Friday, October 31, 2008

Three Metrics for Retail Loyalty

Aberdeen Research conducted a survey of 231 retail enterprises between May and June 2008 to determine the state of loyalty technology in retail. The survey results indicated that 58% of best-in-class companies in retail found that lifetime customer value had great impact on loyalty. They defined lifetime customer value as the present value of future cash flows through long-term customer relationships. They also found that 93% of retailers execute loyalty programs as a standard offering for their web store or catalog customers.

A significant point made in the report is that lifetime customer value in retail is being overshadowed by loyalty programs which are more tactical in nature than the more strategic lifetime customer value strategy. The survey found the following three factors were the most significant for justifying spending on loyalty:
1. Repeat visits were used by 61% of the retailers,
2. Incremental sales were used by 58% of the retailers, and
3. Overall satisfaction were used by 57% of the retailers.

The retail business is somewhat unique in that it is dominated by the need to be current. Since many retailers generate much of their revenue in only a few seasons, missing one (or even worse more than one) can quickly put a retailer out of business.
For this reason alone, the three criteria noted above seem particularly relevant for the fast pace of retail.

The bottom line is that these three factors really represent complementary measures of loyalty. Some people would add share-of-pocket as another possible measure. If there is a recession (and it seems very likely, if it hasn't already begun), the retailers who manage their business with an eye toward building and maintaining customer loyalty will be better positioned to survive than those who ignore the value of a loyal customer.

Thursday, October 30, 2008

Metric Confusion

The Gartner Group recently held its CRM Summit in Washington, D.C. where the opening theme was managing the customer experience. Ed Thompson, Vice President made the point that focus on CRM has shifted to better managing the customer experience. He provided two interesting statistics; namely,
1. 80% of executives think customer satisfaction is more important than it was three years ago.
2. 95% of business leaders see customer satisfaction as the next competitive battleground.
3. Most companies have an average of seven metrics.
4. Most companies have their own derivative of the net promoter score.

He pointed out that everything else a company does is easy to copy - such as price, product and delivery.

The big question at the Summit "How do you measure it?"

Ed Thompson pointed out that there is no one measurement of the customer experience. Customer loyalty provides an incomplete picture. There are two types of loyalty; namely rational and emotional loyalty. While rational loyalty seems to be the more common measure of loyalty, emotional loyalty is the kind of loyalty that really needs to be measured. Emotional loyalty, according to Thompson, convinces customers to "get tattoos of your brand". "The problem is that emotions change quickly and demand different sorts of questions in surveys which need to be conducted very frequently".

Again Thompson made the point that NPS, while a popular metric, is good for causal analytics but not for B2B companies. He noted that NPS captures some emotional loyalty and some benchmark information "but most important it is simple and appeals to the board of your company."

I think the key point that I got out of Ed Thompson's remarks is that organizations have many measurements of the customer experience of which customer satisfaction and customer loyalty are just two. The metrics include:
1. The brand is measured by marketing communications and includes product and service design.
2. Quality is measured by process improvement and process engineering.
3. Customer satisfaction is measured in sales, service or market research.
4. Customer loyalty is measured by customer churn, retention, referrals or loyalty management.

Most people would agree that companies have a lot of information about their customers but do not take the time and effort to integrate that information into a composite picture. The customer measurements noted above demonstrate this point particularly well.

This ties in well with an article in the Harvard Business Review issue of February, 2007 by Meyer and Schwager titled "Understanding Customer Experience" that makes the argument that measuring customer experience is the preferable measure to any CRM measurement. I will review this article in a later blog.

The bottom line is that too many companies do not take the time or utilize their internal resources to integrate the multiple dimensions of the customer experiences that have been documented and lie within their internal data bases.

Saturday, October 25, 2008

Promoter versus Apostle

NPS continues to gather momentum. The categorization of the Promoters and Detractors as a way of viewing customers has a strong appeal. There is a competing categorization of customers that has more appeal to me. The term Apostle is a much stronger word to describe a loyal customer than Promoter. The term Apostle came out of the article "Value Profit Chain: Treat Employees like Customers and Customers like Employees" by Sasser and Jones.

The purpose of this blog is to look at these two competing scales for customers. One of the problems I see occurring is that companies will try to compare statistics when the scales for each statistic are not identical. While there are other scales being used, these two seem to dominate the literature today.

The NPS categorization has little granularity and puts customers into three very large buckets. It would appear that all detractors fall into the Detractor bucket and all Promoters fall into the Promoter bucket. There may be further refinement for these terms, however, I am not aware of any at this time.

