General Motors. I think this is the right way to measure retention sincemany customers often change brands but like the company (e.g. General Motors). This hits home to me since my father always bought an Oldsmobile and from that heritage I have purchased a number of General Motors cars. I was disinclined to change and buy a Ford Motor Company car. I did buy a Chysler 300 at one time. I think migration between brands is a natural phenomenon in the United States and am willing to accept this premise for scoring without further consideration.

The second point that I find intersting is that customer service does not appear to be included in the retention discussion. Neal Oddes, director of product research at J. D. Power cited improved quality in general and the introduction of several well received products in the last couple of years as factors that probably drove the increased retention for General Motors.

When I think about the idea that customer service is not mentioned, perhaps the reason is that customer service is more a function of the dealer than the car manufacturer and hence should not be included in the measurement scheme. Certainly, the dealer has at least as much impact on retention as the product quality or new product innovation. That is another study that I would like to see done. I would want to see the impact of the dealer's service operation on retention. Within the last 18 months I worked with one of the car manufacturers with respect to their service operation. It was clear after a brief study that service plays a major role in repeat business for car dealers.

The bottom line is that car manufacturers could dramatically increase their retention rates if they would insist on having more control over service quality at the dealer level. Some car manufacturers will say they impose service standards, but my brief experience led me to conclude that service quality comes from the dealer ownership. My one liner to every service operation is that every service encounter requires two repairs; namely one must repair the product and one must also repair the customer. The customer repair is ALWAYS the most important.

Monday, December 3, 2007

Don't Expect What you Don't Inspect

One of my least favorite bosses used the phrase "don't expect what you don't inspect." It did not make me happy when he said it, but he made his point that it is important to measure those attributes which are important. Michael LeBoeuf noted as his platinum principle that people do what gets measured. It all points in the same direction. If we want to have loyal customers, we better have systems in place to let us know how well we are doing.

Even the best designed loyalty-based program will deteriorate unless an effective measurement system is established. Accurate, relevant measures that establish feedback loops are the foundation of organizational learning.

One way to avoid mistakes in managing a customer loyalty program is to track and understand the cash-flow consequences of changing customer loyalty - the defection of a target customer. John Goodman, of the Technical Assistance Research Program (TARP) has described three building blocks necessary for an effective customer-driven quality-improvement tracking system:
1. quantify the bottom-line impact of poor quality and customer problems
2. identify quality priorities on the basis of market/revenue impact, and
3. measure performance continuously in each priority area and have top management review the results.

A company's definition of quality must be driven by the desire to earn customer loyalty, and it requires an examination of products and srvices in terms of customer expectations. Achieving customer satisfaction, continued customer loyalty and long-term revenue growth depends on the consistent delivery of products and services throughout the customer's relatioinship with the company, and requires that all areas of the company have a direct or indirect effect on quality, customer satisfaction and continued customer loyalty.

Goodman has identified two rules for a successful measurement system:
1. Identify where and how often customr expectation have not been met:focus on expectations. He has suggested "presenting customers with a list of potential problems or questions across a broad range of transaction types and soliciting which and how many problems or questions they have experienced." Remember, whatever the customer says is a problem, is a problem!
2. Determine the company's ability to handle customer complaints and inquiries by obtaining a baseline indication of the extent to which the existing recovery process reduces defections or helps retain customers who otherwise might defect to the competition.

By examining the impact of problems on customer loyalty, the company can quantify the payoff for problem prevention. For example, in most industries, for every six customers who perceive thay have an unpleasant experience, the company risks losing some, if not all of the future revenue from at least one of those six customers. Further, about 50 percent of all customers with problems or questions never complain to anyone; about 45 percent complain to someone at a front-line level; and barely 5 percent contact the corporate office.

In general, customers who do not complain are about 15 percent less loyal to the company that customers who do complain. Loyalty for customers who do complain and can be satisfied through effective measures increase by about 20 percent. Finally, customers who are completely satisfied often exhibit no less and sometimes greater loyalty than customers who have not experienced a problem. An additional measure of payback and a useful predictor of customer loyalty for problem resolution is word-of-mouth behavior.

Goodman has identified five types of data required for calculating the market impact of improved qualtiy and service:
1. profit value of a customer,
2. number of customers who experience problems,
3. percentage of custoemrs who complain about problems,
4. impact of problems on loyalty, and
5. the impact of the service system on loyalty.

The objectives are (i) estimating the bottom-line impact of quality and service,
(ii)determining potential payback from preventing problems and/or improving customer response systems,and (iii)calculating the return on investment of a customer-driven quality program. Armed with data, quality improvement priorities can be established on the basis of emprirical data collected from custoemrs, NOT management intuition.

Companies can isolate the relative importance of different performance areas by determining the relationship between specific problems and customer loyalty. Once the company determines the percentage of its customer base at risk, priorites can be set accordingly. It should be noted that internal data about custoemr complaints often can conflict becasue custeomrs report eh problem to different people at different times. Multiple reports can lead to conflicting or inconsistent indications about the nature and frequency of the problems. In addition, data may need to be weighted based on where within the company the complaint was received. Companies can easily fall into a measuremnt trap with too much data, too little sensitivity about data interpretation and too complex data integration.

Often, management may find themselves in a situation where analysis assumes priority over action. It is important to use the key drivers of customer satisrfaction to organize the use of internal data. Internal data shold be used to corroborate the nature, frequency and seriousness of customer problems in the key areas, then inform management about the specific nature and solutions for the problems.

A final point about data. Failure to conduct routine follow-up measurements will jeopardize the execution of quality improvement processes.

When reports quantify bottom-line impact, set priorities and dianose potential solutions, an increased investment in measurement activities can be justified. A tracking system, designed to determine the effectiveness of its customer loyalty management system, requiress five criteria to ensure continued effectiveness according to Goodman.

1. transaction-based questionnaires,
2. cost-effectiveness with ease of implementation,
3. minimized response burden for customers,
4. manage by exception, and
5. useful data.

The bottom line is that most companies that have loyalty programs do not manage them and then they wonder what happened. Duh!

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