Monday, March 31, 2008

Just Some Statistics from the Web

I continue to scan the web for loyalty data or data that relates to customer loyalty. Since I have several excerpts on my desk with what appears to be well documented data, it is time to log them and get on with some more interesting aspects of customer loyalty.

1. From the Harvard Business Review - The average organization loses 50% of its customers every 5 years. The cost of replacing them can be six to seven times more expensive than winning them in the first place.
2. From ACcenture - 59% of people had actually stopped doing business with companies in the past year due to poor service (based ona survey of 3,500 consumers on five continents).
3. From an annual survey by the National Retail Federationi and IBM - 6% of retailers don't have anyset schedule at all in tracking customer satisfaction (based on a survey of 137 retail firms). Only 10% of retailers measure customer satisfaction on a weekly basis and only 8% do an annual survey.
4. Foresee Results measures online customer loyalty for retail web sites - In 2007 the aggregate customer satisfaction rating fell by 1.3% to 74%. The rating declined for nearly half of 40 online retail retailers due to higher consumer expections (according to Foresee CEO Larry Freed.
5. From Harris Interactive who polled 2,000 mobile phone users - 96% said they wouldn't hesitate to switch carriers to get a better experience. In fact, 72% had already made a switch due to a negative experience.
6. From Amdocs, a call center technology firm in their survey of 2,000 consumers in the US and Britain - four in five consumers were satisfied with their service levels, but one in three said they would switch to another carrier to get better services for mobile games, entertainment and ads.

The bottom line is that there are vast amounts of customer information on the web. There appears to be a consistent message in all the satistics that customers are important and those organizations who measure them and make them an important component of their strategy seem to perform better (financially) than those who do not. This message is pervasive in all industries (at least those industries that I have either worked in or found on the web).

Thursday, March 27, 2008

A Loyalty Check List

I have written a number of blogs about metrics but most of them have been focused on the customer. I have also developed a rather comprehensive checklist that provides an in-depth assessment of a company's commitment to loyalty. I have included a simplified and reduced version of this assessment below. Please note that this checklist has a copyright; however, it can be used by anyone as long as the source is noted.

To Assess Internal Loyalty Components in a Company

[Directions: respond to each statement using a rating of 0 = not at all; 1 = minimally; 2 = moderately;
3 = significantly]


A. Identify homogeneous customer segments to determine the kind of customers to whom you can deliver superior value. ___

B. Understand your target customers and determine specifically how you will retain them. ___

C. Identify specifically which, where and how often customer expectations have
been met, exceeded, or not met. Remember, whatever the customer says is a
problem, is a problem! ___

D. Determine accurately your company’s ability and willingness to handle customer questions, inquiries and complaints effectively. Identify specific procedures for
each customer question. ___

E. Determine accurately the extent to which your recovery process reduces defections and/or retains customers whom might otherwise switch to the competition. ___

F. Identify the percentage of your customer base at risk. ___

G. Maintain programs to ensure customer retention throughout the product or
service lifecycle. ___

H. Establish specific vehicles and opportunities for multiple levels of interactive communication with your customers. ___

I. Articulate specific examples of how your company earns the personal trust,
respect and loyalty of each type of customer. ___

J. Assess the meaningful reciprocal loyalty between your company and your
customers. Identify specific ways in which each feels and demonstrates some
obligation to the other. ___


A. Identify specific new products and/or services based on your customers’ changing needs, desires and expectations. ___

B. Identify the process by which you anticipate evolving customer needs and
wishes through intelligence-gathering and analysis. ___

C. From your customer’s perspective, scrutinize your products and services to determine the gap between their expectations and experiences. ___

D. Specifically how do you keep customers actively involved throughout your
product or service lifecycle? ___


A. Understand and can state clearly the share purpose between the company and
each employee. ___

B. Employees have integrated the company values and priorities into their work life. How do you know? ___

C. Ensure that management decisions and behaviors are congruent with the stated vision and goals of the company. ___

D. Design operating structures and incentives to empower front-line staff to take the initiative to serve and delight your customers. ___

