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.

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