On the other hand, the Apostle model has five categories. I believe the following definitions are reasonable representations:
1. Antagonist - those customers with low satisfaction scores who spread negative word of mouth about the product and/or service. These are referred to in other models as defectors or terrorists.
2. Mercenary - those customers with high levels of customer satisfaction but low loyalty. These customers want high satisfaction but give very lttle loyalty.
3. Loyalist - those customers with relatively high levels of satisfaction and moderate loyalty. They will generally remain but can be persuaded to leave.
4. Viral Loyalist - those customers who are more satisfied and loyal than Loyalists. They also spread positive word of mouth.
5. Apostles - those customers who are more satisfied and more loyal than Viral Loyalists and are more vocal. These custoemrs will argue for the company's products and services.

While these categories provide much more granularity, they also require a more precise definition for each (better than my approximation). The key in this model is that customers are shown to follow an ever increasing curve that relates customer satisfaction to loyalty Thus as satisfaction increases loyalty tends to increase. This relationship further implies that loyalty and satisfaction correlate high with the likelihood of recommendation. More and more data seems to be providing validation for this assumption of the relationship between likelihood of recommendation and satisfaction and/or loyalty.

My preference is the five category scale used in the Sasser article. I have a difficult time believing that someone who rates a product or service a nine on an 11 point scale has the same status as one who rates the same product or service a 10. Both of these scores would be categorized as a Promoter but, in my opinion, they are not the same kind of promoter. That granular difference between the two scales can translate into a large impact on revenue and profit.

The bottom line is that the categories defined by survey scales provide the lens by which we can accurately see the customers for who they really are. The more granular the scale the greater the accuracy of our vision.

Wednesday, October 22, 2008

Three Kinds of Loyalty

Christie Nordhielm, a clinical associate professor of marketing at the Ross School of Business, University of Michigan has offered another way of defining loyal customers (from her perspective she means brand loyalty). Her point is that companies are taking the approach that they cannot be all things to all people. Further she suggests, they should target their marketing efforts toward the three types of brand loyalty.

She suggests the following types of brand loyalty; namely head loyalty, heart loyalty and hands loyalty. The definition of each of these is given below:

1. Head loyalty - the consumer is just interested in the features of the product. The company would likely implement lots of product improvements and then introduce and promote them heavily.
2. Heart loyalty - the consumer has a really strong emotional brand loyalty. The company would show the heart loyal consumers that they are being heard and understood.
3. Hand loyalty - the consumer seeks familiarity. The company works to maintain the habit, so product changes should be more subtle and gradual. The emphasis should be on maintaining distribution and product quality.

The challenge with this approach is that the skills and resources the firm needs to maintain these different types of loyalty are very different.

Dr. Nordhielm offers an example of each and they seem to make sense.

An example of head loyalty is Toyota. The Toyota consumers regularly list off rational reasons why they buy the car.

An example of heart loyalty is Apple. The Apple consumers are often very emotionally invested in the Apple products.

An example of hand loyalty is Morton salt. The consumers buy salt out of habit, despite the premium price, and they are unwilling to go to the trouble of looking for alternatives.

The bottom line is this is definitely a new way of looking at loyalty. The problem might be that consumers may start with one kind of loyalty and shift to another and it may be very difficult to detect the shift. If the marketing programs are aimed at one type of loyalty and the consumers in that category shift, the results of the shift may not be detected until there is some severe loss to the company both in terms of loyalty and financially.

Tuesday, October 21, 2008

Is India Different?

J.D. Power just released its 2008 India Customer Service Index (CSI) Study for automobiles. They received responses from 5,594 owners of nearly 41 different vehicle models. The study measured satisfaction among vehicle owners who visited their authorized dealership service center for maintenance or repair work during the first 12 to 18 months of ownership.

Some of the more interesting findings are:
1. 77 percent of owners said they definitely would recommend their vehicle make, compared with 82 percent in 2007.
2. 64 percent of owners in 2008 said they would definitely repurchase their vehicle make, compared to 63 percent in 2007.
3. 94 percent of highly satisfied customers definitely would recommend their vehicle make, compared to 55 percent of customers with the lowest levels of satisfaction.
4. 84 percent of highly satisfied customers said they definitely would repurchase their vehicle make, compared to 43 percent of customers with the lowest satisfaction scores.
5. The cost of gasoline powered vehicles have risen by 7 percent since 2007, compared to diesel powered vehicles that had only a minimal increase since 2007.