E. Implement an effective retention strategy aligning employees’ enlightened self-interest with the company’s interests. ___

F. Ensure that every employee understands thoroughly their personal contribution, their role and responsibilities in the overall activities of the company. ___

G. Articulate specific examples of how the company earns the trust, respect
confidence of its employees. ___


A. Track and understand the market and revenue impact of poor quality, customer problems and priorities. Determine the percentage of your customer base at risk then set priorities accordingly. ___

B. Determine the gap between what the customer expected and what the customer actually received. ___

C. Evaluate each critical incident with your customer and determine accurately the nature and extent of the problems where they occur. ___

D. Measure each priority area accurately and continuously. Review the results regularly with top management. ___

E. Identify core causes of defections rather than triggers. ___

E. Determine your company’s ability to handle customer complaints and inquiries effectively (recovery process). ___

F. What is the net present value of your customer base? ___

G. How much is a new customer worth? ___

H. How much is it worth to keep an existing customer? ___

I. Determine the actual payoff for problem prevention and resolution. ___

• Review your scores by section to determine categories of strength and/or weakness. If your average ratings overall fall within the two-to-three range, CONGRATULATIONS!
• If you have 6 or more of the 9 measurements scored at 2 or higher, CONGRATULATIONS!
• Otherwise, you may want to get more directly involved with specific problem areas.

Wednesday, March 26, 2008

Metrics Are Important

I recently read an article by Neil Davey, the editor of and appreciated some of the points he made. In fact, some were so timely, I decided to incorporate them in this blog. First, the statistics which really have impact on our vision of what customer loyalty is all about. These statistics strongly suggest the need for a serious review of the metrics we are using.

1. Deloitte's 2007 study "in the Dark" seems to indicate that business leaders have an excellent idea of what traditional financial figures mean but are not clear what the customer information means. The statistics from the study show that 87% of companies are happy that their financial measurement is goodbut only 29% can say the same about non-financial indicators.

2. VisionEdge Marketing, a market research company, found in their 2007 study that 78% of companies in their study track leads to conversion but only about 25% track and measure the rate of customer acquisition and fewer than 10% measure customer lifetime value or customer advocacy.

The point of the article, and it is a very valid point, is that when we measure customer loyalty and customer satisfaction we are immediately ignoring the potential customer and the lost customer. Mr. Tom Mooney, consulting and propositions director at Experian Integrated marketing is quoted as saying "The nearest many organizations get is the use of customer satisfaction surveys and average call answering statistics - neither of which adequately measure customer experience."

The bottom line is well stated in the article; namely, companies need to focus on those metrics that aid in decision making and which will contribute to the bottom line of the financial statement. A secondary point made in the article is that the search for a single customer metric that holds the key to success for every company is a futile one. The author suggests that the metrics must include behavioral and experiential metrics along with the traditional metrics. He also suggests we expand our vision of "customer."

I believe that Neil Davey has made a good case for taking a closer look at the metrics companies are using. His point that not all metrics have value and one should be willing to eliminate those that have minimal or no impact on the performance of the company.

Tuesday, March 25, 2008

Loyalty Creation From the Inside

When we think of customer loyalty many often see it as one or more measures that have been taken from customer responses. But the question comes to my mind that loyalty starts inside the company. I have written previous blogs that showed how customer loyalty is strongly related to employee loyalty. Now I would like to suggest a further step into the creation of loyalty. From this perspective customer loyalty is seen as loyalty to a brand (another way of defining a company).

If we look at the "brand" as consisting of two dimensions; namely, the management component and the employee component I believe there is a simple analysis that will provide clues to the ability of the company to create loyal customers. Here is how it works.

First, score the management component on a scale from low commitment to the company to high commitment to the company (this will be the subject of a future blog). The score can be on any scale so long as there is sufficient granularity to differentiate a highly committed management from one where the manangement team has objectives other than increasing involvement in customers. One indicator of management involvement with the customers is the rigidity of management to accommodate variations from the policy handbook to meet an unusual customer need.

Second, score the employee component on the same commitment scale from low to high commitment to the company. An indicator of the employee commitment is the willingness of the employee to stay a little longer to resolve customer problems rather than "punching the clock" and leaving before the customer issue is resolved.

Finally, compare the level of management commitment to the level of employee commitment and notice the following:
1. If both the management and employee commitment are low, then the likelihood developing customer loyalty is very low.
2. If the management commitment is high but the employee commitment is low, employee turnover will increase and the likelihood of developing customer loyalty is still low (but not as low as #1 above).
3. If the management commitment is low but the employee commitment is high, the likelihood of creating customer loyalty is reasonable and definitely higher than either #1 or #2 above because a committed employee has the most direct impact on customer loyalty.
4. If both the management and employee commitment are high the likelihood of developing customer loyalty is very high.

The bottom line is that internal commitment to the customer has two components; namely management commitment and employee commitment. If either or both are either missing or low, the likelihood of developing a strong customer loyalty program is low. When both groups are highly committed, customer loyalty will thrive.

Monday, March 24, 2008

Loyalty Without Coupons

The more I read about loyalty programs that use coupons, the more I am convinced that coupons are no longer a differentiator that will create loyalty. I now see coupons as a commodity; that is, something one must do to maintain a place in the market. Since most, if not all companies that use coupons, are competing in similar markets, the value of the coupon becomes the attraction. As soon as a coupon with better value is offered, the appeal of one company over another is lost.

Perhaps the most important point is that a coupon has an intrinsic value that is NOT based on the company, service or relationship of the company offering the coupon. The coupon is only based on the product. As long as its price is the lowest (with the coupon, it will attract customers. A dismal store with untrained personnel and no interest in anything other than moving products can offer coupons (and most of them do). The life of a company that depends on future sales from coupons, and only coupons, will only survive as long as their coupon values are the best. And example in the LA area was a discount chain called Adray's. This company was the quintessential of what I have just described. The store was not visually appealing, the clerks were not there to build relationships, only to sell product. Adrays is no longer in business.

I continue to see coupons offered for grocery stores. The purpose for some of the coupons is to entie people into the store when a holiday is nearing. For exaample, the beer and soft drink industries offer coupons just before Memorial Day, July 4th, and Labor Day. No surprise. The local store will encourage the use of coupons so that the customers who come in for the "super deals" on drinks will also buy the rest of their holiday shopping articles there.

My purpose for writing this blog is to note that one grocery chain has found a way to create loyalty that is, in my mind, very novel. The chain is Hy-Vee, a chain in the midwest with more than 200 stores that has been working with Dr. David Katz, an internal medicine specialist at Yale University. Dr. Katz has developed a computer model that scores food products on a nutrition scale of 1 to 100. The scale takes into account 30 nutritional properties such as fiber, vitamins, cholesterol, fat, etc. The computer computes a score that will soon be placed on the shelves so that people who are diet and health conscious can better manage their diet.

The system which is now being implemented is called Overall Nutritional Quality Index (ONQI). Hy-Vee is expecting to roll out the ONQI system in September and have the ratings in place for 40,000 products this year.

Bottom line: You don't have to use coupons to create customer loyalty, you just have to listen to the customers and find a way to fill their needs.

Saturday, March 22, 2008

Some Further Thoughts on NPS

I have some further thoughts about the NPS measure and its use. I think my main problem is that I don't understand how it is used and what makes it a superior metric for customer loyalty. Let me focus on one area that gives me some "heart burn."