Overall satisfaction is determined by J. D. Power on a 1000 point scale and includes measures of problems experienced , service quality, user-friendly service, service advisor, service initiation, service delivery and in-service experience. The highest score was achieved by Maruti Suzuki with a score of 820 points. The industry average increased by 3 points since 2007.

These scores look very similar to the US. Once again the impact of excellent service on loyalty and the willingness to recommend correlate highly.

The bottom line is that car manufacturers and dealers can easily see from these statistics that loyalty and repurchase relate to the overall satisfaction increases. The report seems to indicate that it only covered satisfaction from the service perspective. The concern that always comes to my mind is whether or not the survey should also measure salesman's influence as well as other business features such as ease of financing, location of the dealership and the general appearance of the dealership. These were not discussed in the limited version I saw of the report so I must add the caveat that I have not had access to the entire report. If they were not included this may have limited value since these other factors may be equally, if not more, important to loyalty; otherwise, if these other factors were included and had little or no impact, it might make an even stronger case for the value of service. I wonder what the NPS would tell them?

Monday, October 20, 2008

Loyalty Falling for Banks and Insurance Companies

A recent survey of 500 consumers across the US and UK by Thunderhead, a provider of enterprise solutions, indicates some very disturbing statistics.

For example:
1. 61 percent of consumers are actively considering "switching" insurance providers in the next twelve months.
2. 63 percent of consumers are actively considering "switching" banks in the next twelve months.
3. 26 percent of overall respondents said they felt their current bank or insurance company sent them"personalized" communications that were relevant to their needs.
4. 17 percent of consumers feel a sense of loyalty to their insurance provider
5. 16 percent of consumers feel a sense of loyalty to their bank
6. 50 percent of consumers said that receiving communications in real-time was very important to them
7. 76 percent said they would like the option to receive communications via email
8. 40 percent preferred the option of having relevant, timely information delivered to them via personalized web portals
9. 50 percent wanted to continue to receive communications from their bank or insurance company via snail mail.

There is definitely a sense of bias in this survey since it was performed by a company that sells enterprise solutions (another way of saying they will provide a company with ways to communicate with their customers. A survey of 500 consumers from the US and the UK may not be representative of the two countries. It is not clear whether or not communication is what is causing the low levels of loyalty. There may be little or no correlation between communication satisfaction and company loyalty. This can happen when a survey has multiple metrics. It can be that the factors are related but the key is to remember a statistical relationship does not necessarily imply cause and effect.

Nevertheless, there is a strong message here that says banks and insurance companies don't seem to have very high levels of loyalty. Loyalty of 16 percent for banks and 17 percent for insurance companies is worse than the automobile industry in the US.

The bottom line is that banks and insurance companies are spending a great deal of time and money to improve loyalty but according to this survey it doesn't appear to be working very well.

Loyalty is Falling for Banks and Insurance Co.

A recent survey of 500 consumers across the US and UK by Thunderhead, a provider of enterprise solutions, indicates some very disturbing statistics.

For example:
1. 61 percent of consumers are actively considering "switching" insurance providers in the next twelve months.
2. 63 percent of consumers are actively considering "switching" banks in the next twelve months.
3. 26 percent of overall respondents said they felt their current bank or insurance company sent them"personalized" communications that were relevant to their needs.
4. 17 percent of consumers feel a sense of loyalty to their insurance provider
5. 16 percent of consumers feel a sense of loyalty to their bank
6. 50 percent of consumers said that receiving communications in real-time was very important to them
7. 76 percent said they would like the option to receive communications via email
8. 40 percent preferred the option of having relevant, timely information delivered to them via personalized web portals
9. 50 percent wanted to continue to receive communications from their bank or insurance company via snail mail.

There is definitely a sense of bias in this survey since it was performed by a company that sells enterprise solutions (another way of saying they will provide a company with ways to communicate with their customers. A survey of 500 consumers from the US and the UK may not be representative of the two countries. It is not clear whether or not communication is what is causing the low levels of loyalty

Nevertheless, there is a strong message here that says banks and insurance companies don't seem to have very high levels of loyalty. Loyalty of 16 percent for banks and 17 percent for insurance companies is worse than the automobile industry in the US.