I hope I am correct when I define NPS as the percent of scores that lie between those who score 9 or 10 and those who score 1 through 6 on a survey that asks the "ultimate question" - using a 10 point scale. An NPS score of 10% for company A could be obtained if there were 80% of the responses to the "ultimate question" at either 9 or 10 and 10% of the responses having a score of 1 though 6. The 80% number represents the advocates and the 10% who score on the low end, the detractors. (If these names - advocates and detractors - are not quite right- forgive me - it is Saturday morning).

But consider the case (company B) that shows the percent of advocates is 85% and the percent of detractors is 5%. This also gives an NPS score of 10%. According to the NPS score both companies have equal loyalty. This can't be true. I must be missing something.

What if I find company C who has only 60% advocates and 30% detractors. This company according to my understanding of NPS would have the same loyalty score as companies A and B.


It appears to me that the location of the difference (the NPS score) is critical to the valuation of customer loyalty.

I read a note by Dr. Paul Marsden, director of and he states "the value of the Net Promoter is that its simplicity drives adoption across the business to develop a customer-centric culture." I believe it is just as simple to look at the percentage of customers who score 9 or 10 on any overall measure versus those who score low on the same measure. I have found that most overall measures correlate very highly with one another so that selection of one over another as being "better" may be nothing more than wishful thinking (or good marketing).

On the very positive side of NPS, it has provided a simplistic measure that can be easily displayed and described to all levels of management. From the position of viewing customer loyalty as a single, simple measure, a company that selects NPS may be more inclined to develop company-wide customer-centric behavior throughout its corporation. That is VERY positive.

The bottom line: A customer loyalty measure that can be used to encourage a company to be more customer focused should discover the customer focus invariably improves the company's performance. This has been proven in many studies.

The caveat we must always remember is that the NPS measure is statistical and therefore is subject to all the errors in data collection and analysis associated with the measurement. One final caveat is that statistical measures are just that; namely, statistical measures. This means that just because there is a statistical relationship, there may not necessarily be a cause-and-effect relationship.

And finally, the use of a single measure of customer loyalty is only the open door to developing a detailed understanding of the impact of the three components of loyalty: namely, product, process and relationship. The "devil is in the details."

Monday, March 17, 2008

Good Customers versus Nice Customers - Which One is Loyal?

This is just a short blog to document the obvious. When I am reminded of some of the naivete in our market place, I feel an obligation to repeat what many of us know but the newbees or the unthinking have not discovered. In this instance my concern is the apparent lack of understanding between what is a "good customer" and what is a "nice customer."

A "good customer" is the kind of customer every business wants. This is the customer that pays attention to the quality and performance of the product, the service of the product and the way problems are handled. That customer will also pay attention to the way the company conducts its business. What makes this customer a "good customer" is that this customer is willing to tell the company when the company does something that bothers, offends or in some way is affecting the relationship in a negative manner. This customer has the possibility of being both a very loyal customer but is, in any case, the ABSOLUTE BEST consultant the company could ever get - and it costs nothing. I often tell my clients that their customers are the best consultants they can get. All a company has to do is provide an atmosphere of openness and be able to listen accurately and respectfully to the customer at all times and under ALL CONDITIONS.

A "nice customer" on the other hand is one who will never cause the company a problem. This customer never complains to the company. This customer does not need a customer complaint department because this customer will never file a complaint. This customer just says thank you and then DISAPPEARS and never comes back whan any kind of a probelm or concern occurs. You will never know that a problem or concern occurred with the customer. You never know why they left! BUT, these same customers will be more than willing to give negative comments to friends and business associates without telling the company. These "nice customers" can absolutely destroy a business.

The bottom line is that every company should do its best to create "good customers" and eliminate the possibility of a customer becoming a "nice customer." That means companies should create an atmosphere of openness that encourages customers to tell them their problems. This sounds like a simple customer survey challenge - BUT IT IS NOT. The details of how to do this is a topic for a future blog.

Saturday, March 15, 2008

Those Dastardly Statistics

There is a recent article titled "Customer Feedback: Are You Putting It to Good Use?" that makes some simple claims and then reminds me of the deadly misuse and abuse of statistics. Here are the statistics from the article:

1. A recent Gartner report revealed that 95% of firms surveyed collected customer information, but only 35% of these used the insight gathered from this information in any way.
2. A second study conducted by CDC Respond in 2005 and 2006 surveyed 130 of the top banks and insurance companies and found 95% reported they were collecting information, but only 41% of the firms actually use the information to alert staff to problems and drive change.

The article appears to draw the following conclusion:

"The main reason feedback tends not to be put to productive use is that companies generally don't have a clear and high-level vision for why they're collecting feedback, and no formal business process to ensure that the feedback collected is actionable."

While I basically agree with the conclusion, I think it is a little too simplistic. Let me add the other items that I think would also contribute to the lack of use. They are:

3. Most customer information data gathering occurs without the use of a survey plan. The purpose of the plan is to determine the objective and demonstrate that the information collected will meet some pre-defined goal that has been agreed to by top management. Thus without the survey plan, once the information is collected, no one know how to use the data or for what reason the data was created.
4. There is a DRAMATIC lack of knowledge of statistics and one of the obvious results of their misuse is the discovery that they do not produce the intended results.

Let me give an example of each of the two items I have suggested.

Several years ago I was given a consulting assignment for a company that had just spent about one quarter million dollars collecting customer information for one year. Before they were to renew their contract to spend another quarter million dollars, they asked me to look at the information collected. They were told that their customer satisfaction level was increasing and they should be happy with the work they were doing. When I looked into the data, I found that, indeed, their smaller customers were exceedingly happy and their satisfaction level was soaring. At the same time I found their larger customers were ready to leave them as soon as possible. The problem that came up was that the additional information needed to determine why the larger customers were ready to leave was not collected. There was no survey plan to guide them in defining what was to be collected. Hence, although they had the general idea that the smaller customers were happy, and the larger customers were furious, they had no place to go from there. Of course, the survey company was more than willing to go and collect that additional data for a significant incremental charge (a charge that would have been ZERO if it had been collected with the original data).

The misuse and abuse of statistics is a subject that I could write a book based solely on my experiences as a consultant. Oh boy, the troubles I've seen!!! The worst part is that some of the most egregious errors I have seen have been in textbooks shoiwng how to analyze customer satisfaction information. Let me give a few examples of what I have seen (some of which are pervasive in the industry).

Example #1 - everybody uses the arithmetic mean to compute average satisfaction scores. Unfortunately, satisfaction scores come from an ordinal scale. An ordinal scale does not provide sufficient information to calculate the mean. There are two serious violations of math and simple logic. The first is that the satisfaction scale is assumed to be linear (equal energy required to move from one score to the next) e.g. does it take the same energy to move a customer score from a 3 to a 4 as it does to move the same customer from a score of 4 to a 5? The answer is maybe, but probably not - hence the linearilty assumption is violated. The second problem is that an ordinal scale only assigns order and from that we assign numbers. The problem occurs when a 5 point scale (or any numeric scale) is used, the numbers lose their meaning. For example, one could ask is a score of 4 equal to twice the score of 2 (do 2 dissatisfied customers equal one satisfied customer?). The answer is emphatically NO.
Example #2 - Everybody wants to compare the score from one time period to another or between two products or two geographical areas. Someone with almost no knowledge of statistics will offer the idea that a statistical test could test the hypothesis that the scores between the two groups to detect a difference. They suggest the student-t test since it can be used when the population standard deviation is not known. GREAT, however, the student-t test requires two VERY important assumptions to be met; namely, the data must be normally distributed and, perhaps even more importantly, the data must NOT be ordinal. (There is that word again.) Of course, almost all customer data is highly skewed and not normal and, of course it is all ordinal data.