Friday, October 17, 2008

Customers Are Your Greatest Asset

I think we miss a very important point when we think of customers. We miss the fact that they are an asset. When we look at the balance sheet of companies, we see the buildings as an asset, the equipment as an asset, the inventory as an asset and cash as an asset. We don't usually see the customers noted as an asset. Companies will often note personnel skills as an intangible asset, the brand name as an intangible asset and sometimes the customer data base as an intangible asset.

I believe the IRS added Section 197 to the Revenue Reconciliation Act of 1993 which now provides that customer and subscription lists, goodwill and going-concern value are now regarded as intangible assets and may be amortized over a 15 year period.

When I look at the customer as an asset I see an asset that is very complex, that changes value over time, that changes value with the size of the company, that changes value with the level of customer service (support), and changes value with age of the products or services offered.

I had a client who had a bright orange 8 1/2 x 11 inch poster distributed to each of his managers that read "CUSTOMERS ARE WHAT MAKE PAYDAYS POSSIBLE." He asked that each manager hang the poster over his desk as a constant reminder.

The Oxford dictionary defines asset as: property available to meet debts; any possession; any useful quality. MY DEFINITION of the customer asset is: TREASURE. Meaning precious; something valued for its rarity as a beloved or highly valued person.

I can use the Oxford Dictionary definition to get:
Customers are a form of "property" that provide revenue "to meet debts"; and
Customers represent a "possession" without which there is no business.

The impact of managing the customer asset under ideal conditions would lead to customers who would never leave to go to a competitor. The reality is that the better customers are managed, the higher the retention rate and the greater the opportunity to grow your market share (with an implied improvement in total profit).

When the customer asset is well managed customers who are a positive asset are identified and the company can focus on retaining those customers. At the same time, those customers who are not a positive asset can be eliminated.

Operations Impact
When the customer asset is being managed the role of Operations is
1. focus on maintaining good communications and relationships with customers
2. focus on meeting current and future needs and desires of customers
3. focus on a strong compliant resolution system
4. focus on continuous improvement in quality of products and services

Measurement Impact
When the customer asset is being managed, the impact on the internal measurement system will be to:
1. measure retention
2. measure defection - where did they go and why
3. measure complaint resolution
4. Measure delivery performance (products and services)
5. Measure the variance/gap between performance and needs/desires of customers

The bottom line is that customers are very important assets. The customers should be continuously evaluated to determine the quality of the customer asset base. If the company does an audit of its assets (plant, equipment, inventory, etc.) on a regular basis, why not take an audit of the customer asset on a regular basis? The objective is to determine whether or not the customer asset value is increasing or decreasing in value. Most companies cannot answer this question quantitatively.

Thursday, October 16, 2008

Bad Metrics

There was an article in the March 3, 2008 issue of BusinessWeek that announced the 2008 winners of customer service. They list the top 25 companies that are, according to BusinessWeek, the Customer Service Champs. Sounds good. The top company is USAA with a score of 1030.66 points The last company on the list of the top 25 is True Value with a score of 857.21

My guess there are a lot of happy customer service executives that were happy to see their company on the top 25 list. In general, I think the companies listed do provide excellent customer service and may, in fact, be the customer service champs. When I look further into the way the companies were selected and then how the scoring was accomplished I cringe. This is a bad metric - it has too many flaws to be accurate.

The first problem is that there is no indication that the more than 1000 readers who responded to the survey represent a probability sample. Without a probability sample the results are questionable at best. Then J. D. Power created a web-based survey for the brands and surveyed at least 100 customers (for each brand?) to get a comparable score (whatever that means).

Then J. D. Power ranked all brands using scores from both their database and the supplemental surveys (ranking based on what?). Next the folks at BusinessWeek combined the "people" and the "process" scores from J. D. Power's data to create the service index with people weighted at 60% and process at 40%. There is no description of how the scores were combined (probably added). Further, the question is why choose a 60/40 split. No rationale is given for the ratio. Why not 50/50 or maybe 90/10?

That is not the end of this nightmare. Brands that were ranked first in their category received 100 bonus points (why not 82 or any other number - no rationale given). Those that ranked second received an additional 50 points (why not - this makes no more sense than the 100 points for first place). Hold on, those companies that fell below third place had 50 points subtracted (I can't believe a publisher would allow this to be published when company reputations are on the line).

Finally, those companies that did particularly well in the reader poll were awarded an extra 25 points if their vote-to-complaint ratios were in the top 10%. I guess 25points makes as much sense as the 50 and 100 points that are being thrown around.

The bottom line is that this is a bad metric because it is unlikely to be a good probability sample and then the scoring is absolutely arbitrary. Company reputations are being helped or hindered based on a metric that is not well founded.