The bottom line is that companies do perform better when they have good information. I suggest you read the article in The Business Renaissance Quarterly (Summer 2007) by my colleague Dr. Darrol Stanly and me which demonstrates statistically that companies with higher levels of customer satisfaction have better financial performance than those with lower levels of customer satisfaction. The key is that companies must plan properly to get the correct information and then, they MUST analyze it correctly. Using the wrong statistics to make decisions is somewhat akin to trying to drive a car with the steering wheel disconnected.

Here are the downside risks to data problems and analysis errors:
1. The companies using the data will give up on the data because it is not helping them and continue to fly "blind"; that is, they will not see customer trends as they occur.
2. The companies may make some strategic errors based on the improper analysis and may, as noted in the previous risk, either miss a business trend, a product problem, or even personnel problems.
3. The survey company may lose business.
4. The survey company may be partially liable for either providing bad data or incorrect analysis and interpretation of the information.

Friday, March 14, 2008

Coupon Loyalty

At my house we get a lot of coupons. I thought it might be worthwhile to do a little digging to find out a little more about customer loyalty as it relates to consumer coupons. First, some statistics:

1. 300 billion coupons are distributed in the United States each year, which equates to offers that have a total saving of $3 billion.
2. In the United States 1.26 percent of coupons are redeemed. This is only about one-third of the redemption rate in Canada where they redeem 4.46 percent.
3. The average household receives about 55 coupons a week which translates into 2800 per year. Of course, the number of coupons arriving will depend on the season and time of year.
4. 82 percent of coupons come in newspaper inserts - in Canada only 57 percent arrive in newspaper inserts.
5. The average face value of a coupon is 84 cents.
6. The average time before the expiration date is 3.2 months.
7. Coupon useage in the United states dropped 13 percent from 2005 to 2006 (according to CMS a company that tracks coupons trends).
8. When looking at the rate at which coupons are redeemed they found:
18 percent are used in the first three months
41 percent are redeemed between four and six months
34 percent are redeemed after six months.

It appears that companies that use coupons often use them to drive short-term sales rather than build customer loyalty. The companies may have other objectives; e.g. getting rid of excess inventory or increasing their cash position.

One of the drawbacks of coupons is that they take time to clip. People to day seem to have less time to go through the paper and clip coupons. It may be as simple as time and money; that is, how much time will it take me to clip these coupons and then how much will I save. It may not be worth it to spend the time for the amount of money I will save. Some stores are using technology to beat the need for coupon clipping. For example, Target is using a customer card which when scanned will show the available discounts at the time the customer is in the store so that they do not have to clip the coupons before they come to the store. The coupons are available at the cashier once the customer card is scanned.

One area of interest is how much of a discount to offer on a coupon. There are some studies by ICOM Information and Communications, a company that tracks coupon behavior, which indicate that as the value of a coupon rises, so will the number of people who will redeem it - up to a point. Apparently there is a point at which the impact of the discount plateaus and further discounting does not increase the number of customers who will redeem the coupon. The company usually tries to figure out where the "sweet spot" is; that is, where the expiration date and value offered get the most return on investment.

The bottom line is that store coupons are not about building customer loyalty, they are a mechanism designed to bring customers in the store once. The customer loyalty is only as good as the value of the coupon and the convenience of the store location. There is no relationship building in this process. This is all about getting a good deal - if it is worth it.

Wednesday, March 5, 2008

Customer Loyalty Revisited

As you may know from reading these blogs where I discuss customer satisfaction and loyalty, I believe your customers may describe themselves as satisfied and happy and still defect to your competition! Let’s explore further the notion of customer loyalty. What is it and how do you know you have earned it? What makes customers loyal repeat buyers?

Customer loyalty derives from earning, maintaining and enhancing an interactive, personal business relationship between a company and a customer. Such collaboration involves investments of time, energy and money by both parties and results in genuine mutual benefit. The company meets and exceeds customer expectations and anticipates customer wishes and desires with innovative and appropriate products and services by virtue of a comprehensive understanding of customer requirements, values, attitudes and preferences. Customers respond by communicating their personal requests, likes and dislikes, inviting the company to serve them in a variety of ways and allowing the company the opportunity to resolve problems as they arise.
How do you know if customers are loyal?

Accurate, quantifiable data is a key component of good research and objec tive assessment. Customer surveys are one accepted method of obtaining such data. For the purpose of this discussion, I refer only to your existing customers and assume all current customers would receive a follow-up satisfaction survey within a year from the time of purchase.

Potential customers, those who have never purchased from your com pany, would not be surveyed. Previous customers, those who have not purchased within the past year, may be re activated in the future. Mean while, these customers may represent a target market segment for your company.

One of the standard questions contained in a good customer satisfaction survey is, “Would you buy again? While this question serves as an indicator of future buying potential, it may not actually yield meaningful data relative to customer loyalty for several reasons. First, the questionnaire respondent must be qualified as the decision-maker. The respondent may not have been the previous buyer and may have totally different perspectives, needs and expectations relative to your company and your services. The respondent may not be the next buyer.

Secondly, timing can be a critical issue affecting the efficacy of survey results. What is the relationship of the timing of the questionnaire relative to the customer’s decision-making and buying cycles, both past and future? If a purchase decision has been recent, the immediate experience (positive or negative) remains fresh in the customer’s mind and their opinion will be quite definite. Considerable time may have been elapsed, or will have elapsed, either between the last pur chase or the next purchase, and receipt of the questionnaire.

Thus, a multitude of changes could influence the respondent’s answer during the interim period such as product and/or service requirements, budget considerations, personnel changes, market competition and vendor relationships. Such a variety of external stimuli could mitigate the accuracy of response to the “would-you-buy-again” question. The important point to remember is the question should serve as an indicator, not a predictor.

A third reality is people don’t like to deliver bad news, even if they are anonymous. Some respondents may fear negative consequences from their candid critical comments. Customers frequently bias answers positively rather than provide honest constructive critique. Further, many respondents don’t perceive that answering a questionnaire benefits them and they resent the time it takes to complete such forms. Some companies even have policies precluding responding to survey questionnaires because of the large number they receive and the lack of reciprocal value. Thus, even if customers do respond, their answers may lack candor or thoughtful consideration. Questionnaire design, simplicity, administration and logistics contribute significantly to collecting viable data.

What is loyalty anyway?

I have discussed the fact customer loyalty embodies mutually beneficial and interactive engagement over time. Inherent in the concept of loyalty is allegiance, faithfulness and obligation. One of the ways we experience and understand such a relationship within a business context is through repeat business (by customer), consistent useful communication (by company and customer) and regular responses to information and/or requests (by customer and company). So, a loyal customer relationship involves a reciprocal allegiance between customer and company where each party feels some obligation to the other. A loyal relationship, an intangible commodity that is both critical and integral to the success of many businesses, to some extent eludes measurement and precise description. We can demonstrate a strong statistical relationship between customer satisfaction and the survey question, “Would you buy again?”

While we certainly have evidence of some casual relationship, positive customer satisfaction statistics do not guarantee loyal customer relationships. For example, some automobile manufacturers concluded that the results of thier customer satisfaction surveys were accurate and proudly touted that 90 percent of their new car buyers were happy, satisfied customers and would purchase again. However, these same manufacturers were surprised and chagrined when only 38 percent of those customers actually did purchase again. Contrary to their expectations, more than one manufacturer lamented the significant level of market share erosion even though the majority of their customers reported being satisfied. The auto industry, and many other industries, have been deluded by a sense of false security they received from their customer satisfaction survey results. Despite kind words or good intentions, most customers do not remain loyal buyers. We now realize customer satisfaction is a necessary but insufficient ingredient of a loyal relationship.

What is a necessary but insufficient variable, and how does it impact the purchase decision?