Monday, October 13, 2008

NPS revisited

Here we go again. There is another article about NPS - also critical. The article was published in the October, 2008 issue of Quirk's Marketing Research Review under the title "Customer Loyalty 2.0" NPS (Net Promoter Score) is a simple methodology for indicating a degree of loyalty that, according to the developer of NPS, is a good predictor of company growth by asking one question; namely "how likely is it that you would recommnd this company to your friend or colleague."

This methodology has come under some very severe criticism by both the academic community and the consultants who specialize on the measurement of customer loyalty. Some of the researchers found that customer satisfaction is just as good at predicting growth. Other researchers have found that measures such as likelihood to repurchase are also comparable to NPS for predicting growth.

The author of the article makes the statement that there is no published empirical evidence supporting the superiority of NPS over the other conventional loyalty metrics. The basis for this statement is that recent scientific, peer-reviewed studies do not appear to support the claims of NPS. The author makes two very strong requests of the developers of NPS; namely,
1. Present their analysis to back up their claims.
2. Refute the current scientific research that brings their methodological rigor into question.

It seems that most researchers have found that customer satisfaction is consistently correlated with growth. I have found (and published) results that show that high levels of customer satisfaction yield better financial performance for companies than those with low levels of customer satisfaction.

The author and researcher then conducted a statistical test using 1,000 respondents in the United States (18 years and older). [I assume it was a valid statistical sample]. The test asked them the following four questions:
1. How satisfied are you with Company ABC
2. How likely are you to recommend Comapny ABC
3. How likely are you to continue to purchasing the same product and/or service from Company ABC
4. If you were selecting a company for the first time, how likely is it that you would choose Company ABC.

The result was that all four questions appeared to measure one underlying construct, customer loyalty. There was a correlation of .87 among the four questions. Needless to say the statistics appear to indicate the four questions could be considered interchangeable as a direct measure of loyalty and using the NPS logic each of the four could also be used as a good predictor of company growth.

I think the author of the article makes a great point when he points out that a single item measure is less reliable than a multiple item meaure. He uses the example of using a single question to determine the SAT score. If that were the case then why bother with the other questions. In fact, the author averages the scores of all four questionsshown above and suggests that the average of all four measures is a more precise measure of loyalty than any of the four questions used alone.

One point that the author makes is that the customers who score 7 or 8 may be potential disloyal customers and are currently overlooked by NPS. He cites a study of wireless service providers where he found that 31 percent of those who scored 7 or 8 were likely to switch to a different wireless service provider even though they were not identified as a detractor.

In conclusion, the author suggests that companies should use a variety of loyalty questions so that those customers who may be likely to switch can be identified. To quote the author "how well we are able to predict business performance masures depends on the match between the business metric and the loyalty questions."

The bottom line is that the people who are selling NPS, while it is being touted as the best measure, need to publish more data to support their claims. There are some serious claims being made that strongly suggests that NPS is not all it is advertised to be. Time will tell.

Saturday, October 11, 2008

Customer Service Counts in Pharmacies

Wilson Health Information, LLC will present its 1st Independent Pharmacy Satisfaction Report at the National Community Pharmacists Association meeting this week in Tampa Florida. They have written an 8 page report based on a sample of 34,454 repondents from a total mailing of 70,000 households. The sample was balanced by geographic region, market size, age, household type, income, size and state. Based on this sample the margin for error is +/- 0.5 percent at a 95% confidence level. They required at least 40 responses within a market in order to draw comparative and quantitative conclusions.

The primary conclusion they drew from the survey was that independent pharmacies rank higher in customer satisfaction than the chains. The American consumer rated independent pharmacies the most highly satisfied and most trusted healthcare advisors and customer-service providers in the retail pharmacy industry.

The independent pharmacies seem to outperform the chains as well as scoring high in customer satisfaction. Some of the statistics from the survey are:
1. Independent pharmacies received 7.8 new scripts compared to the chains that received 6.8.
2. Independent pharmacies received 27.7 refills in the past year compared with the chains that received 23.8.

"Information from their research indicates that independent pharmacists succeed because they stick to the basics and provide superior one-on-one customer service as they have for most of this nation's history" according to Jim Wilson, president. "They take the time to build personal relationships with their patients, counsel them on their medication needs and go the extra mile to make sure those needs are served."

The bottom line is that aiming at the individual customer has financial rewards as demonstrated by higher new scripts and refills.
 

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