For example, 24-hour service may be necessary but insufficient to motivate a customer to buy a computer from a specific company or business. The customer may not even consider dealing with your company (or business) without this service being available. However, because 24-hour service is offered, it does not guarantee the customer will buy.

We can see how this example relates to the dilemma of customer satisfaction versus customer loyalty. If a customer requires 24-hour service and you provide it without problems, then, lacking substantial motivation to change, the customer would probably describe himself as ‘satisfied’ and may indicate a willingness to buy again. However, unless a meaningful interactive allegiance has been developed between your customer and your company, a tantalizing offer may lure that customer away to your competition.

Based on the nature of the relationship, your customer may or may not offer you the option to serve him. Based on your company’s resources and responsiveness, you may or may not respond quickly and competently enough to save the business. Needless to say, your company does not want to operate from a tenuous and defensive position of constantly reacting to market competition.

Successful companies employ strategies promoting pro-active development of loyal customer relationships and by first anticipating and then exceeding customer expectations. Today’s customers are extremely sophisticated and discriminating due to the abundance of information, options and fierce competition among providers, especially in high-tech industries. Quality products, good customer service, fast delivery, training and competitive prices are expected and taken-for-granted by customers because all competitive companies must offer them.

How can a company differentiate itself and develop loyal customer relationships?

In today’s competitive marketplace, given that customer expectations are consistently met, a major discriminating component for customers is the perception of a special relationship. An important way a company can develop a faithful customer relationship is to ask questions, not only about objective facts but also about the reasons and motivations behind their comments, opinions, expectations and concerns. Then, listen and understand their answers.

A company adopting an attitude of genuine learning and is not inhibited or biased by defensive rationalizing, mixed messages, blaming and censorship, can promote an agenda of organizational learning, creative thinking and commitment to knowing the objective truth about who their customers really are, what their needs are both now and in the future.

Customer expectations, preferences, tolerance, perceptions, satisfaction, intentions and experience can be measured. Company performance can be determined through definitive probing questions and rankings including qualitative and quantitative measures. For example, define and measure service quality from the customer’s perspective, then determine the variance or gap between expectation and delivery. Service expectations can be evaluated in terms of desired and adequate levels of service as well, as implicit and explicit customer expectations. To determine a zone of tolerance, separate the desired service level from the adequate level.

The Bottom Line: Customer loyalty is a complicated relationship and should not be given cursory attention by top management. Top management needs to understand that customer loyalty cannot be described with a few simple metrics. One way to think about this is to think of the customers of the company as an asset, then the challenge is to measure and understand whether or not the value of that asset is increasing or decreasing.

Tuesday, March 4, 2008

A View of NPS from South Africa

I just read an exerpt from an article by Craig Kolb, a merketing research specialist who has authored papers and articles on customer satisfaction, loyalty and brand equity in Wouth Africa. Apparently Craig is not sold on NPS because his article is not very positive and carries some impressive statistics to go with his conclusions.

Here are some of the points that Craig makes:
1. He conducted a study of a number of different markets from short term insurance to cars and found that differences in the tendency to recommend don't automatically mean there will be differences in loyalty behavior. He found that the Net Promoter Score does not relate to the percentage of customer switching away from each institution. According to the article he quotes a study of 8000 customers in banking, retail and ISP industries, conducted by Keiningham, et. al. (2007) that lends support to his conclusions.
2. Another problem that Craig uncovered was there were hidden differences among cunsumers who were identified as "promoters." He found that far from being uniformly loyal, some were far more prone to being tempted by competitor offers than others.
3. One more point he makes is that a study of 80 companies over a seven year period, the researchers, Morgan & Rego (2006), found that the Net Promoter Score was not predictive of company growth rates.

The conclusion of the article is that there is another side of the story of NPS and that is that the "Ultimate Question" is far from being the most predictive measure of loyalty, and so will more often mislead than help.

The Bottom Line: NPS needs to do some more publishing of data and cases which proves their metric does what they say it does.

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